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When a conversation shifts to investments, it immediately scares the uninformed. This is why many of us would rather postpone getting into it or totally shy away from investing. We worry about making the wrong purchases. We worry about having the wrong timing in buying and selling. They are legitimate concerns alright – but they should not stop you from letting your money work for you.
You shouldn’t make your own investment adventure a complicated journey. Right now, there are just two main important things to consider: starting early and maintaining the discipline.
This article is not meant to be a technical material to give you investment advice or techniques on how to improve your investment strategies. Instead, we offer simple tips for beginners who have the determination to start investing but are at a loss on how (or even scared) to start. To help those who are still ‘neither here nor there’ in their investing venture, here are some things you should know about:
Understand How's Market Expectations Work
One of the funnier things about the prices of assets and stocks is that they have nothing much to do with the underlying companies’ business performance but on how the general investors’ perception of how the companies will do. Yes, there are several highlight stories of unknown companies that made it big and made overnight millionaires out of their stockholders.
But don’t you skip that important qualification: they were little known entities before they hit the jackpot.
So it’s not enough that you pick your stocks because your academic analysis shows that it will have above-average potential. It’s better to pick an asset that will grow faster than the market expectation if you can find one. In the case of shares of stock, you have to outdo the combined expertise of all the financial experts the industry can offer to come out with better analysis and projection. Obviously, that is nearly impossible to do.
The percentage of Americans investing in stocks has remained steady since 1999, according to a report by Gallup. In 2020, only 55% of Americans invested in stocks, which is 10% lower than the share of Americans who held stocks in 2007. After the great depression, the percentage fell to 54% in 2011, and 52% in 2013. The levels have not risen beyond 55% in recent years.
Make Sure You Diversify Your Portfolio
A good strategy to protect yourself against the unpredictability of the market is to spread your money over different types of investment rather than sticking it out with just one.
An ideal portfolio should include bonds aside from stocks and the stocks should be a mix of big and small companies, U.S.-based companies and international corporations. There is an easy way to do it – via mutual funds. This type of investment lets you own a small portion of hundreds of stocks and/or bonds simultaneously with a very large outlay. You can diversify:
- Through diverse asset types. Provide a mix of assets such as stocks, corporate bonds, government bonds, real estate, precious metals, and others.
- Through diverse asset sectors. Assemble a mix of assets representative of different industries. Real estate may be making a comeback and appear to be a good investment to put all your money in. But if it bursts again, you may lose all your money.
- Through diverse geography. Sure, you diversified your asset types and sectors but all of them are in the United Kingdom. If Britain’s economy should suffer a meltdown because of (for example) Brexit, it could wipe out your holdings. This is why you should try to assemble a mix of assets from all over the globe.
It will be good to work with a financial planner to put together the optimal asset allocation for you that factors in your age, budget and risk tolerance. Or you can D-I-Y it using an online calculator to get a rough estimate.
If you’d like to be more laid-back, you may look for a target-date fund because it will automatically apportion your investments for you and harmonize it according to your time table.
Sooner Is Better, Dive In Slowly
According to Forrest McCall, founder of Don’t Work Another Day, you should dive in as soon as possible, without risking too much – and focus on safe investments.
“You might feel bad when you see a certain company stock climbing on the double, and you didn’t buy any. Or maybe some of your friends took a long shot with Bitcoin and became overnight financial sensations”.
“It’s quite natural to regret not being able to be part of these investing fairy tales that ended somewhat “happily ever after.” That’s even normal. However, you must remember that the reward didn’t come without taking some form of risk. When you’re just starting your journey, it’s not wise to throw everything in, says McCall.
Here’s an important truth: hindsight is not foresight, although many people mix it up.
If you’re the type of person who looks at the charts daily and struggles to decide whether to buy or sell with a small amount of money, you’re probably not going to make a lot of headway.
As we’ve said, boring stocks don’t create many waves because they don’t move like rabbits on steroids. Instead, they slowly plod, plow and trudge in one direction. But alongside its snail-paced movement is the power of compounding interest that makes up for its slowness. Do you want to see how that works out?
