A Beginner’s Guide To Investing: What You Need To Know Now

INVESTING

This is the beginner’s guide to investing that you have been looking for. Many people fail to invest because they assume that it is all too complicated or too risky. It doesn’t have to be. Anyone can begin, even with a very small amount. Getting started is often the hardest part.

So You’ve Decided That It’s Time To Make Your First Investment

To start investing. To become an investor.

Sounds exciting right? Well, it is. 

Sounds a bit scary too right? Well, it shouldn’t be. 

Sounds complicated? It doesn’t have to be. 

Let’s start with the basics and hopefully give you the confidence to get started.

Getting Started

I teach a Grade 10 Economics class and just this week I introduced them to the stock market and a game called ‘How The Market Works’. In this stock market simulation, students spend $100,000 on the stock market. They certainly were excited. As the money wasn’t real, they weren’t really scared. But at first, they did find it a little complicated. As a teacher, it’s my job to simplify things. By the end of the lesson, I was convinced that they understood how it all works. You will too.   

The biggest misconception about investing is that it’s just for the rich.

That might’ve been true in the past. But that barrier to entry is now well and truly gone, thanks to companies and services that have made it easier for everyone, including beginners and those who have just small amounts of money to put to work.

In fact, with so many investments now available to beginners, there’s no excuse to not be involved in building your wealth this way. And that’s good news because investing can be a great way to grow your wealth. Don’t use lack of knowledge as an excuse either.

Why Is Investing Important?

Investing is a crucial step in securing your financial future. Whether you’re looking to build wealth for retirement, save for a big purchase, or generate additional income, understanding the fundamentals of investing is essential. Remember, there will be a point in your life where you will want to work less or even not work at all. Saving and investing will help you to do this. 

In this guide, we’ll walk you through everything you need to know before making your first investment, using real-world examples to make it easy to understand.

Define Your Investment Goals

Step 1 needs to take place before you plunge in. Before you begin investing, it’s crucial to define your financial goals. Are you saving for retirement, a down payment on a house, or simply looking to grow your wealth? Each goal may require a different investment strategy. For instance, if you’re saving for retirement, a long-term approach with a diversified portfolio may be suitable. We’ll explain what this means later.

Real-world example:

Let’s say you’re a 30-year-old and you want to retire comfortably at 65. You estimate that you’ll need $1 million to support your retirement. This goal will help you determine how much you need to invest and for how long.

Understand Risk and Return

Investments come with varying levels of risk and potential return. Generally, the higher the risk, the higher the potential return, but also the greater the chance of losing money. Lower-risk investments may provide more stability but offer lower returns.

Real-world example:

Consider two investment options: stocks and bonds. Stocks have historically offered higher returns but come with more significant fluctuations in value. Bonds, on the other hand, are generally less risky but offer lower returns. As a beginner, you might start with a balanced portfolio of both to manage risk.

Diversify Your Portfolio

Diversification is the practice of spreading your investments across different asset classes to reduce risk. By not putting all your eggs in one basket, you can protect your investments from the poor performance of a single asset.

Real-world example:

Imagine you have $10,000 to invest. Instead of putting it all into one stock, you could diversify by investing $5,000 in stocks, $3,000 in bonds, and $2,000 in a real estate investment trust. If one asset performs poorly, the others may offset the losses.

Choose the Right Investment Vehicles

There are various investment options to choose from, each with its characteristics and benefits. Some common options include stocks, bonds, mutual funds, exchange-traded funds (ETFs), index funds and real estate.

Real-world example:

If you want to invest in stocks, you can buy shares of companies like Apple or Amazon. Bonds, on the other hand, are essentially loans to governments or corporations. Mutual funds and ETFs pool money from multiple investors to invest in a diversified portfolio of assets. Index funds track the stock market and kind of provide you with the average return of the market.

Understand Investment Fees

Investing often comes with fees, which can eat into your returns over time. These fees may include management fees, transaction costs, and expense ratios. It’s essential to understand the impact of these fees on your investment returns. Being able to minimise fees can make a huge difference.

