Investing For Beginners.
In this blog article, we will look at the basics of investing and how to start investing.
I will give newbies the guide they need to get going and start building a solid investment portfolio based on my own experience.
I will be looking at how to start investing, the best way to begin your journey, and what advice I have for anyone new to investing so you can secure your financial freedom.
What is the Best Time For Start Investing?
The number 1 thing that you can do when you are just starting investing is to have started as early as possible.
The greatest time for you to start investing was yesterday, but fear not, today is the second-best time to start investing.
How To Start Investing in Stock Mutual funds.
Mutual funds are a great place to get started if you’re looking to start stock investing. They’re the most popular way for people to invest in the stock market and are incredibly easy to get involved with.
Mutual funds are a pool of money that an expert manages. The mutual fund manager buys shares of different companies and then sells them when they make or lose money. The fund manager distributes the profits to beginner investors through dividends or capital gains.
Mutual funds can be beneficial for people who don’t have enough money to buy individual stocks but still want some exposure to the stock market without taking on too much risk.
What is the difference between exchange-traded funds and mutual funds?
Exchange Traded Funds
Exchange-traded funds (ETFs) are a hugely popular way to invest in the stock market. They’re similar to mutual funds but trade like stocks and can be bought and sold throughout the day.
Exchange-traded funds are index funds that are traded on stock exchanges like stocks. They track an index, such as the S&P 500 or the Dow Jones Industrial Average, and provide similar returns to those indexes with less risk than owning individual stocks.
ETFs can be bought or sold on major stock markets like the New York Stock Exchange (NYSE) and Nasdaq, making them more accessible for individual investors than mutual funds, which can only be purchased at a specific time during the day.
Mutual funds are investment portfolios that pool the money of many investors to purchase stocks and bonds. Mutual funds are an excellent way to enter the stock market, but they’re not without drawbacks.
Mutual funds are managed by highly professional fund managers who invest in hundreds or thousands of stocks or bonds. They’re great for small investors to diversify their holdings and spread their risk.
That’s because mutual funds are on a wide range of stocks or bonds, so if one company in the portfolio runs into trouble, other companies may pick up the slack.
In addition, mutual funds offer instant diversification: Investors don’t have to spend time researching individual companies before buying shares in them. Instead, they choose which type of fund they want (such as large-cap growth) and buy shares in that fund.
What are the primary stock markets around the world?
The primary stock markets for investing in around the world are:
The US has the largest stock market in the world by capitalization. It is also one of the largest equity markets in total value traded.
The United States is home to some of the biggest companies in the world, such as Apple Inc., Microsoft Corp., Meta Platforms Inc., Alphabet Inc., and Berkshire Hathaway Inc., which all have a global reach.
China’s stock market is one of the fastest-growing stock markets in the world.
It has been growing at a CAGR (compound annual growth rate) of over 20% since 2004, with total market capitalization reaching USD 7.62 trillion (2021).
China has embraced technology companies like Alibaba Group Holding Ltd., Tencent Holdings Ltd., JD.com Ltd., and Baidu Inc. due to their potential for growth and profitability.
Japan’s equity market accounts for about USD 5.67 trillion in shares traded yearly (2019). Japanese companies are known for their high-quality products, which include products from Toyota Motor Corp., Sony Corp., and Panasonic Corp.; consumer electronics from Toshiba Corp.; and pharmaceuticals from Takeda Pharmaceutical Co., Ltd.
What Is Compounding And Compound Interest?
We have all heard of compounding and compound interest.
To harness the true power of compounding, you need to physically start your journey in investing and get it started as soon as possible.
You won’t make any gains in the markets waiting for the perfect time to invest, and believe me, there is never an ideal time, so just get started as soon as possible.
If you are a bit late to investing, don’t worry, we have some strategies for you too, and you can still get the benefits of compound interest.
It just won’t be on the same level as someone who started ten years before you, as the power of compounding works better the more time you have your money invested.
Benefits of starting early as an investor.
Aside from the compound interest, there are also other benefits to getting started in investing early.
One of these advantages is the younger you are, the more mistakes you can make. If you make a big mistake investing when you are 20 years old, you still have time to recover. If you make a costly investing mistake impacting you at 50 years old, you don’t have as much time to recover the losses.
So, take a bit of time to learn about investing, but try to take the plunge and get your money into the markets as soon as possible for maximum gains. The best investment strategy for your age is to look at higher-risk investments in your younger years and gradually reduce the risk as you get older.
Often the higher-risk investments give the most potential for return. Still, it also gives the most exposure to losses.
So it makes sense to look at some higher-risk investments in your 20s, for example, to try and get that investment snowball built up early on, and if it doesn’t work out, you still have time to recover.
What is a good scale of risk by age?
A good scale of risk by age in terms of investments is as follows:
You can try some high-risk investments to maximize gains
Here, you need to start thinking about moving your investments into medium risk depending on how you have done in the earlier years.
You want to have most of your money in medium-to-medium/high-risk investments.
This is where you need to have your investments in medium-risk markets
You need to be considering having the bulk of your investment portfolio in low-risk markets
You should be looking to have all your investments in low-risk markets. As you approach retirement age, you need steady growth with a low potential for volatility.
Golden rule of investing and life.
The golden rule of investing and life is to pay yourself first. You pay your bills, your expenses, your insurance, and the tax man, so make sure that you pay yourself too, don’t invest with money you cannot truly afford to put somewhere and not touch it for years.
