You probably already know investing is good for your money and that people have made fortunes doing it.
Frankly, investing is a must. Not doing so simply does not make sense.
The problem is you don’t know where to start. No one ever taught you how to invest and the thought of losing all your money is scary.
The good news is all those fears and concerns aren’t realistic as long as you cover the bases.
This article will help you with the basics of investing for beginners so that you can finally get ahead financially.
No more being intimidated, overwhelmed or scared of losing all your money.
You only need to do two things right now:
- commit to learning by starting with this post and
- take that big scary leap of faith – future you will be thanking you for it
Here’s a quick investing crash course to help you with investing for beginners.
A savings account is not investing
Some of us who like to be safe with our money and fear the stock market put money into checking and savings accounts.
The problem is, banks don’t like giving away money. That’s translated through, what I like to call a slap in the face low interest rate.
When you deposit your money in the bank, the bank turns around and invests your money at roughly 7% a year or more. Most savings accounts don’t offer more than 1% interest.
What about that 5% difference? The bank collects the profit and gives you a tiny portion of the profits your money made.
That’s your money and you deserve more than scraps.
The illustration below shows a $1,000 investment over 10 years and compares it to what you would earn with a savings account, a bond (Treasury bill) and the stock market (S&P 500 index fund).
Interestingly, over 10 years, you can only expect to gain about $94 with a savings account. When spread out over 10 years, $94 is pretty meaningless; that translates to less than $1 per year.
On the other hand, the stock market would make you $838 over the same time period.
With those kinds of differences, you would be crazy not to invest
What is diversification?
Whenever you read about investing for beginners you’re bound to hear the words portfolio and diversification.
Why should you care?
Your portfolio is everything that you own which you expect will increase in value over time. That includes:
- Home
- 401K
- IRA
- stocks
- bonds
- funds
As you can see, a portfolio is not only made up of stocks.
There are many more types of investments that could go into a portfolio but these are a great investing for beginners starting point.
Diversification on the other hand simply means to own multiple types of investments.
Let’s go back to the list above. If you owned a home and contributed to your 401K and/or IRA you would consider your portfolio somewhat diversified.
You would not consider one home on its own to be a healthy diversified portfolio. THat’s because a home is but a single piece of property with a very specific geographic location.
This is very risky because a number of things could happen to your home. What happens if the area where your home is floods? maybe the neighborhood becomes less popular and prices drop. What if the housing market crumbles? If that home is your only investment then you’ve put all your eggs into one basket and you could risk losing it all.
Get the right broker
Much like you buy a car at a car dealership, stocks are bought through brokers.
Here are the main types of brokerage firms you need to know about:
- Discount broker – for DIY online investing (the upside being lower fees)
- Full-service broker – provides an investment plan based on your personal needs and goals including periodic reviews (the downside is it costs more)
It’s important to know that full-service brokers earn a commission for each transaction. That means they have an incentive to tell you to sell/buy even if it may not be in your best interest.
If you sign up for a full-service broker, you should be skeptical if the broker is constantly advising you to trade stocks (instead of holding on to them). You should also know that each time you sell a stock, any gains become taxable.
Here is a list of brokers I’ve tried or have heard great things about
FYI: none of the bullets below contain affiliate links. I wanted to give you the very best advice even if it meant forgoing my commission. I recommend these companies over the ones I could have received a commission on because I love and trust them.
- Robinhood – this is the new kid on the block that’s shaking things up for the old school brokers. It’s a free trading app for stocks, options, ETFs and cryptocurrency. The best part is there are no commissions or fees and no minimum investment. The app is really easy to use and only takes a few minutes to set up. Where Robinhood falls short is it does not support mutual funds or bonds and has more limited investment options than some of its competitors.
- Fidelity Investments – this one is known for its mutual funds but it doesn’t come short on any of its other investments. While the commission is more than with Robinhood, the cost is reasonably set at $4.95 per transaction. As with Robinhood, there is no minimum investment required. Fidelity is best for retirement investors and has amazing research tools. As far as falling short, I personally use Fidelity and there isn’t much I don’t like about it. Of course, I would like to see free transactions (instead of $4.95) but the tools and support are so great that I don’t mind paying it.
- TD Ameritrade – with no minimum investment and exceptional free features (such as research and data, investor educations and support, portfolio building guidance and an awesome trading simulator), it’s no wonder TD Ameritrade has kept its reputation for so long. It’s a great platform for a beginning investor with tons of investing options but each stock trade will cost you $6.95.
Why the market is predictable
The beauty of the market is that it’s anything if not consistent.
