Eight Important Investment Tips For Beginners
For those who are new to the world of investment, knowing where to start can be daunting. That is why we have put together this list of eight important investment tips for beginners!
Table of Contents
Investing vs Trading
Before we get started with our investment tips for beginners, it is important to firstly draw a distinction between investing and trading. Whilst both investors and traders approach the financial market with the same purpose, the creation of wealth, the way in which they attempt to achieve this goal is different.
Investors take a long-term approach to creating wealth, whereas traders are generally more interested in quick profit from short-term movements in the price of assets.
Neither approach to the financial markets is wrong or right, but it is important to establish which category you fall into. The principles outlined in this article are focused on investing, although that is not to say that many of our tips will not also apply to traders.
Now that we have that out of the way, let’s take a look at the first investing tip on our list.
Create an Emergency Fund
Before you even think about investing, you should make sure you have money set aside in an easy access bank account for emergencies. The last thing you want is for a situation to arise where you are forced to liquidate your long-term investments prematurely.
Calculate your monthly necessities and make sure you have enough to cover these for three – six months in case anything unforeseen should occur.
Outline Your Goals
Why are you investing? Obviously to make money, but for what purpose? Are you investing for your retirement or to buy a new house?
Simply saying “I want to be rich” is too abstract. Set yourself a goal, work towards it and try not to lose sight of it.
Having clear objectives and knowing what these are will help enormously on your investment journey in the long-term. Knowing your goals will also influence your investment decisions and your attitude to risk.
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Our next investing tip is to make regular investments. Sit down and go through your monthly expenditure and come up with a sustainable figure which you can realistically commit to investing each month.
This approach is sometimes referred to as “dollar-cost averaging” and is beneficial in two main ways. Firstly, it allows you to build up your investments gradually, over a long period of time, without drastically impacting your day to day life in the same way making unplanned, sporadic lump sum investments might.
Secondly, spreading out your investment over a longer period of time can help eliminate the impact of short-term volatility in the market. By investing a fixed amount at fixed intervals, you minimise the risk of making a lump-sum investment when the asset is unfavourably priced.
This is somewhat a repetition of points already made, but it is an important one! Make sure you always look at your investments with a long-term perspective. Do not let yourself become obsessed with short-term price movements in the financial markets. Instead of worrying about the monthly performance of your investment, keep thinking long-term and picture how your investment will look in several years’ time.
A longer time period gives your investment time to grow and recover from any periods of market instability.
Anyone vaguely familiar with investing or trading will be aware of the concept of diversification. To put it simply, portfolio diversification is the concept of not “putting all your eggs in one basket”. In other words, investments should be spread across different asset classes and industries.
This is an important investment tip to follow in order to minimise your risk. The idea is that, if one of your investments falls, this loss is offset by investments in different areas of your portfolio.
Factor in Fees and Tax
Next on our list of investment tips is to always remember to factor fees and potential taxes into your investment plan.
Wherever you choose to invest your money, you will be subject to fees. These will usually be charged by your brokerage firm and, if investing into an Exchange-Traded Fund (ETF) or mutual fund, you may also be charged a fund management fee.
Be sure to check a fund management fee before investing in it and compare it with other similar funds which are on the market. The management fees are usually expressed as percentages and, whilst they may sound low at the beginning, they will begin to add up as your investment grows.
It is also important to research and factor in potential taxes for the future. Depending on where you live you may have to pay capital gains tax on any realised gains in your portfolio.
Seriously Consider Index Funds
Although investing in an index fund may not sound glamorous and will certainly not make you rich overnight, it is one of the most reliable methods of creating wealth over the long-term. This is why the next on our list of investment tips is to consider investing in index funds which track historically proven indices such as the S&P500 or the FTSE250.
An index fund passively tracks a stock index by holding positions in all the companies which make up that stock index and, in doing so, mimics the index’s overall performance.
There will be some years where the stock index performs well, some where it performs not so well and others where it loses ground. However, if you average this out over a longer period of time then, hopefully, the overall performance will be positive.
For example, if we look at the 10 year performance of the S&P500 between 2011 and 2020 – the overall increase in the index was 197.6% - not accounting for dividend payments.
A further benefit of investing in an index fund is that it offers instant diversification with a single investment. Continuing with our example of the S&P500, an investment in this index is spread over 500 of the largest US companies by market capitalisation.
Do Not Invest in Something You Do Not Understand
Our next investment tip actually comes straight from legendary investor Warren Buffet, who once said “never invest in a business you cannot understand”.
This is a very important tip and, whilst it may sound fairly obvious, unfortunately, many aspiring investors are guilty of investing in things which they do not understand – simply because they are trendy at that moment in time.
Do not blithely make an investment without having a full appreciation of what it is that you are investing in. Do your research, make sure you are familiar with historic performance, future prospects and your investments ability to compete within its field.
Investing does not have to be solely for the older generation. It is never too early to start investing for your future and, the earlier you start, the bigger your potential rewards will be further down the line.
Fortunately, with the advent of the internet and the increased availability of online brokerage firms, investing has never been more accessible than it is today.
Although people in their 20s may not have as much disposable income as they will later on in life – even investing a small amount every month is possible and will add up over the long-term. For example, investors who choose Admirals can open an Invest.MT5 account with a minimum deposit of only €1!
Investment Tips - Final Thoughts
Making your first investment may seem daunting, but it doesn’t have to be. Take things step by step and follow the eight investment tips for beginners which we have outlined above to get yourself started.
One of the most important things to remember is to never invest money which you cannot afford to live without.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.