Getting started investing can be a fun and exhilarating way to make money — potentially a lot of money. However, for many young or beginner investors just getting started in the game, there can be many pitfalls if they proceed without caution.
Unfortunately, investing is often glamorized in movies, TV shows, and popular culture. It seems everyone has a secret plan to put their assets into just the right stocks and make it big. However, more often than not, this can lead to disaster and humiliation.
What’s gone wrong? Oftentimes, it’s forgetting to hit the books and learn the basics. That’s why, today, we’re going to explain just a few of the basics that you should know before getting serious about your investing game. Here are three things you don’t want to overlook.
Learning the basics
Seems obvious, but you’d be surprised how many newbies forget to sit down and learn the basics of investing. For instance, before getting started, ask yourself these questions:
- What is equity?
- What are dividends?
- What are growth stocks?
- What’s an index fund?
- What investments should you start with?
If you don’t have solid, well-researched answers to these questions, then you should definitely spend some time reading up on investing basics before diving in. Besides “getting rich” it’s a good idea to define some solid goals for yourself prior to investing; that way, you can narrow down your research to the topics that are most relevant to your priorities.
Here are some questions to ask as you get started:
- Why am I investing? — what is my end goal?
- What is my time horizon? (That’s the amount of time you’re working with before you need the money.)
- What strategy do I prefer, slow and steady, or fast and risky?
- Do I have a backup plan in case my holdings depreciate significantly?
Related to the last question, be sure you always have an emergency fund with at least 3 to 6 months’ worth of expenses saved up before you start investing. After all, sometimes the market slumps, and you may lose significant value.
That brings us to our second point.
Researching your holdings
Many beginner investors are faced with this decision: their mate who’s always read up on the latest trends comes to them practically screaming that he’s found the perfect stock to invest in. It’s a new public option that’s opened up but few investors have heard of, and it’s about to be the next big thing.
The truth is that, more likely than not, this is probably a little too good to be true. That’s why it’s important to do your own research before investing in anything. This involves researching several factors:
- Market research — Does the market look favorable for companies you’re considering investing in? Where do the trends look like they’re headed? Be sure to diligently read up on the latest statistics and news reports; you don’t want to be invested in a company that uses outdated technology, or a startup specializing in a trend that’s already fallen out of popularity.
- Research the company — If you can find accurate information, be sure to research the company’s financial profile. For instance, if a business owes money in taxes or massive debts to investors, this could be a sign that they are not a safe or worthwhile investment. Find out what you can about their business plan, too: how do they plan on becoming profitable if they aren’t already? And are they planning on scaling soon? This gives you key insight into the kinds of returns you might hope for.
If you’re investing in a mutual fund — that’s a bunch of stocks bundled together — find out what you can about the fund manager, what their history is with investing, and what their personal strategy is when selecting the stocks and bonds they use to balance their portfolio.
A seasoned investor knows to be patient and always be skeptical whenever there is too much hype surrounding a new company or fund. Only by carefully researching your options and potential holdings can you be confident that you’ll make a good trade — and even then, it’s important to remember that investing is always a risk.
Considering the long game
The last thing that too many beginner investors forget to think about is the long game. Many investing novices see investing as a way to get rich quick. And, while that might work for some on rare occasions, it’s unlikely to happen for most investors. That means you should spend time thinking about how you will make money in the long run.
You’ve likely heard about investors diversifying their portfolios. The idea there is that you don’t want to put all your eggs into one basket — instead, it’s wise to include a healthy variety of options that provide some security that you won’t lose all your money if the market slumps.
Doing this is a good way to factor in the long game. Why? Because having a portfolio that’s been diversified with plenty of growth stocks, dividend investments, and bonds is a great way to keep a slow and steady trickle of money coming in to offset any losses you may experience if a risky startup fails.
In fact, some investors choose to focus primarily on the long game, setting up retirement accounts and investing primarily in index funds that promise slow and steady long-term growth as the market plods along. This strategy might not get you rich in a season, but you can more or less count on making a significant return many years down the line.
We know, it’s no fun talking about investments that will benefit you in a couple of decades, but a wise investor should understand that long-term investing is an important way to build personal wealth while offsetting the risk you might experience investing in newer companies.
Investing comes with plenty of risk, but you can mitigate risk by learning everything you can about investing before diving in. With the right knowledge, patience, and strategy, you can make your investment portfolio work for you.