7 investment tips for beginners
Are you looking at investing by yourself? Here are some investment tips for beginners that will help ensure your efforts are a success.
1. Getting started with investing
One thing to keep in mind is that investing successfully is a journey, not a one-time event. For this reason, you will need to prepare yourself as you would when going on a long trip. Start by defining your destination and then plan your journey accordingly. For instance, if you want to retire in 20 years at the age of 55, figure out how much money you will need for this. Such questions will help you come up with a plan that suits your investment goals.
2. Find out what works in the market
Take an investment for beginners course or read books that deal with modern investment ideas. The people who developed ideas and theories such as diversification, portfolio optimization, and market efficiencies received their Nobel Prizes for a good reason.
Investing is mainly a combination of art (qualitative factors) and science (financial fundamentals). You will want to adopt a consistency of approach in investing. The scientific aspect of finance is a great place to start, and otherwise, it shouldn’t be ignored. If science isn’t exactly your strong suit, don’t fret. Many textbooks, such as Jeremy Siegel’s “Stocks For The Long Run” explain the high-level finance ideas in ways that are easy to understand.
When you know what works in the market, you can then come up with some simple rules that should work for you. For instance, the most successful investor ever, Warren Buffet, summed up this in a popular quote, “Never invest in a business that you don’t understand”. This has served him well. And while it made him miss the tech upturn, he was able to avoid the subsequent devastating downturn of the high-tech bubble of the 2000s.
3. Understand your investment strategy
Nobody can understand you and your situation better than you would. So, you are the most qualified person to do your own investing. The only thing you need is a bit of professional help. Try to identify the personality traits that can prevent or assist you in investing successfully, and work to manage them properly.
One useful behavioural model when it comes to understanding yourself as an investor was developed by Larry Biehl, Tom Bailard, and Ron Kaiser. The model classifies investors based on two personality traits: method of action (impetuous or careful) and confidence level (anxious or confident). With these personality traits, the BB&K model then divides investors into 5 distinct groups:
- Celebrity: The follower of the latest investing fads
- Adventurer: Entrepreneurial, volatile, and strong-willed
- Guardian: Wealth preserver, highly risk-averse
- Individualist: Confident, careful, and one who takes a DIY approach
- Straight Arrow: Has the characteristics of all the above, equally
Unsurprisingly, the best investment trusts will be realized by the individualist, or a person who exhibits confidence, analytical behaviour, and has a good eye for value. Nonetheless, if you establish that your character traits are similar to the adventurer’s, you may still attain success in your investing if you modify your strategy accordingly. Simply put, no matter which of the groups you belong to, you should manage your core assets in a disciplined and systematic way.
4. Know your friends and foes
You need to beware of false friends who will pretend to be on your side, such as certain unscrupulous investment experts whose interests’ conflict with yours. You need to remember that as an investor, you will be competing with big financial institutions that almost always have more resources, including faster and greater access to information.
You also need to understand that you are potentially your worst enemy. Based on your personality type, particular circumstances, and strategy, you might be sabotaging your own success. A guardian may be going against their personality type if they decide to follow the latest market craze and scalping for short term gains. Since you are a wealth preserver and generally risk-averse, you will most likely be affected much more by the large losses that could result from these high-risk investments.
Be honest with yourself and try to identify the factors that could be preventing you from investing successfully and modify them, or move away from your comfort zone.
5. Find the right investment path
Your personality, level of knowledge, and resources should help determine the path you choose. Generally speaking, investors will adopt one of these strategies:
- Diversification: Don’t put all your eggs in one basket.
- Put all your eggs in one basket, but watch the eggs really carefully
- Combine the two strategies and make tactical bets on a core passive portfolio
Many successful investors will start by using a low-risk diversified portfolio and gradually learn by doing. As they gain more knowledge over time, they get better at taking a more active stance in their portfolios. Online brokers usually have a variety of tools that investors could leverage on all levels to manage their risk.
6. Do it for the long term
Sticking with an optimal long-term strategy might not be the most exhilarating investment choice. However, if you’re looking to be successful in investment for beginners, you should aim to stay the course without allowing your emotions or the “false friends” to get an upper hand.
7. Always be willing to learn
The market will always be hard to predict, as one thing is certain – it will always be volatile. Being a successful investor is a gradual process and the typical journey is a long one. In many cases, the market will prove you wrong. Be sure to acknowledge this and keep learning from your mistakes.