Getting Started as an Investor

Investors of all shapes and sizes make mistakes. It doesn’t matter if you’re young or old, experienced or naïve, too risky or too risk-averse—there are potholes in every road.

Young investors in particular, including veterinarians just entering practice, tend to make the same mistakes when just starting out.

Here we lay out a few of those mistakes, along with a possible solution for each.

Mistake: Lingering in Debt

Veterinarians frequently begin their careers carrying a heavy load of debt. This can be a big obstacle, both in actual dollars and in terms of the mental toll that debt brings. Potential investors often consider holding off on pursuing their retirement savings strategy until they are out of debt. This is generally a bad idea; the sooner you start saving for retirement, the better off you’ll ultimately be.

Remedy: Address your debt as quickly and directly as you can, but not at the expense of future planning. Differentiate between long-term “good” debt, and high-interest-rate “bad debt;” the latter should be paid off as quickly as possible, whereas the former can be managed alongside a solid investing strategy. In the meantime, try not to accumulate new debt, as it will counter your strategy.

Mistake: Failing to Plan for Contingencies

A bad budget may have an allocation for “miscellaneous expenses,” but it might underestimate the amount and frequency of these expenses. This is dangerous for many reasons, but most importantly because funneling a portion of your investment income into a contingency fund has a positive overall impact on longer-term savings. If a situation does arise where you need cash fast, you can tap your contingency fund instead of other investment incomes.

Remedy: Keep a portion of your investments and income in liquid holdings, such as a savings or money market account. Even relatively less liquid investments such as certificates of deposit give you more options than investing in only long-term corporate bonds or hedge funds. Your contingency fund doesn’t even have to have growth potential; what matters is that it’s there.

This investment is safe and relatively easy to get to on short notice. Having that money set aside frees up your other investments to take advantage of the inverse relationship between risk and reward as well as the benefits of compound interest that build up over time.

Mistake: Misunderstanding Risk

Every endeavor entails a certain degree of risk. We accept some risk in all areas of life, but the concept often seems difficult to grasp when thinking about retirement. Who wants to “risk” their future happiness? But the simple truth is that because of the longer time window for your investments to grow, you can bear more risk than those who are closer to retirement.

Risk and return naturally go hand in hand, especially with your investments. Generally speaking, the bigger the risk of an investment, the bigger the potential return will be. Because low-risk investments earn only modest returns, inflation can erode the purchasing power of the funds invested. Your investment amount won’t go down, but the value of that investment may.

Remedy: Don’t think of your investments in terms of avoiding risks. Instead, think about how to manage that risk and use it to your advantage in your investments.

Here are a few ways to do that:

• Set and stick to your investment goals.
• Understand the relationship between risk and time.
• Diversify and adjust your portfolio depending on those goals and your time window until retirement.

While young investors are more prone to making mistakes, even experienced investors end up making them. If you can relate to any of the mistakes listed above, don’t beat yourself up—work with your advisor, adjust your strategy, refine your budget, and get back on track.