Welcome to investing for beginners – a pretty sweet guide to not completely wasting your hard-earned money.
When you invest, you give your money away today with the hope that it’ll return with more of its friends in the future.
Believe me when I say you won’t have enough money for retirement if you plan on keeping your cash in a savings account at less than 1% interest. You put money in, but not enough of Mr. Benjamin Franklin’s friends show up to the party.
The three basic rules of investing:
- Minimize the risk/reward relationship. That is, you want the highest reward possible for the lowest amount of risk possible. If you can get incredible returns for no risk, call me immediately. Typically, however, low risk is correlated with low reward potential and high risk is correlated with high reward potential.
- Diversify your investments across industries, companies, company sizes, and investment types. Diversification helps lower your risk. If you put all your eggs in one basket, you could lose everything quickly if one company or industry goes belly up.
- Minimize costs. Brokers and investment managers charge a fee for transactions and managing your money, so be sure to check the fine print to ensure you’re not lining someone else’s pockets with your hard-earned money. They especially love ripping off rookies and they can smell it from a mile away, so always ask about fees.
The three main investment types are stocks, bonds, and mutual funds.
Companies sell ownership shares called stocks.
That’s right – when you buy stock, you become part owner.
You can make money if the stock prices rises or if the company issues a dividend on the stock. Dividends are paid quarterly (most common) or annually, and are a way for the company to share profits with the shareholders.
Keep in mind that your investment return is tied to the success of the company. As a shareholder, if the company thrives, your investment performs better.
Stocks are generally seen as high-risk/high-reward because your investment will disappear if the company fails, but it could reward you many times over if the company experiences great success.
A bond is effectively a loan.
When you buy a bond, you give the company money in return for periodic interest payments (fractions of the principal). When the loan matures, they pay the initial amount (called the bond’s face value) back to you.
Bonds are typically low-risk, low-reward. This is because you earn a fixed rate of return, but bond holders are more likely to be paid back than stockholders in the event of a bankruptcy.
As debtors of the company, bond holders are always paid before stockholders.
A Mutual fund is a mix of investment types (stocks, bonds, and much more) which is professionally managed for you.
A mutual fund brings instant diversification, and they charge fees for taking your money and investing it.
Mutual funds can come in all shapes and sizes. Some passively track the large market indexes like the S&P 500 (spreading your money across lots of companies), while others are more actively managed and more costly.
Be sure to check the expense ratios before investing.
Best bang for your buck
When you’re a rookie investor like yourself, you want to get consistent returns with minimal effort.
Don’t try to be smarter than everybody else – individual stocks can be volatile and even the experts have a tough time picking winners.
Putting your money in a stock index fund (a type of mutual fund) by Vanguard is a great way to start investing for beginners.
- Low cost
- Consistent returns
Vanguard is a non-profit investment management company, meaning they’re not backed by shareholders bugging them for higher returns.
This helps them keep costs low.
Vanguard also touts the industry’s oldest index funds, and their track record of consistent performance speaks for itself. For instance, the 10-year average annual return on their U.S. Growth stock fund is 7.96%. Not too shabby!
As a youngin’, you have the investment horizon (time you’ll hold a portfolio) to take on additional risk by investing in one of their stock funds.
You could also invest in bond funds – they tend to be less costly but provide less return on average.
The key of investing for beginners: due diligence
When researching funds to buy, be sure to note:
- The prospectus/summary – this discloses the investment objective and strategies
- The expense ratio – this tells you what costs are coming out of your pocket
- The historical performance – just remember that past success doesn’t predict the future
This gives you a solid baseline for understanding how to make your money work for you, which is key to financial freedom.
Investing for beginners is an exercise in avoiding failure. Preserve capital at all costs and don’t outsmart yourself – leave that to the big-wigs!
If you’re interested in building wealth, keep yourself on track with my FREE wealth building tool HERE.
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All opinions expressed on this blog are solely those of Home at 30 and are in no way affiliated with any other organization or institution. The purpose of this blog is to give general education and information about investing, wealth, careers, and college; It is not intended to be professional advice.
Author: Josh Ramos
Josh has paid off $130k in student loan debt in 4 years. By founding Home at 30, he wants to help end the student debt crisis by helping students and young professionals make decisions that will reward them for a lifetime.