For beginners, investing can seem somewhat daunting at first. The steep learning curve, the technical jargon, and the fear of picking the “wrong” investment(s) are things that first-time investors often struggle with when they get started with investing.
We have compiled a list of the top ten investment tips for new and inexperienced investors to help to demystify investing and to put you on the right track on your investment journey.
1. Define your investment goals
First and foremost, you need to be clear about what your investment goals are. Are you saving up for a downpayment on a house in five years? Are you investing to pay for your child’s university degree? Are you looking to create wealth for yourself and your family? Your reasons for investing will shape your investment goals.
Noting down your goals will help you to identify what investment horizon you are looking at, what expected returns you will require, and how much risk you will need to take to achieve your investment goals.
2. Have a plan
Once you have defined your investment goals, you can create your investment plan. An investment plan primarily exists to match your financial resources with your investment goals. It will also help you to stay on track with your investments to reach your financial goals.
Your investment plan will detail what assets you will be investing in, how long your investment horizon will be, how much capital you will start with and how much you will invest periodically, and how much risk you will take.
3. Know what you are buying
Before hitting that buy button, you need to know what you are buying. That means you should know what the risks and rewards are when investing in stocks, bonds, commodities, cryptocurrencies, and any other asset you are considering adding to your investment portfolio.
The old investment adage “don’t invest in what you don’t understand” is sound advice. Conducting thorough research into what you plan to invest in - if you are unsure how a financial product works - is imperative. There isn’t much that you can’t find for free online if you have a question about investing. Should that happen, you can always reach out to a financial advisor to receive expert advice.
“Don’t put all your eggs in one basket.” This expression may be a cliché, but it holds true in financial investing.
Diversification means building a portfolio composed of assets and securities that have different correlations. If the value of one asset class drops, you can mitigate loses by also holding other asset classes that do not have a strong correlation with the first asset class. That is a key reason why most standard portfolios are composed of a mix of stocks and bonds. The two asset classes tend to have an inverse relationship.
Bitcoin, for example, is an excellent diversifier. Historically, the digital currency has had little to no correlation to traditional assets, such as stocks and bonds. That means it can potentially help to add portfolio returns even when the stock or the bond markets are experiencing market corrections.
5. Invest, don’t speculate
There is a difference between investing and speculating. Investing refers to having investment goals and building a portfolio to achieve them. Speculation is more akin to gambling. It involves investing opportunistically and, usually, for the short-term.
While you may make money speculating here and there, in the long-run, you are more likely to generate losses. The slow and steady approach of investing in a portfolio of carefully selected assets (and adding to that portfolio regularly) is widely considered the smarter way to make money in the financial markets.
6. Don’t follow stock “tips”
In addition to investing as opposed to speculating, it is also important to note that making an off-plan investment on the back of a “tip” that someone gave you is not advisable. Now and then, you may come across someone who has “an amazing stock tip” or another investment opportunity that you “must” get in on. Avoid that at all costs!
Making an investment because of a “tip” is a sure-fire way to lose money. Instead, building your wealth by following your investment plan and adding to your portfolio regularly is a much safer and wiser approach to making money as an investor.
7. Think long-term
As an investor, you need to think long-term. Slow and steady wins the race in the financial markets.
With an investment horizon between 10 to 25 years, periods of volatility and market corrections are nothing to fear. You can sleep easier as a long-term investor because you know that what’s happening in the markets today doesn’t really matter that much.
Your investment horizon will depend on your investment goals but, generally speaking, the longer you are able to stay invested, the more money you can expect to have at the end of your investment period.
8. Don’t risk more than you can afford to lose
While investing in a diversified portfolio composed of a mix of different asset classes is a relatively safe way to invest, there is always the small possibility of a global market meltdown that could cut your portfolio value by 25 to 50 percent (as we witnessed in 2008).
While financial markets recovered in the years after the great financial crisis to reach new highs, if you would have needed some of the money you had put into your portfolio at the height of the crisis, you would have had to take heavy losses. Hence, it is important not to risk more money than you can afford to lose. Only invest funds that you don’t need to live.
9. Don’t forget about taxes
Sorry to disappoint you but the taxman always gets his cut. That is also the case for (most) investments. You will need to file capital gains tax on your investment income (unless you are using a tax-free investment vehicle, such as a stocks and shares ISA).
Additionally, different investment products come with different tax obligations. Consult your tax advisor to ensure that you are aware of how much taxes you will need to pay on your investments.
It is essential to incorporate expected capital gains tax payments into your investment plan as taxation payments will reduce your actual realized returns at the end of your investment period.
10. Use the power of compound interest
Finally, you should aim to benefit from the power of compound interest. Albert Einstein once referred to compound interest as the most powerful force in the universe. Explicitly, he stated: “Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn't, pays it.”
The way to benefit from compounding interest as an investor is to add funds to your portfolio periodically and to re-invest investment income such as dividend and coupon payments.
An excellent way to potentially benefit from the power of compound interest is to use our automated crypto savings platform. It enables you to add bitcoin to your investment portfolio at regular intervals in a fully-automated fashion by connecting your bank account to the platform.