Clueless on Investing? Then Don’t Use Stocks

For those people just starting out with investing I’m going to make a suggestion that might go against the usual advice you hear.  If you are clueless on investing when starting out and don’t know what to buy, then skip the stock market.  Go straight to a GIC, savings account or something else very conservative.

Why?  Well let’s face it when you are clueless and young you tend to have very little saved. So in that case a higher rate of return is nearly meaningless in the first few years.  After all an extra 1% return on a $10,000 investment is just an extra $8 a month.  You could save more by altering your spending habits than your investments. Also if you went straight to stocks without knowing anything, the odds of you losing some of your money is actually fairly damn high.  The stock market is rather like a casino where idiots are separated from their money fairly quickly most of the time.

Of course you could potentially make more in the stock market in the long run, so that is why you need to educate yourself in the mean time and find out what investment method will work well for you.  Then after a few years you can shift yourself over into the market with a vague idea of what you are doing.

So how do you know you are clueless on investing?  Well that can be hard to tell since we tend to have a much higher opinion of ourselves than we should.  I know I was even guilty of this in the beginning so might I present my list of you might be clueless about investing if:

  • You pick a stock because you like the company name (Yes I did this with my first stock when I was a teenager)
  • You don’t understand what the company does to earn money (for example, what is a junior mining company?)
  • You have ever taken a stock tip from your paperboy, best friend or the clerk at the store
  • You can’t read the company last financial statement to find out how much they made last year per share
  • You have no idea what companies you own in your mutual funds

How about you?  Are you clueless on investing?  If so, when did you know that?  If not, do you have any idea on when you stopped being clueless?

13 thoughts on “Clueless on Investing? Then Don’t Use Stocks”

  1. I would almost advise the opposite. I think when you are young and clueless (and don’t have much money) it’s a lot easier to stomach losses and gain critical experience. I think the best teacher over time is experience and personally have learned a lot more by learning about stocks, trying different strategies, experimenting with different types of investments. Do I wish I wouldn’t have made some of the mistakes I did? Absolutely, but I would much rather make a mistake on $1000 now than $100,000 later.

  2. I agree with Tim’s advice to avoid stocks when you know nothing about them. But I also think that the best way to learn is by doing. That means either fantasy investing, or investing with a small amount of money. Not your life savings! I still make mistakes, but fortunately I’ve found a strategy that I’m comfortable with and learned to stomache the ups and downs. Mutual funds are ideal for beginners, but I think directly owning stocks and bonds has certain benefits for investors who have reached that level.

  3. I’m clueless – but I’m learning a lot in a short amount of time. I’m not playing with fake money, but I’m using retirement funds at a young age… so in theory, some of my miscues will be negligible (at a relatively low worth).

    What I do to combat this ignorance, is go with a full service broker. The problem I have now, is how to analyze how he’s doing and compare it to the market rate of return. With dividend reinvestments, exchange rates, etc… this becomes difficult.

  4. Nothing teaches you about the stock market quicker than losing half your money. Do that when you don’t have much to begin with, and you’ll be careful later when the stakes are higher.

  5. I think modifying the lead-in for investing to be, “if you’re clueless about investing and don’t have the desire to learn…”

  6. Low cost index funds (I am a huge fan of TD’s e-series) are just the ticket for those who don’t know much about picking individual stocks. Buy the entire TSX or S&P 500…

  7. Mmm, you guys bring up an interesting point that some people really do learn best by doing and in this particular case failing. Yet I have to agree with Robert that losing a smaller portion of your money is easier to do than half of everything such as Patrick suggests. The issue is to find a large enough amount that you learn your lesson without losing too much that it sets you back badly on your long term goals.

    Now what that level of loss where it hits home will vary from person to person. Some people can handle the loss of $100 fairly easy, but $1000 gets to them. While others a $1000 isn’t that much (generally it has to do with reference to the size of the total pot of money). I personally got the point with only a couple of hundred dollars when I was a teenager because I lost almost the entire account value.

    Tim

  8. Worst advice ever. How do you retire when making a 0.5% return on your investments?

    If you know nothing about investments, buy an ETF that invests in large cap Canadian stocks. They are available from Claymore and iShares and trade on the TSX.

    Most important think long term. Don’t worry about one year returns. Worth about one decade returns.

  9. I would make an important distinction between investing in individual stocks and getting exposure to the stock market with a diversified index fund. As jon_snow points out, anyone can simply buy the whole market at very low cost. They need to understand the risks involved in equity investing (namely, that you can lose half your money), but they certainly don’t need to know anything about how to a read a company’s financial statement.

    Indeed, I would argue that amateur investors who analyze individual companies are usually fooling themselves into thinking they understand more than they do.

  10. Best way to learn is set up a mock portfolio and play with that for a year. Pretend you have $20000 and see what works.

    Then buy only blue chips; that is stocks that have been paying a dividend for 5 years. Look for bargains: ie PE less than 10, price book ratios less than 1. Also look for stocks trading at 5 year lows.

    Before buying determine a sell price or condition ie PE greater than 20 or price at 5 year maximum. A yeild of at least 3% makes it worth holding while waiting for the stock to achieve price targets.

    This is a simple discipline. Stick to it and learn.

    After a while (several years) the discipline can become more complex and a wider variety of stocks can be played so long as you understand the difference between speculating and investing.

    Never trust your “instincts”; stick to the discipline.

  11. @ Canadian Couch Potato,

    While I agree that there is a distinction between individual stock investing vs index funds I would still caution a clueless investor from putting money into the market with no understanding of allocation. If they know about the couch potato portfolio then fine, I wouldn’t classify them as clueless at that point.

    Good point. Thanks for bringing it up.

    Tim

  12. Unfortunately we do all need banks, but do we need to help them make even more money?
    Just think of it this way (this is a fact). For every $1000 you invest in the bank, they can lend out 50x that; Yes they can lend out on a 50:1 ratio
    1. You purchase a 1 year GIC paying 2% for $1,000
    2. The bank gains $1k, thus enabling them to lend out 50x that amount. Gaining interest rates of 6%-20% (LOC, loans, credit card payments)
    3. The bank Will pay you $20 at the end of the year
    4. They averaged a 12% return from lending out the money, and made over $500.

    Now imagine someone bringing 10,20,$50k+ into a bank to purchase GIC’s.

    In no way am I saying don’t use banks, and throw all of your money into stocks. But keep your money in a high-interest savings account until you find a better alternative.
    Nothing wrong with getting a PAC for a Mutual fund or Segregated fund. You can start with as low as $25/m at some institutions.

    Good luck and always think before you act.

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