If you have $5,000 that you can invest today in an index fund that grows at 6% per annum, you’ll end up with $50,000 after 40 years. Time is money. Each year you lose money in the market materially affects your potential payout later.
This is why those who invest early will be better able to retire early too. Those who start investing at an older age may have to work longer before they can comfortably decide to quit.
With the introduction of low fee platforms, stock investments have become more commonplace. In this chart using FED Survey of Consumer Finances data, it is clear to see that stock holdings are still dominated by the older age groups.
Under 35s account for an average of $27,000 in stock holdings, while those closer to retirement age and the retired hold over an average of $550,000. This suggests that stocks form an integral part of retirement planning.
Investing Is Different Than Trading
Keep your eyes consistently on the big picture as an investor. Don’t panic when your stocks are correcting; take it as an opportunity to buy more shares. When you invest, you have to be more patient.
Sometimes, your journey will take you through tough times of recession, and your response will determine the results. Impatient investors usually lose money while patients collect dividends, wait for a good time to add more stocks to their portfolio, and get high ROI. Keep in mind that investing and trading follow the same golden rule of money management: To boost your profits, reinvest them.
Set Long-Term Goals
Before you start, stop for a moment and take stock of your present situation and where you want your investing journey to take you in the future.
Would you feel comfortable investing in an asset and waiting for a long time? If not, don’t even bother putting a little money into it. What you want is long-term value in your investments. You don’t want any of those “get rich quick” offers that turn out to be primarily scams or flops.
Here’s what you want to ask yourself:
- Where do I want to be five years from now? What about 20 years from now?
- How much income do I expect over time?
- How many contributions do I expect to make over time?
- Looking at my long-term goals and current finances, what are the ideal investment options to get myself started?
- How long am I planning to invest?
- After I’ve launched my investing adventure and gained traction, what adjustments do I need to consider overtime to ensure I am on track to achieve my goals?
- How much can I comfortably invest now?
Investing can help you program your money to grow to reach your financial goals. These goals would be different for everybody: full retirement at 60, a new home 10 years from now, traveling the world before you reach 50, etc.
Whatever you have on your wish list, you’ll want the timing to be perfect. Your investments should match these needs at their proper time so that when it’s time to make the down payment for the new house, the money in your investment account is ready.
Research Is A Key
It is very surprising to find that many investors do not put in adequate time into researching their investment opportunities. Instead, they rely on what “the experts say”. Doing so may not be a bad idea at first, but to become a better investor you need to do your own homework and become very familiar with terms, theories and the numbers in the wonderful world of investing.
It's quite puzzling the way many investors put importance on their money but don’t allot enough time to thoroughly check their investment opportunities. Their money is important to them but they invest them here and there because it’s what the financial gurus recommend. You might get lucky doing that and hit a small jackpot, but seasoned investors know that you always become better if you do your own homework. Your first assignment is to familiarize yourself with the terminologies, concepts, theories and what the numbers mean in the mesmerizing world of investing.
In the realm of investing, one should have information. But information is useless without the basic knowledge. The complex and confusing financial jargon, acronyms and abbreviations can easily overwhelm a newcomer. Invest first in a few financial literacy materials that can give you a beginner’s lesson on the principles of investing in the stock market. Augment your college education by reading top-rated books on finance, investing and the stock market.
When you’ve done your homework on an asset, you’ll get the necessary confidence in your investment. You’ll spare yourself the worry that hounds many investors who did not do sufficient checking before they bought in.
Always make sure you comfortably understand anything you’re buying. Avoid trading your money for any instrument or product you only have a vague idea of. Don’t be afraid to ask questions and always compare the different products.
Advertisements and sales talks have the same agenda – to push a particular product foremost for the benefit of the company. So don’t buy anything because of a nice ad or a sweet-talking salesperson.
Reduce Your Cost
Mutual funds, index funds, and ETF portfolios offer more than just the fast way to diversify your investments. They are extremely convenient and even more so when you enroll in an auto-deposit service that fills your buckets on cue. But such convenience comes with a price and these fees often escape the attention of beginners. To some, it may not be significant but if you’re just starting, you should take these fees into consideration.
