Successful investors evolve through four stages: Saver, Mutual Fund & ETF Investor, Stock Investor, Options Investor. I’ve identified these four stages as the primary path for many investors. This is clearly a generalization as I understand that some people inherit money and can skip the first stage. Others may never become options investors and can still be extremely successful (see Warren Buffet). Recently I read that Mr Buffet actually uses options some these days when he believes they are mispriced although it’s not a primary tool in his arsenal. Do not be confused by my exclusion of “traders” in my four stages. Traders follow a different path for a different goal. This does not mean they are not successful, but it does mean their end goal is not for me.
I think of this path to becoming a successful investor as similar to becoming a fast marathon runner. In short, a good marathoner has to build a strong base through walking and running slowly while studying various techniques for improvement. Eventually a marathoner will add in once per week long runs to help build better endurance and then will add in some speed work to really get the muscles used to faster speeds. In the end, a marathoner can go out for a long enjoyable run at any time and it doesn’t feel like work. Fast marathoners don’t have to think much about their running. They have developed the proper form over the years and due to the cautious base that they built, they rarely suffer from injuries that ruin the season or end their careers. These marathoners have figured out through study and trial and error which foods help their performance the best. They continuously nurture their bodies while addessing any pains before they progress to real problems.
Stage One – Saver
For most of us who haven’t started a successful company (see The Savannah Bee Company – cool story behind this one) or were not given a trust fund at a young age we had to spend time saving. Savers come in many different flavors. Some identify their needs for a safer future and treat their savings as another bill to pay and fund their savings account as a percentage of their income each month or even a specific dollar amount each week. Others save whatever they have left over after their expenses at random times. Either way can get you to the goal of having enough to invest after creating a safety fund for yourself.
I prefer the planned approach since I like to build a more stable, sustainable plan. Newcomers to saving should under estimate when trying to determine the right amount to save each month. Over-saving and not having enough money to enjoy life can be very discouraging. Starting with as little as $50 per month paid to a savings account begins to develop the habit of allocating money to the future. Building a routine of saving is what’s most important during this stage.
Over time that monthly savings amount can grow from various sources such as by taking a large portion of a raise and allocating it to savings and from better money mangement as fixed expensed are reduced or eliminated (i.e., paying off a car). One of the key lessons learned during stage one is money management and living below your means. This process is completely scalable and will create the foundation for a stronger financial future. I was lucky to have been raised by parents who liked to save and stressed the importance of staying out of debt. I knew I could have whatever I asked for, as long as I knew what to ask for. We kept purchases within reason. Glutony was not part of our spending equation.
I’ve known some really good savers who have no plans to advance past this stage because it is not in their nature to accept any losses. Anyone reading this knows there will be down days in the stock market, but over time history shows that we will make more by being invested in stocks as compared to bonds or worse yet a simple savings account. I’m not criticizing the benefits of saving, just the logic. Some savers take it to the extreme and will pay off all debts including their house before moving towards stocks. I can see the logic in that if your expected returns in stocks are less than you pay in interest on your house, tax write-off or not.
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Continue reading this series about stage two – mutual fund and ETF investors here.