Take a percentage of your monthly income and put it away into your investment fund.
Whatever amount of money you are currently making, whether its $1000 a month, $2000 a month, or $10,000 a month, you must decide how much to invest of this, and this is a big decision.
What percentage of your monthly income should you invest?
I recommend starting with at least 20% of your salary and putting that aside for investing.
Put this money into an investment or invested savings account, which you do not have easy access to, and leave it there and don’t touch it.
When should you start thinking about investing?
Some of you may be saying that you don’t have the money to invest, every cent you earn goes to paying bills, and you are left with nothing in your account at the end of the month.
If you are in this situation, then maybe before you start thinking about investing, you need to consider how you can reduce your expenses or earn more money.
But you need to sit down with a pen and grab some paper and drill down into your expenses and where your money is going.
Get your last 12-24 months’ bank statements (which can be downloaded from your internet banking account), and go through every transaction forensically and see where your money is going; you should be able to cut some expenses and use this money to start your investment account.
Options if you don’t have spare money to invest.
There are two options for you if you currently have no spare money to invest. To either reduce your expenses or increase your income, you need to work out how to do one of these two as soon as possible so you can start investing.
Before you start your investing journey, I recommend you start by speaking to a financial advisor because, remember, I am not a financial advisor; I am just speaking from my personal experience.
Please speak to your local financial advisor and open a retirement account with them, where you contribute a percentage of your salary every month automatically.
Investing into a retirement investment account.
If you are investing into retirement savings account directly through your employer or directly out of your profits from your business, that money is invested before tax; this is very important.
This gives you a higher amount of capital flowing into your retirement account as the government has not taken a large 30-40 or 50% cut from the money you have earned; all of that money goes into your retirement account tax-free.
You will have to pay the tax you owe on this amount when you come to draw it down on your retirement account. Still, there will be an amount you can take each year tax-free at this point, and by this time, when you retire, your tax bracket should be a lot lower, plus you won’t need as much money to live, so the tax implications should not be an issue at this time.
The other benefit you can take advantage of if you have an employer is an employer contribution scheme. This is where whatever you contribute from your salary into your retirement account. Your employer will match it one for one!
How is that for a great deal?
Whatever you contribute to your retirement account, your employer will match. So, this is 100% gain on whatever you contribute before any gains on the actual investment, instantly doubling your money!
What you need to look for.
You need to be looking into this if you aren’t already. You must contribute the maximum amount to your employer’s investment account. If they have this contribution matching scheme, speak to your HR department at your place of work, and they will let you know what you have to do to join this scheme.
Now the other benefit of the dollar cost average method of investing a portion of your salary every month is that you are smoothing out the peaks and troughs of the market and reducing the volatility of the market fluctuations.
Buying stocks from S&P 500.
If you are buying into the S&P 500, for example, and are putting $500 a month into it no matter what the current market stock price is…. high low, or average. Some months the price of the S&P will be higher; some months, the price will be lower.
If you are buying continuously throughout these fluctuations when the price is low, you are purchasing more units; when the price is high, you are buying less, so you are averaging out the cost of the shares throughout the time you are investing.
Dollar Cost Averaging.
Generally, this investing tracks the uptrend of the markets and delivers returns over the long term, an average of about 9%. Now, this isn’t going to amaze anyone with massive gains in your portfolio, but steady gains of 9-10% a year over the long term start to compound when you have built a nice bit of capital in your portfolio.
In investing, we say that you need to get to $100,000 invested capital, and then you start to see the impact that compounding has. Here is an example to show you the power of compounding at 10% on $100,000. If you manage to get to $100,000 in principle invested, leave it in an investment account for 20 years without adding any more.
If you were getting an annual return of 10% on that $100,000 pot of money, after 20 years would be worth $672,750. Therefore, it’s important to start early to build up that principle invested and see the gains you can make with compound interest.
Dividend paying stocks
Some of your investments will also be dividend-paying stocks in the stock market. I highly recommend you re-invest any dividend payments into buying more stock. This is because this turbo charges the power of the compound interest.
Not only are you accumulating interest on top of interest, but you will also be accumulating interest on the dividend payments and increasing your principal investment pot.
You can see how this investment will grow over time, keep getting bigger and bigger, and eventually become an unstoppable money-making machine to increase your net worth year in and year out.
This is how the rich get richer because of the power of their investments over time and the interest upon interest upon interest that keep accumulating.
Send out your soldiers.
You need to get your money working for you; imagine just a few dollars you earn is a little soldier you will send out to make more money for you.
The more soldiers you have, the more they can make for you. Try to invest as much as possible and have your money continue working for you rather than working for money; this is the best path to financial freedom.
Give your investments time to grow, and one day, you will look at your investment portfolio and be amazed at how much it has grown against the actual contributions you have made.
You need to have a long-term mentality when it comes to investing, and you need to invest your money and forget about it, don’t keep moving your money around. Keep plugging the money into your index funds or retirement account; over time, the general up trend of the markets will mean that your investments are also rising.
If you’re only just starting, you don’t have to have a lot of money to begin your investment journey. Even the smallest savings can be used to buy shares through stock markets and mutual funds, which I highly recommend for if you are new to investing.
Applying what you have learned in this article and the other article on this website will set you up to be an unstoppable money-making machine, and your future self will thank you for it.