Mutual funds employ professional fund managers (note, it’s plural) to oversee the funds and that combined genius output isn’t exactly worth peanuts. On average, you’ll have to shell out around 2% or more every year. Yes, that be like a small drop in the bucket but when you’re talking about 5, 10 or 20 years, that comes to a tremendous amount.
Take this for instance. You check out a fund on a website and see all these colorful graphs showing the progression of its returns and the number of stars it received from Morningstar plus testimonials from random people. It’s almost enough to convince you that it’s worth your money. But beyond them, try to dissect these uninteresting items:
- The fund’s expense ratio. You want to see how much (in percent) of the fund’s assets go to cover the expenses.
- The fund’s turnover ratio. You want to know how often they trade the fund because every time they trade, you pay a transaction cost. The higher the frequency, the higher the cost for you.
- The fund’s load fee. You want to learn how much they would charge you when buying or selling shares of a fund.
Your ideal fund should show low or below average numbers for these factors. You can always use an invetments fee calculator as well.
You can go by way of index funds which has a much lower set of fees but you’d personally have to manage your portfolio. The other option is to have a professional manage it for you but you have to pay the fund manager.
There are different types of index mutual funds in the US, and their numbers vary greatly, based on data from ICI. In 2020, “other domestic equity” was the highest index at 246, followed by world equity at a distant second with 87, followed by hybrid and bond at 80. S&P 500 was the least mutual fund index at 77.
Don't Act Emotionally
Often, what stands in the way of making good profit in the stock market is the investor’s emotions that sometimes prevent him from making logical decisions. What you see on the charts showing the prices of the stocks is a reflection of the collective emotions of the whole investment populace. If an asset worries a horde of investors, its price will most decline because the anxious investors usually do panic moves. When there’s strong confidence in a company’s future, the opposite happens – the asset’s price tends to go up.
When things aren’t going according to your expectations, you would often react. If an asset price is going down instead of up, it creates tension and causes insecurity to swell. What do you do? Sell your position now and avoid a loss? Do nothing for now and hope that the price will make a turnaround? Be aggressive and buy more?
The funny thing is, even when the price is performing according to your expectations (or beyond), you’ll still have questions. Sell your position now and make a profit before the price drops? Do nothing and hope that the surge continues its upward trend? Many thoughts will play out in your mind and more thoughts will come if you keep watching the price of a security. Ultimately, the tension can build up and compel you to take a hurried action. If it’s primarily an emotional decision, it would often be not the best of moves.
Before you buy an asset, you should have done your research and convinced yourself that it is a good buy. You should also lay down your own projection of how the price will behave assuming that your reasons for buying it are accurate.
But you must also peg a benchmark at which point you will sell your asset in case your research doesn’t yield the results you hoped for or if it’s moving as you expected but is not giving you the (potential) income you are anticipating. In short, prepare a solid exit strategy before you purchase the asset and will yourself to execute the strategy when it becomes necessary without reservations.
Stay With Enough Cash
If you haven’t guessed by now, we’re really serious in promoting investing as a means to reach your goals. But the real power of your investments comes out when you let it grow for years. What happens then if there are emergencies and you need to use the money?
Well, obviously, you’ll interrupt the growth and this will probably shrink your profits and move back your original timeline. A good strategy is to have cash on hand or savings for emergencies even before you start investing. This way, your investment money lies separately and you won’t have to touch it prematurely or go into forced borrowing.
A good amount to set aside is equivalent to at least three month’s worth of expenses as an easily accessible emergency fund.
If you don’t have one right now, put this on your top priority: have a rainy-day kitty in case something unexpected crops up such as a major car repair or sudden sickness. Once you have your emergency fund to back you up, your investment money can grow undisturbed even if your life experiences some financial big humps along the way.
As a young investor, you may still be in a low tax bracket and you don’t pay much attention to tax savings because you’re not familiar with tax strategies. But professionals agree that it’s never too early to start making the tax statutes work to your benefit.
You can start with the tax deferral that you can get from the traditional 401(k) or the tax-free status of the Roth 401(k). Although the Roth does not offer an upfront deduction on contributions that the traditional 401(k) does, many tax experts advise young investors to still put half of their 401(k) contributions into Roth accounts anyway.
