In this article, I’m going to share the top 5 tips that will lay the foundation for your investment strategy for many years to come. Whether it’s 1995, 2014, or sometime in the future, these are proven tips that experienced investors use as a framework when building a strategy. As a beginner, it is crucial that you study and internalize these rules if you want to beat the market.
While the tips exist in different ways among many investment circles, it is perhaps best summarized by the Bogleheads’ “Investing Philosophy.” The website is an incredible wealth of information for those looking to learn more about brilliant investor John Bogle.
Without further ado, let me share with you the top 5 best tips for beginning investors:
1. Get a plan and stick with it. If you are still starting off trading in stocks, it’s very important you start working on your investment strategy early. How much money do you allocate? How often will you make deposits? What are your goals? Are you looking for a Tax-free or Tax-deferred investment?
Think about these questions to develop a baseline budget and strategy. Make sure your budget is within your means – an investment is a great way to make money, but you must have some starting capital in order to make anything work. Once you have an idea, I suggest writing it down so that you can reference it later (and it helps you stay on track!)
2. Develop a routine early on. Make sure you have a system to regularly segment your income into categories – your spending money, your savings, and your investment capital. This may seem obvious, but strict personal budgeting is an incredibly important step in developing the discipline needed to be a successful trader. Each pool has a different quality — You must look at your investment capital as a risky venture, your savings as a buffer (to help mitigate any damages from poor early investing), and so on.
At this point you are probably wondering why I haven’t talked about actual investing tips yet. This is for good reason: The first two points are the legs on which the rest of advice (and, indeed, your entire investing career) stands on. While trading can be incredibly fun and rewarding, a successful investor must always stay focused and disciplined. Make sense? Let’s keep going:
3. Balance your risk with less volatile investments. Stocks are inherently risky. While it’s tempting to jump right in, it’s important to keep in mind that you are in it for the long haul. You can essentially get “knocked out” early on if you don’t balance your stocks with stable, though less fruitful, investments. How? Many recommend to help temper the risk by purchasing bonds (read an Introduction to Bonds here). At their core, bonds are loans. Though they accrue interest very slowly, they are a great way to stabilize your investments.
How much of your money should you put into bonds? The answer to this depends on many variables – your confidence, your risk tolerance, your strategy, and more. A good rule of thumb, as recommended by John Bogle, is as follows: Invest roughly your age in bonds. That means that if you are 40, you should invest 40% in bonds, and 60% in stock.
4. Diversify, diversify, diversify! Though the importance of diversification is mentioned in many investment help articles, it is still an often overlooked part of managing your portfolio. Many investors feel comfortable in their knowledge of a specific industry or sector, and tend not to stray far from it. This is a mistake. A diverse portfolio – one that spans multiple industries, sectors, and securities – helps create a strategy that approximates the stock market as a whole. As a beginner, your goal should be simply to match a pre-determined index. Without diversifying, you are likely to have a volatile portfolio, which you need to manage more aggressively, and in turn accrue a higher amount of brokerage fees.
5. You can’t predict the market, so don’t try. The common saying is that investing boils down to buying low and selling high. While that is true, we simply don’t know when the market will turn (for the better or worse). In fact, mutual fund investors underperform the market by an average of 5%!
What I recommend is that instead of trying to time the market correctly, you stick to a strategy (this is exactly why step 1 is so important.) A well-thought through and steady investment strategy allows you to avoid investing with your emotions and avoid costly mistakes.
These may seem like relatively basic tips, but they lay the foundation to a solid investment strategy. As a new investor, you must be cognizant of how you structure your portfolio, and avoid many of the common pitfalls early investors fall into.
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