Determine your goal

Almost everyone forgets about this simple question. What is your goal? What do you want to achieve when investing or trading stocks, crypto or anything else? Almost everyone is trading or investing because they want to make money. But most people have no plan. How much money do you want to make? And is the market you want to trade or invest in the best market to make that happen?

Reading time: 9-13 minutes (2.463 words)

Key concepts in this chapter:

  • What is your goal? Decide what you want before you start investing or trading
  • Don’t expect astronomical returns in the stock market
  • Investing in the stock market may take decades to see serious profits
  • Your age determines the amount of risk you can take
  • Compound interest works best with large amounts of money
  • If you want to make millions start a business
  • 95% of day traders fail

Quest: The best age
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What would be the best age to start investing?

Reward:  +10 XP  0   0   0

Investing in the stock market does not mean you get rich very quickly. It's more like a thirty year plan than a five year plan. Day trading or crypto trading is much more volatile. You can earn a lot in the short term but it comes with much greater risks. There are many different goals when trading or investing in the short and long term:

  • Making money for your retirement
  • ​Insure a second income besides your day job
  • Become rich
  • Own a piece of a company
  • Living of dividends
  • Becoming financially independent
  • Etc.

6.1 Wrong expectations

If you really want to become rich with investing or trading you also have to take the risks and put in a lot of time. One does simply not come without the other. So you have to start thinking before you start:

  • What is my goal?
  • What do I want?
  • Can I reach my goal with investing, trading or both?

Do you want to spend the money you earned? If you spend your earned money you might lose money in the long term you can't profit from compound interest.

Quest: Compound interest
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What is compound interest?

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What is the purpose of making money if you’re not able to spend it? To build up an asset for the future. There will be a point in your life when you can spend the money. But most of the time, when investing in stocks, it will take at least ten - twenty years before you get there. This depends on your age, the amount of money you can invest (and want to spend) and the risks you want to take. Someone who is already seventy five years old can’t take the same risks a twenty five year old can. 

For most people, the stock market is very slow and boring. The crypo market is much more fun. Some people made millions by just buying a random coin at the right time. Dogecoin is a prime example. Dogecoin does nothing special. It started as a meme coin. But when Elon Musk (Owner of Tesla and SpaceX) started tweeting about Dogecoin, the price went up astronomically. You could buy Dogecoin for $0.003 late 2020 and sell for $0.70 only six months later.

Dogecoin - USD chart, source: Tradingview

You will never see this kind of gains in the regular stock market. Exactly the reason why the crypto market is hot. The high risk high reward attracts many people. Dogecoin is no exception. Many coins are seeing these kinds of gains. But also note they might even fall harder a few weeks or even days later.

You need to know what to expect before you start trading or investing. For example, if you know that investing in the regular stock market takes decades to reach your goal you can make a plan around that goal. Or if you need a different aproach to reach your goal. If you enter a market with the wrong expectations your emotions will take over at some point and you will make costly mistakes. 

6.2 Your age matters

Whatever your goal, it is tied to your age. Someone who is seventy five has completely different financial goals then someone who is twenty five. The younger you are, the more risks you can take. Because when you are young, you have decades of compound interest and (business) failures ahead.

Benjamin Graham (mentor of Warren Buffet) did use a formula to calculate how many risky versus safe investments you should have:

  • Subtract your age from one hundred and invest that percentage of your assets in risky investments
  • The other percentage should be invested in relative safer assets like cash, gold or bonds

If you are seventy five and subtract seventy five from one hundred then you could invest max 25% in more risky investments like stocks and crypto and 75% in safer investments like cash, gold or bonds. If you're twenty five, it’s the other way around. Of course you can determine your own risky vs non risky ratio. Most people go all in on risky investments and most of them lose money in the long term. It’s not very exciting to invest in gold or other less risky assets. If you are older, you can’t risk losing too much money because you will retire soon. 

6.3 Some goal examples

There are a few hot topics that are becoming more mainstream which are both heavily related to the stock market and investing:

  • Living frugal and living off dividends
  • Creating your own business 

1. Creating your own business

During the gold rush in 1849, most people did not find any gold. The people that became rich were the ones selling the shovels. Becoming rich with investing or trading is only for the few. There are other ways to become rich. When you are building a business you can generate an income flow that is not possible for people that are working nine to five.

Quest: Business and investing
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How would a business help you with investing?

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Because when having a business you can invest more money because of the greatly increased income flow from the business. And that is where compound interest is at its best. Compound interest is a very strong tool but it does nothing special if you can only feed it a small amount of money. If you put in large amounts of cash you can build up a second income pretty quickly with the help of compound interest. For example:

  • Initial investment $10.000
  • Monthly contribution $500
  • Yearly interest 5%
  • Time: 20 years

If you invest $10.000 + $500 each month with a yearly interest of 5% you earn $10,772.63 in interest at year 20. Now let's do the same calculation with $500.000:

  • Initial investment $500.000
  • Monthly contribution $500
  • Yearly interest 5%
  • Time: 20 years

If you invest $500.000 + $500 each month with a yearly interest of 5% you earn $72,682.91 in interest at year 20. That is $6000 each month. Because you have a greater income from the business you can now up the monthly contribution to $1500. In that case you'll earn $91,701.23 in interest at year 20. 

As you have learned that your age matters, will you become rich when you are sixty five and only have $10.000 to invest? Not with compound interest. You will be eighty five and you then have $900 each month from dividends you can spend. Hoping that you will make eighty five in full health in the first place... But if you are twenty five, you have many decades to build up compound interest (and a business). If you have a small starting capital, compound interest starts small but gets rolling after a few decades. Only thing is, it takes decades to build...