This is because down the road if you’re looking at decades on your investment journey, the tax-free withdrawals then will be more worthy than the tax-deductible contributions now.
Here’s another thing to think about. When looking where to invest, put your tax-inefficient things (bonds and other instruments that pay out distributions) in your tax-deferred account. You’d want to take advantage of them for over 20-30 years. Putting them in your taxable account means giving the IRS 20% or 30% every year in taxes. On the other hand, put your tax-efficient investments in your taxable account.
Consider Automating Your Investments
The very idea of distributing your money into four buckets and keeping track of them may seem like a difficult job but it’s not rocket science. In fact, there are even ways to automate it.
The process is simple. Once you’ve filled the first bucket, arrange for an automatic transfer to remit money from your checking account straight to your investment account. After this, there’s no need for you to set reminders and alarms to move money from one account to another. You just set it and you sort of “forget about it”. You can do this online or at your local branch.
Some investing platforms allow you to automate your investments and lets you get money directly from your bank account. Simply select the frequency and amount that fits your requirements and they will do the rest. Or make saving even more efficient by setting aside funds automatically from your paycheck. It’s out of your hands and into your savings account even before you can touch your salary.
In 2020, JPMorgan recorded the highest revenues from investment banking in the world at $8.5 billion . The new record made JPMorgan the largest bank in the world, with a market share of 9.3%. In the same period, Goldman Sachs recorded approximately $7.1 billion, making it the second-largest bank. BofA Securities and Morgan Stanley ranked third and fourth, with a difference of $111 million between them. UBS secured the 10th spot with $1.8 billion in revenue, $6.9 billion behind JPMorgan.
Keep Investing In Yourself
Your interest to know how to invest had you reading this far – that’s a good sign. But it shouldn’t end here because there’s volumes and volumes of information out there that are yours for the taking. Never tell yourself that you’re too old to learn something new.
However, you need to be careful about the sources of your information especially about investing news and the financial markets. Pick the ones that are bold enough to back up their claims and have a track record of seeking the best interest of the public and not for personal gain. The Internet is a good and easy place to start. Many incredible investment guides and tools are at your disposal in just a click of a mouse.
You’ll always win when you invest in yourself.
You just need to focus on the area which would maximize your potential. It could be more knowledge about trading in the stock market. Or maybe looking at the lives of great investors and getting inspiration from them. You might also invest in yourself by improving your character like patience and discipline which can help you as an investor. There are many ways – but you have to start somewhere.
There is no investment that is 100% risk-proof, since most investments are affected by fluctuating markets and an unpredictable economy. Different investment options have varying levels of returns, and it requires in-depth research and analysis to prove a specific security is at its current status profitable.
However, some investment options have earned themselves a high-yield title despite having low risks. Examples of these investments include certain stocks, Certificate of Deposits (CDs), treasury bills, corporate bonds, high-yield saving accounts, etc.
There are multiples ways of allocating your assets. One of the old methods is to subtract your current age by 110 and distribute your savings in percentages between equities and fixed assets. For example, if you are age 45, 65% (110 – 45) must go to equities, while 35% to the fixed assets.
An alternative method is the risk tolerance quiz. It is essentially a set of ten quizzes asking different questions on different areas and complexity. On completion, you submit the answer, and the system presents an allocation strategy based on your responses.
Generally, none of these options is a silver bullet to your investment allocation dilemma. Therefore, you should invest your time and energy in understanding your individual investment needs.
Typically, your choice of investment will depend on your investment goal, your risk tolerance, and strategy. For example, if you can accommodate high risks, your returns probability might be high and so do the risks. If you go passive, leaning towards low-risks, you are likely to attract low returns. As a result, it is difficult to assign a specific investment as ideal for monthly income.
However, some investment instruments provide a more stable monthly income than others. Some of the best investment options offering a reasonable monthly income include dividend-paying stocks, floating rate funds, long-term corporate bonds, treasury bills, Certificate of Deposit (CDs), municipal bonds, among others.
However, you will have to do an intensive analysis and/or consult a financial advisor to evaluate the best investments.