Investing in the stock market isn't a complicated process like most people might think. If you're new to investing in stocks, or have experience investing but looking for some added guidance, here are 5 beginner friendly tips for investing in stocks.
1. Start With The End In Mind
Successful people know the importance of starting with the end goal in mind. This means analyzing your goal or objective, laying out the plans to get there and then taking appropriate actions to work towards your objective. The same is true when building a house.
To start, a construction worker designs a blueprint that gives a visual of what the house will look like. It shows the sizes, the arrangements, the materials used, etc. next, they start building the basics of the home by pouring the foundation and building the framework of the house. Once they've finished, they can then begin working on the details of the house such as colors, interior design,etc. The end result is a comfortable home to live in.
The same is true with investing in the stock market. By setting your expectations right up front, you know what you need to do to get to your goals, and why you're working towards those goals.
If your only focus at the moment is to get on track for saving for retirement, you start out by analyzing how much money you want to live on when you retire, how much you need to save up to officially retire, and how much you need to be saving and investing each month to get there.
Avoid distractions from your end goal
The benefits of investing in the stock market can be very rich, so much so that once you've built a decent lump sum of cash towards your goal, it may be tempting to justify using it to go on that major vacation you've always been dreaming of, or starting that business you have had an idea for, and even upgrading your home to something more preferential.
These are all distractions that will happen when investing in the stock market, that's why it's important to set your plans and expectations up front, and be committed to following the course til your goal is reached.
2. Determine Your Investor Profile
What is an investor profile? It's an assessment of the type of investing personality you have and the objective of the money you are investing. Understanding your investor profile is as easy as answering a few important questions such as:
- How soon will you need the money you are going to invest?
- Do you consider yourself to be risk averse? Or are you comfortable with regular volatility?
- How knowledgeable are you about the stock market?
- What is your current income? Do you expect your income to gradually increase, stay the same, or rapidly increase over the years?
- What is your current age?
These are just a few examples. But the answers to these questions helps you determine your overall risk tolerance for investing. You risk tolerance may be conservative, moderately conservative, moderate, moderately aggressive and aggressive.
Each of the different risk tolerance profiles will have an approximate approach you can follow to investing your money, how to allocate your money and to which investments you should allocate it to.
Most investment banks will ask you a few similar questions before opening your investment account, and will suggest a strategy for you. For an example quiz to asses your risk tolerance, visit https://www.calcxml.com/calculators/inv08 to answer a few basic questions and get a free report on your investor profile.
3. Determine Your Management Approach
Choosing your approach to investing in the stock market may be what actually intimidates individuals from ever getting started in the first place. Why? Because how do you do what you don't think you know how to do?! Many people see investing in the stock market as choosing which companies to invest in, when to buy them and when to sell them, and calculating the prices to buy and sell, etc.
While this is certainly true for those who wish to have a very hands on approach, what most people don't know is you can invest in the stock market with a completely passive approach or an active approach.
A passive approach to investing means setting up your portfolio up front and investing on autopilot. It works by putting your money into exchange traded funds (ETFs), mutual funds or using a robo-advisor that customizes your portfolio for you. First you determine your objectives, pick a few funds that meet your goals, and invest automatically on a weekly or monthly basis.
By choosing to be a passive investor, you're not saying you don't monitor your investments, or that you are taking a riskier approach. It simply means doing the work up front, and letting the rest be done automatically.
An active approach to investing means hand picking your investments, doing research on each company you choose to add to your portfolio, and regularly monitoring your portfolio.
So what's the beginner tip? Make sure you understand which approach you wish to use for managing your investments. One takes more time and the other is more passive. Most beginner investors should probably begin using the passive investing approach, because it's an easy way to get started, it can be automatic and its already diversified by nature.
4. Invest Only In What You Believe & Understand
Warren Buffet is famous for teaching the principle of only invest in companies and industries that fit your circle of competence. This means investing in companies that you understand what their product or service is, how they make money, and how that compares to the industry competition.
Perhaps you have years of professional experience working at a few major banks. You understand the in's and out's of how the banking system works. Would it make sense to decide to invest in a company that creates semiconductors? Absolutely not!
Regardless of how much potential anyone says the company might have, you have no idea of how the company operates, let alone understand what a semiconductor even is.
The principle of investing within your circle of competence may also include investing in companies that you love and perhaps use every day. You might be an avid fan of Apple, it's fairly simple to understand how they make money, and you love their products because you own them all! This, combined with a little due diligence on the company financials and future plans poses potentially a great investment addition to your portfolio.
5. Keep A Long Term Perspective
Investing and trading are two completely different things. Trading the stock market means making multiple trades per day or week, and basing your trading decisions off of short term indicators like technical analysis, press releases and economic activity. Investing in stocks means putting your money into a company or fund, with the expectations of not touching it for many years to come.
The great thing about keeping a long term perspective is that it's nearly bulletproof. Looking back at the entire history of the stock market, we can see that it has it's both good and bad years, but the overall trend is always been up. Every single recession in history has rebounded to surpass it's original value. Thus, keeping a long term perspective eliminates any short term risk to losing your money, because you're not in it for the short term!