Real-world example:

Let’s say you invest $10,000 in a mutual fund with a 1% expense ratio. Over 30 years, assuming a 7% annual return, you would pay around $16,000 in fees. Be aware of these costs and choose investments with lower fees when possible.

Stay Informed and Educated

Investing is not a one-time decision. Markets change, and your investment portfolio should adapt to those changes. Stay informed about economic trends, market developments, and the performance of your investments. There are also many great books and online resources that can help you. 

Real-world example:

For instance, if you notice a decline in a particular sector, you might consider rebalancing your portfolio to mitigate potential losses. But there are also ways that you can set up a low-maintenance portfolio that only requires some minor rebalancing once every year. One book that I found excellent for this strategy is Alexander Green’s  ‘The Gone Fishin’ Portfolio‘.

Have a Long-Term Perspective

Investing is a long-term game. It’s essential to have patience and not react impulsively to short-term market fluctuations. Many successful investors have reaped the benefits of compound interest over several decades.

Real-world example:

Let’s say you invest $5,000 per year from age 30 to 60, earning an average annual return of 7%. By the time you retire at 60, you will have over $700,000 in savings. This illustrates the power of compounding over time.

Consider Tax Implications

Different types of investments may have different tax implications. Understanding these can help you maximize your after-tax returns. Utilize tax-efficient investment strategies to minimize your tax liability.

Real-world example:

In some countries, capital gains tax may apply to your investments. Consider tax-advantaged accounts like Individual Retirement Accounts (IRAs) or similar tax-saving options to reduce your tax burden.

A Tried And Tested Long-Term Approach That Is Easy and Effective

If this still sounds a little complicated and if you’re confused about the best way to get started then I have a plan that covers most bases.

This approach reduces fees, provides low risk if you are investing for a long term and provides a large amount of diversification. It involves investing in either index funds or ETF’s. These investment instruments are quite similar and are both excellent options. But let’s look at how they differ.

ETF’s (Exchange-Traded Funds)

An ETF is like a collection of different investments bundled together in a single package.

Imagine it as a basket filled with many types of fruits, like apples, bananas, and oranges. When you buy an ETF, you’re essentially buying a small piece of that basket.

ETFs are traded on stock exchanges, just like shares of a company, and their prices can change throughout the day.

Index Funds

An index fund is a specific type of investment fund designed to match the performance of a particular stock market index. Think of it as a mirror that reflects the moves of a specific group of stocks, like the 500 largest companies in the U.S. (S&P 500). When you invest in an index fund, your money is used to buy the same stocks that make up the chosen index. The goal is to match the returns of that index, so if the index goes up, your investment goes up, and vice versa. Throughout the history of the stock market, the average return has been 10% per year. 

In summary, an ETF is like a mixed basket of investments you can buy and sell on the stock market, while an index fund is more like a mirror that mimics the performance of a particular group of stocks. 

Both can be great ways to invest, depending on your goals and preferences. Both provide diversified investments to reduce risk and both have low fees. In the long term, ETF’s and index funds will perform approximately the same as the average of the entire stock market. This is less risky than trying to pick which stocks will rise. 

Most experienced investors admit that picking stocks is very difficult. Most fund managers are unable to beat the S&P 500. It is the reason why the guru of investing, Warren Buffet recommends that investors invest monthly in the S&P 500 and never sell until retirement. 

Conclusion

Investing can be a rewarding way to grow your wealth, but it’s crucial to educate yourself and make informed decisions. By defining your goals, understanding risk and return, diversifying your portfolio, choosing the right investments, managing fees, staying informed, adopting a long-term perspective, and considering tax implications, you can set yourself on the path to financial success.

 

Remember, your dedication to learning can be a valuable asset on your investment journey. But it doesn’t have to be complicated at all. Start small, gain experience, and watch your investments grow over time.

Got questions? Add a comment and I’ll do my best to help.

Related Articles:

The Janitor Who Died A Millionaire

Slow, Boring Investing

The Stock Market