Tips for Investing Beginners

Tips for Investing Beginners

Starting out investing can be tough and there is a lot of terminology that serves to confused more than help in the beginning.  Fortunately there are a few things you can do to save yourself from going broke without even knowing what happened.  Following these simple tips will get you investing in a way that should set you up for success over the long term so that down the road you will be able to retire to live a happy, healthy, worry-free life in retirement.

Know Your Risk Profile
Whether you're going to start invest money for yourself or go through an investment advisor the first thing you need to do is to understand your personal level of risk.  Are you comfortable with losing half of your money on a high risk stock or are you not willing to risk losing any money at all?  Most people fall somewhere in between the two extremes and should have a portfolio of investments that matches their risk profile.

Once you know how you feel about risk taking in investing you will also need to consider your age since it is another important factor in determining how to setup your investments.  The younger you are the more risk you should be able and willing to take.  This is because, in a worst case scenario where you lose a lot of money, you still have a lot of time left to make up for the lost time.  The advantage however would be that you could grow your money much faster if things do work out.  As you approach retirement age, it's important to keep as much of the money you have saved as possible because you can't really afford any large losses when you need to begin drawing on the money soon.  In this scenario you want to keep to the lower risk investments.

Get A Low Cost Brokerage Account
The next step in your investing journey should be to sign up for a low cost online brokerage account.  I won't mention any specifically here but sufficed to say that googling for one would produce many positive results.  Read a few reviews and decide on which one suits you best.  Either way, standard brokerage accounts will charge anywhere from $25 to $50 per trade which can really eat into your profits, especially when you're dealing with small accounts in the beginning.  The new low cost online brokerage accounts will charge anywhere from $3.95 to $9.95 per trade which is really a significant savings.  More to invest!

Diversification
"Diversification is the only free lunch" Jim Cramer.  Diversification is basically spreading out your money over different types of investments.  This keeps the eggs spread over many baskets.  Having a diversified portfolio of investment involves investing many different sectors in the stock market as well as internationally and also some money in bonds. This strategy will ensure that you always have some money protected from losses while other parts of the portfolio are growing.  Stocks are considered growth areas whereas bonds are the safe less risky money.  The recommended way to get begin investing in a diversified portfolio might look something like:
25% bonds
40% US Stocks
25% International Stocks
10% Higher Risk Stocks

Avoid Mutual Funds
Mutual Funds are a pool of money that individuals contribute to that is managed by a financial professional.  Most mutual funds use these funds to purchase stocks and will generally attempt to profit through strategic buying and selling of stocks so you can profit without doing the work.  The only problem is that it gets expensive as they take over 2% of your investing dollars every year whether they make money or not.  On top of this is the fact that their track record on average is worse than the overall stock market, which can be purchase as an index fund.

Go With A Low Cost Index Fund
An index fund is a collection of stocks that aims to match the performance of the index it is tracking.  These index funds work by owning all of the stocks represented in the overall stock market index it's tracking in value-weighted proportion, but don't worry about that stuff.  For investing beginners it is the best way to setup your diversified portfolio because it has cheap management fees and matches the average performance of the markets.  The management fees are usually less than 0.5% compared with 2%+ with mutual funds and index funds, on average out perform mutual funds.  Your investment portfolio could be based entirely on index funds and still maintain diversification.  Just take the list from the diversification section and you should be able to purchase index funds in each of these categories.  Be sure to keep the proportions that you're comfortable with.

Be Prepared To Lose Money
It's a sad reality but you will lose money.  Everyone loses money investing at some point.  Even Warren Buffet one of the richest men in the world gets it wrong sometimes.  But if you know you have a diverisified plan that you stick with, you will overcome those losses and persevere.

Start Now
Go!  As it was mentioned in the Risk Profile section, time is your friend.  The sooner you start investing the more time you have for compounding interest to take hold and grow your money to untold levels of richness.  Once you've begun investing don't think that it's time to stop learning about it.  It's your money and no one will care about it more than you so do all that you can to keep it and get more!

All the best in your investing success.