Three weeks ago I was in California and took a surfing lesson at Kula Nalu surf school. Learning to surf has always been a goal of mine and I was very excited that I was finally accomplishing it.
Turns out surfing is very similar to investing and the lessons I learned that day on Newport Beach could be applied to creating wealth.
Rule 1: Always know the current conditions.
Before we entered the water, our instructor had us stand on shore and do some light stretching while we studied the way the waves were breaking and which way the currents were pulling.
Before you make an investment, you need to study the current market conditions.
For example, did you know that President Obama is planning to triple the tax on dividends in the U.S. in 2013?
Those are shark infested waters that I wouldn’t surf in!
Rule 2: Never try to ride one wave all the way to shore.
If you watch a good surfer, he will catch a wave, ride the best part of it, then jump off his board on purpose.
He knows that he could ride that wave all the way into shore, but then he would have a long distance to paddle back out to catch the next wave. Instead he just catches the wave when it first breaks and is big and powerful but jumps off at the first sign the wave is slowing and diminishing in size.
It’s very unlikely that you will be able to invest in one stock, or one mutual fund in your twenties and ride it all the way into retirement. If you attempt to do this, it’s more likely that you will crash at some point, lose a large sum of money and have a long way to paddle to get to retirement.
Rule 3: Always use the right equipment.
Since I was new to surfing, my instructor put me on a long foam board. It was very stable to stand on and wouldn’t cause too much damage if it hit me (or anyone else!) in the head when I wiped out.
As I get better at surfing I can move up to a shorter, more agile, fiberglass board.
If you are new to investing, it does you no good to start off by investing in risky tech stocks or complicated options trading. These are the people I meet who wiped out early and now say “investing doesn’t work”.
Maybe start out by putting $50-$100 a month in a balanced mutual fund at your bank. This way you learn about dollar cost averaging and how to stay calm during market fluctuations.
After a while you will be ready to branch out into ETF’s or even individual stocks.