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It can be scary trying something new. I remember when I was really young and my friends first invited me to play basketball with them. They had all played before. But I was the new kid on the block. The novice. Beginner. I didn’t know what to do when I had the ball. I didn’t know what to do when I didn’t have the ball. But these friends didn’t leave me in the dust. They helped prepare me. Gave me tips on dribbling, driving, shooting. And the experience wasn’t as scary as I thought it would be. Maybe investing is like that for you. You’ve heard of it, but you’re scared to dip your toes in. Well, I’m here to help you out with some of the top tips I’ve found or experienced for beginner investors.
My friends weren’t NBA players. They just knew a little more than I did. And taught me so that I could get into the game. I’m not here trying to say that I’m a Warren Buffet or Carl Icahn. I’m not an analytical genius or prophet. But I have done my research and have some experience in investing. And I want to share some of my favorite tips that I’ve discovered and validated for first time investors.
1. Start Simple. It’s Ok To Be Safe.
It’s hard not to feel like you’re missing out when you see certain company stocks skyrocket. Maybe you had a couple friends throw all their money into Bitcoin and got huge payouts. The temptation can grow when you see these “get rich quick” opportunities. And it’s true. With risk, comes reward. But when you’re just starting off investing, it’s not the best idea to go all in. Remember, hindsight is not foresight. And a lot of people mix the two up.
Anyone can say “If I had invested in Company X back then, I would’ve been rich.” But, guess what. They didn’t. There’s a reason that day trading is discouraged as a new investor. Everyone feels like they’re gonna be the lucky one. If you feel like you’re thinking something along these lines, be warned:
“I won’t make the same mistakes as them.”
“It’s easy to time the market. I know when to buy and sell.”
“If I don’t jump in, I’m going to miss out on an opportunity to get rich.”
Yes, ETF’s and index funds may be boring. But they will most likely outperform the market. If you’re checking your phone everyday debating when to buy/sell with a small amount of money, you’re really not going to be getting anywhere.
Did you know: In a typical six-month period more than 80 percent of day traders lost money, and only 1 percent of them could be called predictably profitable. That’s a low success rate. There’s a low barrier of entry to investing. But don’t be fooled if you’re thinking it’s easy to turn a profit.
2. Start Early. Time Is Your Friend.
As mentioned above, the boring stocks don’t jump up and down like crazy. They generally move in one direction, albeit slowly. But the power of compounding interest will get you far. Check this out. If you have $1000 today and you throw it into an index fund that grows at 7% annually, it’s going to be worth around $30,000 in 50 years.
This example shows the return for literally throwing $1000 into an index fund. This is just to prove that throwing in a small amount of money now nets you much more down the road. If you had just stored that $1000 under your bed and fell asleep for 50 years, you would still only have $1000.
The above example also doesn’t consider any employer match (please contribute to the maximum employer match. That’s a 100% rate of return!). Or increased contribution. Those benefits will add more to your eventual return.
But you might be thinking…how can we trust that there will be a 7% rate of return?
Well, here’s a historical chart of annual returns for the S&P 500 (index fund of 500 largest corporations by market cap).
It’s no wonder they say that time is money. Every year you lose on the market can significantly decrease your payout in the future. That’s why people who invest early are more likely to retire early. And those who invest later may have to work longer before they’re truly able to retire.
3. Don’t Expect to Predict the Market.
You can’t guarantee profit if you’re not a prophet. Fine, that was pretty lame. But the truth stands. I think a lot of people think that they can just go with their gut and have success. Well guess what? The market can do as it pleases. You can follow a lot of “expert analysts” out there. If you follow them long enough, you’ll know that they’re not always right. In fact, some of them can be extremely wrong. These same experts have doubted Facebook, Amazon, Netflix, Google, etc.
Others might try to base their stock purchases off of the news. If a company is making money, the stock must go up, right? If a tech company is about to release a hit new product, then that means the stock must go up!
The problem is: not necessarily. Yes, sometimes it will. But sometimes it won’t. And that can be extremely frustrating when you’re just getting started. That’s why if you’re going to try investing in riskier stock options, don’t go in with your life savings.
I’ve seen people who used their student loans to invest in bitcoin (volatile and risky). That’s playing with fire. Yes, there are examples of people who bet it all and came away with everything. Those cases get highlighted. And people think it’s the norm. But there’s a lot more people who lose money than gain money from risky investments. Make sure you’re investing what you’re able to lose.
4. Buy Low. Sell High.
It’s almost comical that this is a tip. I was amazed at how many times I’ve read these 4 words in investing books and guides. The crazy thing is that even after seeing it. Knowing it. Reciting it in front of a mirror daily (ok fine, I never did that), I still managed to ignore this rule. When you first start investing and you see a stock go up, you want to invest in it. But sometimes it’s already at its peak and already trending downwards. Then you get scared and manage to sell it at its low point in fear of losing money.
The intelligent investor is doing the opposite. They know that when a stock dips too much, they should buy it. And when a stock jumps too much, that there will be some sort of correction, and that it’s time to sell. It feels counter-intuitive at times.
I’m not saying that you should try buying stocks every time you see them dip and sell every time you see them rise. But this is something to keep in mind. This is also another reason why beginner investors will have a very difficult time doing any sort of day trading. Catching the highs and lows of the market is no easy task.
5. Continue to Improve Yourself.
Well, you are reading about investing right now, so that’s a start. But there’s a WEALTH of information out there. Never think that you’ve outgrown learning. I mean, we do have the internet at our disposal. There is an abundance of investment guides and tools on the web. And great investment books (Here’s one of the most popular ones! A recommended read if you have the time). Do you have a smart phone? Apps are good too. (Here are some of my favorites) Information is all around us!
One of the things that I was taught at first was to try investing with “fake money”. That is, pretend you have a certain sum of money and record your buys and sells. Doing a trial run like this gives you a better picture of what it will be like with real money (without the stress of losing money).
“Ultimately, there’s one investment that supersedes all others: Invest in yourself. Nobody can take away what you’ve got in yourself, and everybody has potential they haven’t used yet.” –Warren Buffet
Investing in yourself is never a bad thing. But it can also mean many different things. Maybe you’re growing your knowledge of the stock market. Maybe you’re learning from other great investors out there. You might also be investing in yourself by finding other ways to grow your income. In that way, you’ll have more money to invest with.
Regardless, I think it’s exciting how much knowledge we can freely access. Definitely take advantage of that!
So what do you think? Were these tips for beginner investors helpful? Do you consider yourself to be a beginner investor? Maybe you’re a more experienced investor. Feel free to share any tips/tricks that you were taught. Perhaps you disagree on some things that were mentioned in this post. As always, I love hearing your thoughts, so don’t hesitate to leave a comment below!