  • Initial investment $10.000
  • Monthly contribution $500
  • Yearly interest 5%
  • Time: 40 years

This nets $38,502.79 at year forty which is $3200 each month. After forty years you could live from dividends till you die. But you can never take money out and are bound to fluctuations in the market.

You might be thinking right now:

Penke

"Ok, so now I have to start a business...?"

This totally depends on your goal. The more money you can invest, the quicker your investment can grow. You can't magically make one million dollars with $10.000 but it's much easier if you start with $500.000. Working for someone else is by far the least effective way of earning money. Because you are not only bound to time, you're also bound to how much money you can earn each hour. When running a business, your income is not attached to time (sales from websites that are online 24/7) and is much more scalable. Most likely you are not interested in starting a business. And that is totally fine. Just think of it as another way to earn money. The main point here is that compound interest does it's work best when you can feed it large amounts of money and with smaller amounts it may take many decades to reach your financial goals.

If you are interested in creating your own (internet) business you should read the handbook of creating a multi million dollar business: Unscripted. (link at the end of this page)

2. Living frugal and living off dividends

The “living frugal” movement is pretty big and growing by the day. This movement has an extreme focus on living frugally and investing all their cash in stocks (ETFs). If you do this for around twenty to thirty years (depending on your starting age and how far you are in the rat race), you can live off dividends for the rest of your life. This is actually a very simple and doable concept. But that also means:

  • You have to live frugal for the rest of your live
  • You can’t have any luxurious house or car (you need to give up your wants for the most part)
  • Your income is following the stock market

Why does it take many decades? Because most people only have small amounts of money to invest. The more money you save, the more money you can invest. Just take a look at the above example. If you initially have $10.000 and invest $500 each month you'll need at least thirty years before it generates a decent income you can use for living. But that also means you can't spend any of that money on things you want. You can't buy that sports car that costs $50.000. If you want to decrease the time needed to living off dividends and increase the amount of money you earn from interest you simply need to invest more money. Within the lifestyle of living frugally that means cutting all unnecessary costs and wants and putting this money in your investment vehicle. You can achieve this by:

  • Living below your means
  • Don't spend more money if you get a pay raise
  • Don't buy things you don't need

Invest everything (most common is an ETF) and after a few decades you can live off the interest/dividends. Assuming everything goes to plan and nothing major in your life happens that could influence the amount you can invest. But the power of this does not lie in the amount of money you put in but in the amount you spend paying your bills. If you take this principle to the extreme, you could sell your current house and buy a camper. If you cut all costs to the minimum you only need a very small amount of money each month. In reality, most people (even the ones that are following this principle) don't want to live frugal. Besides, our lifestyle (in western countries) is based on consumption. You'll need to have a strong mindset to ditch every dream you ever had about buying that dream car or house or whatever you want. Living frugally and spending money does not coexist in the same sentence.

If you want to learn more about this principle you should read: “Early Retirement Extreme” (link below) or read the blog "Mr. Money Mustache". But also keep in mind that the writer of the book and owner of the blog make a lot of money through sales.

​3. Insure a second income besides your day job

If you are looking for a steady income besides your day job, without the desire to stop working anytime soon, investing might be a good place to start. With investing, you are building up assets for the long term. This can be done by investing in stocks or buying and staking crypto. You'll learn more about staking later but it basically means you make more cryptocoins with the coins you currently have. Building a second income from dividends is rather a slow process which may take decades to build, as you noticed in the examples above. But if you have no plans of quitting your job then it's a perfectly good way to insure a second income besides your day job. Without the pressure of quitting your job when you reach your goal.

4. Making fast money on a daily basis and get some excitement

If you just want to make money as fast as possible then day trading might be an option. If you trade every day and make consistent profits your account grows very fast. Make no mistake, successful day trading takes a lot of time to learn and master. But for most people, this is much more exciting than investing in the stock market for many years or even decades. Day trading is full of risks you should be aware off. 95% of all day traders fail. If you think you can become one of the 5% then you should read my in-depth guide about day trading. You'll find a link to this guide in the last chapter.

These are four different goals which all benefit from the stock and crypto market. If you know what you want, you can build a plan around it. If you really want to become rich, you can start building your own business (selling shovels) or start day trading with leverage. This is something you can control. Or you could just buy some random crypto’s and hope that someday one will stick. The result can be the same only you can’t control the outcome when randomly buying something and hoping it will stick.

Knowing that investing in the stock market takes decades might mean that this approach does not fit your goal. In that case, you have to look at other options or simply adjust your goal. If your goal is making a lot of money (like most people have as their goal) you'll need to make a detailed plan and decide if this goal is realistic based on your current income, knowledge and the amount of time you are willing and can invest.

Must reads:

If you want to live frugally and live off dividends you should read the following book:

Early Retirement Extreme: A Philosophical and Practical Guide to Financial Independence

Early Retirement Extreme: A Philosophical and Practical Guide to Financial Independence

Early Retirement Extreme: A Philosophical and Practical Guide to Financial Independence

View book on Amazon.com

If you want to create your own business and become a millionaire you should read the bible of all business books:

UNSCRIPTED: Life, Liberty, and the Pursuit of Entrepreneurship

UNSCRIPTED: Life, Liberty, and the Pursuit of Entrepreneurship

Life, Liberty, and the Pursuit of Entrepreneurship

View book on Amazon.com



Chapters: Trading and Investing Guide for Beginners

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