When you ignore the things the media blows out of proportion, the movement of the market can really be explained by its two base components:
- productivity growth – just like technology continues to get better and faster, the stock market will continue to grow. That’s because we’ll always be able to do things better, faster and overall more efficiently
- debt cycles – the market booms and busts as a result of fluctuations in the debt cycles. These cycles last about 5-8 years. As the debt cycle peaks, loans become more expensive, interest rates go up and the market busts. Following a bust, interest rates reset to a lower level and the cycle starts again with a market boom. What causes the short-term debt cycle bust? It’s caused by when the payments of debt in the market exceed the income in the market. This leads to a recession, otherwise known as negative growth.
Why does this matter?
It’s important to understand that the stock market works in cycles; very predictable cycles.
The market constantly goes up and down. Once you know it’s predictable nature, you can stop fearing it and start using it to make money.
Invest without being an investor
If you’re anything like me, you don’t have time to constantly check the market and properly time your investments – buy low and sell high.
Beyond taking way too much time, what’s the point?
The market is predictable and it will, without fail, go up over the long-term (remember productivity growth?)
If there’s one thing you take away is that you should not try to time or beat the market. It’s simply too time-consuming and only achieves average returns.
Luckily, the market average is conservatively at 7% (remember the graph above with the S&P 500 index fund 7% average compared to a savings account?).
That means you could be making 7% on average for each dollar invested with virtually no work or stress.
What more could you ask for?
Why You Don’t Need a Financial Advisor
Everyone wants to be the success story where only a handful of years investing results in a mountain of wealth. The truth is, that does not happen often and is very unlikely to happen to you.
That’s fine though because over time and with enough patience you can easily find success.
The problem is when people don’t have patience – they start to seek out shortcuts. One of the most common shortcuts is hiring a financial advisor.
There are plenty of reasons why you shouldn’t hire a financial advisor – but here are a few you should be aware of:
- Nobody Will Care About Your Money More Than You – Who do you think will work harder to build your wealth? Some person you just met or yourself? A financial advisor’s compensation is rarely if ever tied to your success. The majority of their income is based on the amount they get you to invest so pony up and hope they care.
- Avoiding Extra Fees – If you go with a financial advisor you’ll still pay a broker fee and then you’ll also pay a fee to the financial advisor. You’re essentially paying twice.
- You Might Not Get The Best Advice- Have you ever thought about why this person wants to be your financial advisor? You don’t have millions of dollars and you likely don’t have hundreds of thousands of dollars either. The advisors who are actually good get the big clients and the not so good ones are managing the money of small fish like you.
Interestingly, less than 25% of financial advisors can beat the market average (market indexes like the S&P500). Chances are, the financial advisor you pick will not be one of the top 25%.
Would you even be able to tell the difference between a good financial advisor if you had a chance to sit down and talk with 100 of them? Chances are you’ll go with the best salesmen.
Better you invest yourself than give your money to someone who doesn’t care and likely won’t beat the market either. The good news is that this is neither difficult nor time-consuming because most of the time we’re just going to mirror the market average.
Successful Investor’s Commandments – Investing for Beginners
- Think long-term – don’t get caught up in the day to day movements. Unless something cataclysmic happens, the highs and lows will balance out so be patient.
- Buy what you believe in – don’t listen to your friends, the news or radio. Listen to yourself. If you don’t know or understand what you’re buying, don’t buy it. Only invest in something that you personally believe in and understand.
- Do your homework – maybe you love gold but if you don’t understand the gold business you either figure out how it works or don’t invest in it. Is the gold business profitable? How competitive is it? You get the point.
- Set it and forget it – don’t try to be a day trader. It’s far too time-consuming and even if you think you’ve made money, you’ve probably lost money after fees and taxes. Invest in the future; let your money and the market do their thing.
- Consistently contribute – try to add money to your investments on a monthly basis.
- Cash-out when others are greedy – if you or your friends are making quite a lot of money very quickly, you should be conservative. What goes up must come down.
- Invest when others are fearful – the best time to buy is when everyone else is dumping their stocks. That said, don’t blindly invest in everything that’s dropping in value.
- Diversify – if it can fail, it will likely fail. Diversification is your secret sauce for avoiding total losses. That means invest in many different things so no single failure can shout you down.
You’ll learn that not all the things will go your way. You may find yourself making mistakes that will cost you money.
Those mistakes are part of the learning curve and will help you improve so you can become a better investor.
If you want more tips on investing for beginners checkout:
- What should you invest in? – stocks, bonds, ETFs, mutual funds, etc
- How To Pick The Best Investments And Stocks To Invest In
- 6 Powerful Steps to Make Money Investing for Beginners
What questions do you have about investing for beginners?
