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  • Writer's pictureGary Grewal

Why Is it So Hard to Be Disciplined In Investing? When to Save and When to Invest

“I want to get your take on investing in the stock market, what stocks should I buy,” a friend asked me recently.

“What’s your goal for investing that money, and what do you want it to do for you?” I returned.

“It’s money that I owe for taxes at the end of the year, I want to double it so I can buy a camper!”

Yes, this was an actual conversation, and thankfully it was via text otherwise I would’ve smacked this friend upside the head, with my book of course, so that maybe some of the knowledge in it would end up with him.

The bright outlook of everything from markets to real estate, to the job market has many people feeling quite content with the current affairs of things, so much that they think nothing can derail their plans. Many young adults just getting into their prime working years may not even remember the Great Recession, especially if their parents didn’t lose their jobs or anything like that.

Many of these young adults also grew up watching others make “easy money” on things like TikTok, Bitcoin, meme stocks, or even Restricted Stock Units (RSUs) from their employer. While RSUs are usually a form of compensation (the employee doesn’t pay for them), they are still seen as an extra bonus from some workers, so they feel perfectly fine gambling with that money. Doesn’t matter if it hasn’t vested yet, or that they need to pay off credit card debt, they will still throw the money in a single stock because they think markets always go up.

It’s too bad that recency bias leads people to make somewhat unwise decisions, however luckily for you, you’re reading this post!

So how do you decide when to save for something and when to invest? Well that comes from putting your thinking cap on and doing your research. Some people spend more time planning their vacations than they do their investments! I can understand how the former is more enjoyable and exciting, but the latter can have greater implications on the trajectory of your life, especially if you are relatively young (what is even considered young these days?)

First off, you should think about the timeline for your goal. If it’s for retirement, or a lake house in 20 years, investing it in a diversified portfolio makes perfect sense. If you need to pay off your student loans in 2 years so your fiance will agree to the marriage, then save it! Look at the charts of stock market performance, such as the popular S&P500 Index, and notice how every few years there is a hiccup, but over time typically it ends up higher than where you started, especially when you increase the chart to span over a decade or more.

The trouble is in a strong bull market, everyone seems like a genius. That’s when investors, who think they make wise investment decisions all of a sudden, turn to invest in individual stocks, expanding into options trading, then cryptocurrency, and even speculative real estate deals. I had a friend whose boss invested $50,000 of his retirement money in a real estate deal where 4 custom homes are being built on the far end of a suburb. Nothing could go wrong there, right?

There’s nothing wrong with playing around, or gambling as some call it, with money you can afford to lose. If that $50,000 turned into $30,000, with no promise on when it would go back up, would you stay the course?

On the other hand, if you have an extra $100 per month to play around with, and rather than spending it on in-app purchases, you buy stocks, then that’s perfectly fine. It might even keep you more engaged with the markets and economy, as well as help you with hands-on learning on investments. Everyone is confident until their first trade goes south.

On the plus side, if you make some money, that can either accelerate your progress towards the larger goal, or you can reward yourself by taking some chips off the table and buying that new laptop.

If you’re worried about controlling your emotions and making some sudden trades, consider using a RoboAdvisor platform like Wealthfront or work with a financial planner if you truly want a hands-off yet tailored approach.

Working in the industry, it’s just interesting to see some charts of investor behavior. For example, the highest amount of outflows from mutual funds was in the months following the stock market crash in the fall of 2008. Instead of staying the course like a disciplined investor, they bailed right when it was the worst time. If you sell during a correction, you lock in your losses!

The only time you should be changing your allocations is during periodic rebalancing once or twice a year, along with if your goal for that money changes.

Use educational-based websites such as Investopedia and NerdWallet to educate yourself on disciplined investing principles. Look into why most investors focus on passive index funds and ETFs.

Also, remember there is nothing wrong with saving money. People get anxious when they have surplus cash sitting around, thinking they are losing money to inflation or missing out on market gains. What will they invest in? Who knows! This is almost a sure-fire way to invest in an irrational way.

Saving money affords you time to do your research on what to do with the money. It enables you time for introspection and getting the advice of others on how to best make use of that money. It also affords you peace of mind.

If you lose your job, get disabled, get in a car accident, have to move out after a breakup, or get stuck with a deadbeat contractor who took your money and ran, a saving account can provide the cushion you need to bounce right back without facing the pressure of selling your investments at the wrong time or for the wrong reasons.

When in doubt, use a savings account. When your mind is at its best, go ahead and invest.

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