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Investment Strategies for Beginners

It can be daunting for beginners to finally take the plunge into investing. There are so many options to choose and it can make things extremely perplexing. However, history shows that it pays to invest, because doing so can help you reap incredible rewards in the future. Before you begin however, there are two basic questions that you should answer:

1) How much money should I set aside to invest?

It is important to answer this question objectively if you are ever going to devise a solid investment plan. The golden rule is that you should never invest more than you can afford to lose. For example, if you are sacrificing your basic necessities to put money aside to invest, then you need to reallocate a smaller portion of your discretionary income to investing. Contrary to popular belief, no amount is too small to set aside for investment purposes. If you can only manage to spare $100 a month, it is still beneficial to invest. Your income will fluctuate over the course of your life, so the exact amount isn’t the most important thing. You should always aim, however, to be consistent in setting money aside.

2) What’s my overall investment strategy?

The vast range of options available often confuses new investors. It’s important to demystify the process in order for you to eventually reach your investment goals. The most common place to invest is the stock market through an online trading account. Stocks represent shares of ownership in individual companies, and are sold to raise capital. These usually fluctuate, but can create solid returns. Also, some of these stocks yield a small percentage of the share price, usually on a quarterly basis. These are known as dividends, and should be considered a reward for your patience.

Individual stocks are not usually recommended for the beginner, because a lot of research is necessary to forecast company growth. Many professionals still make mistakes when picking individual stocks, because in the end, market contractions and peaks are inherently unpredictable. So should you steer clear of stocks? Not necessarily. Mutual funds are an excellent alternative to stocks. These funds typically cost a bit more money to get into than individual stocks, but they are managed by professionals who oversee a great deal of money, and have plenty of expertise.

Mutual funds are a portfolio of stocks or securities. Typically, these funds diversify your risk as an investor, because while one or two securities in the fund may go down, other securities hold steady, or gain ground. This minimizes your losses, but also collars your gains. For this reason mutual funds are best suited for a long-term investment strategy. It is important to research your mutual fund on the basis of performance, risk, and portfolio composition.

Growth or Value?

There are two basic directions you can focus on. The first area is growth. Most investors who carry growth securities are not interested in short term cash pay-outs. Instead they are seeking out opportunities for undervalued companies that have potential to become greater. The growth model is applicable to stocks, mutual funds, and any other security.

The other direction involves pursuing the value strategy. These securities are usually selected based on the amount of yield they produce. For example, the most common form of value in stocks is the dividend. Investors who can tolerate incremental contractions and expansions can be rewarded handsomely, sometimes greater than 8% annually. However, it is important not to select a strategy which is heavily focused only on value. Many speculative or fundamentally flawed companies attempt to lure investors in with yield. History shows that a balance of both strategies works the best.

There are numerous resources which can help you with your search. Investopedia.com is a great resource, and can help you move in the right direction. Feel free to ask here as well!

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4 Responses to Investment Strategies for Beginners

  1. Mark Ross says:

    This is really a helpful for aspiring investors like me, I just want to ask if you have any suggestion on how I should allocate my investments. How much should I put on stocks, mutual funds and bonds? I’m younger than 20 and I want to invest for the long term.

  2. Prateek, good and thorough article – thank you! Love what you said about not investing more than you can afford to lose. I think that’s key advice for any beginner.

  3. Hi Mark,
    At such a young age, you can afford to be aggressive with your investment strategy. However, as you are younger than 20, I would advise you to contribute the maximum of $5,000 dollars into your IRA (Individual Retirement Account). The main reason for this is that you would be exempt from paying taxes on it (a major benefit)
    In terms of stocks or mutual funds you must pay taxes on realized capital gains (and in the case of mutual funds, a small management fee)
    You should only think about stocks and bonds after you contribute your 5,000 dollar max on your IRA. You will earn an astronomical amount via compound interest by the time you retire, if you follow this.

  4. Thanks, Laurie! I’m glad you agree.

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