Investing for Beginners
By Ricardo Ribeiro – Updated January 29, 2020
Investing your money might seem scary at first.
That’s what this investing for beginners’ guide aims to solve. In the end, you‘ll know what to do.
In this article, we’ll go over the basic knowledge you need. Then, we’ll present a few ideas well suited for beginners.
First, an Overview:
You Don’t Need a Lot of Money to Start Investing
Many people believe that they need a lot of money to start investing. This is a common misunderstanding. There are ways a beginner investor can start investing with a small amount.
In fact, it is much better to start small. The reality is that people make more mistakes at the beginning. If you start investing small amounts, those mistakes would be a lot less expensive.
A second reason to start small is that you can start sooner. You need to get comfortable with making investment decisions, and that only comes with experience (and it only happens over time).
You might already have a reasonable amount of money available for investments. Even so, we still strongly recommend you to start small. Only use a tiny part of your money.
You Don’t Need to Become a Professional Investor
Starting as a beginner, you only need to become a competent investor. For sure, it takes time and dedication to become competent, but it is a lot easier than becoming a professional.
What you need is a good understanding of the investing fundamentals, and you need to know your situation and preferences.
How to Know If You’re Successful
The most fundamental investing goal is to make money. But making some money is not enough. At the minimum, you have to beat inflation.
This is how you should measure your efforts: if your money is growing more than inflation, then you are successful.
First, beating inflation is a very good goal for anyone, beginners and pros alike. Especially over the long term.
Second, a beginner should only add additional goals after getting more experienced.
Which Assets to Consider
You should start with these asset classes: cash, bonds, stocks, and real estate.
Each of these classes can help you achieve your goal.
Only expand to the other major asset classes once you gain more experience.
You could invest in one asset, or in more than one. In the latter case, that’s what is called your investment portfolio.
Your choices must make sense to you.
Don’t rely exclusively on what other people say. Otherwise, you might not be able to execute your investment strategy (see below).
Strategies for Beginners
Any strategy that requires frequent monitoring and readiness to act is probably not feasible for most individual investors because it might conflict with their regular jobs and other responsibilities.
Again... your strategy must also make sense to you. If it doesn't, it will be hard to execute it.
Let's focus on strategies that a beginner can realistically use:
Strategic Asset Allocation
This is a fancy name but it is quite simple. Just choose the assets and how much money to allocate to each asset.
For example, an investor’s strategic asset allocation could be to allocate 20% of your portfolio to stocks and 80% to bonds. Another example: 15% stocks, 10% real estate and 75% bonds.
We’ll explain with an example.
Let’s pretend your strategic allocation is 50% stocks and 50% bonds.
So... you take half your investment money and buy stocks, and you buy bonds with the other half.
Initially, your portfolio’s actual allocation matches exactly your desired strategic allocation.
The market prices (stocks and bonds) change over time...
Eventually, your portfolio’s actual allocation will deviate from your strategic allocation.
Then, at some point, your actual allocation might become 55% stocks and 45% bonds.
That is not what you want. So, you will need to adjust it back to the strategic allocation. This means you will need to sell 5% worth of stocks and buy bonds with the proceeds.
In a nutshell, that is how you rebalance your portfolio.
Instruments You Can Use
You have to decide if you will make direct investments (buying individual assets directly), or if you will invest through an investment fund (mutual or index fund), or if you will use ETFs.
Exchange-Traded Funds (ETFs)
ETFs are negotiated the same way as stocks, but it’s like investing in a fund (an index fund), instead of buying shares of a company.
ETFs offer cheaper management fees and are a great way to achieve diversification and keep your overall costs down, even with a small amount of money.
First Steps to Start Investing
Let’s go over the steps you need to take.
1. Do Not Hurry
Before you make your first investment, you need to learn about investing, and you need to know what you are doing.
You should start small, even if you are wealthy.
However, once you have your investment plan, there is no reason to procrastinate.
2. Create an Investment Plan
Determine what’s going to be your strategic asset allocation and how often you’ll rebalance your portfolio.
3. Decide Who Does the Investing
You need to decide if you will do it yourself, or if you will delegate it to a financial advisor.
If you want to delegate to an advisor, you need to decide which advisor (and if it’s a human advisor or a robo-advisor).
Consider quality, reputation, and costs when evaluating the advisors. You want an advisor that has your best interests at the top of his or her list.
4. Find a Reliable and Trustworthy Broker
Now you need to open an account (or accounts) to execute your plan (with a brokerage company or other financial intermediary).
You must select a company you trust. There is always some risk, but you have to try to minimize it by making a good choice here.
5. Take Action
Well, at some point you have to put your plan in motion.
This part is very important. After all, how good is a plan that you do not use?
This is an ongoing step. You need to keep monitoring your execution and your performance on an ongoing basis.
We do not provide financial advice, and nothing in this article should be construed as advice. The contents of this article are presented ‘as is’ and on an educational and informational basis only. You are advised to consult your financial adviser before using, in any way, the information presented here. We disclaim all liability in relation to this article and the contents of this article to the maximum extent permitted by applicable law. Please read our full disclaimer for more information.
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