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Investing for Beginners ~ In the Beginning

Lao Tzu tells us that “the journey of a thousand miles begins with a single step.” So it is with investing, where one’s first investment begins a lifelong journey into a cycle of wealth.

The difference, of course, comes in where to place one’s feet.

When investing, there are a horde of possibilities. It seems everyone these days has a reason for you to place your assets with them. Simply Googling the phrase “begin investing,” and you will be deluged with websites telling you that their advertisers are absolutely the place to go.

The truth is somewhat more mundane. Here’s a couple of very basic tips to get you started; as this blog progresses, expect to see many of these points fleshed out in detail.

Know your purpose.

Why are you investing money? Obviously, an investment exists to make money. But beyond that, the reason for your investment needs to shine through. Is this a long-term investment as part of your retirement plan? A short-term investment on a hunch? Knowing what’s at stake will help you figure out what your acceptable level of risk is. That, of course leads us to: 

Gauge acceptable risk

This one is tough, and it’s the thing that even top professionals argue over. In order to figure out what is acceptable risk for your investment, you need to know what the risk is in your investment.

There’s going to be a number of factors to this. To begin with, how unilateral is your investment? Placing all of your money on one company is far riskier than investing in a fund or a market-supported commodity. It’s true that the solo company has a chance of outperforming the funds by leaps and bounds; we hear stories about people who got in near the ground floor of Microsoft, Boeing, and other large corporations and are now rich.

These stories are to investors as the songs of the sirens were to sailors; they call you to danger. For every company that becomes a Microsoft, there are hundreds that simply fail. The stories of people who invested in a company that then failed, losing those people their money, make for more of a dog-bites-man story, but are far more common.

For less risk, go with more diversity. Mutual funds are a common entry into the investing world; depending on the fund, it may allow you some flexibility to pick stocks. Index funds are even safer yet, being algorhythmically tied to a particular stock index (the Nasdaq, the Dow Jones, etc.). These funds are safe, but they tend to lack the big-buck potential of any single given stock.

A middle ground between these can be found in specific mutual funds, called “sector funds,” focusing on certain industries. For instance, if you think medical technology is the next big, breakaway industry, these funds allow you to invest in medical technology without having to invest in one particular stock.

Whether index, mutual, or sector, all of these funds are going to be managed by a third party. Make sure before investing you know what that third party is going to charge you; it makes little sense to invest your money only to have the profits sucked into management fees.

Commodities investment is a little anachronistic, but it can still yield decent results. That said, commodities markets tend to fluctuate a little faster than stocks (take, for example, the recent crash in the price of gold). Investing in things is one of the most specialized areas of investment, and requires a significant amount of research into the particular commodity. Do not venture into these waters with significant assets.

Practice makes perfect.

Practice?

Yeah, practice. Back in high school, inevitably your social studies teacher ran a game amongst the students where the students had a certain amount of hypothetical money, and each invested said money in their own way. The student who came out the best was usually declared the winner, and universally adulated for two to three seconds.

That’s a good game, though, and you should play it. Pretend you have a portfolio, and then watch how it performs over the course of several months.  Check it regularly and note where it is you made money, and where you lost. At the end of three months, compile your data. You’ll get a pretty decent feel for where you made the best return on your investment.

We could also add researching into this subheading too. It is said that knowledge is power and this is especially true when it comes to investing. The more information you can gather before you start to invest the better prepared you will be. If you’re feeling a little baffled by the array of information available online then you might find it helpful to bury your head in a few of the most popular investing books around to improve your knowledge base.

DO NOT let the investment come to you

Invariably at some point, someone will come to you with a “great investment opportunity.” This could be anything from a D-list celebrity hawking gold on your cable TV advertisement to a cold phone call pumping up a great stock buy.

Whatever it is, decline. Anyone that goes out of their way to tell you about how great an investment is is trying to sell you the very thing they are talking about. This means what that person would like money instead of the very “opportunity” they are selling.

The gold ads are a perfect example of this. In early 2009, gold was around $800.00 an ounce. In 2011, the price had spiked to above $1,900.00 an ounce. And it was in 2011 that ads flooded the market, telling people to “buy gold now” to make their fortunes.

But the people advertising this gold had gold. Alot of it. If gold was such a red-hot property, why in the world wouldn’t they want to keep it? The answer became very clear; those vendors knew they were perched on top of a bubble, and the ads were a way of getting while the getting was good. Gold is now in the high $1,300′s, and still falling. That’s a 32% loss over the course of two years for anyone who listened to those ads.

Don’t be that person. Go hunt your investment; don’t let your investment hunt you.

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5 Responses to Investing for Beginners ~ In the Beginning

  1. You need to know and set your goals in order to be successful. Also, make informed and smart decisions.
    KC @ genxfinance recently posted..Maximum 401k Contribution for 2013My Profile

  2. I’d be telling a lie if I said I knew what my money was invested in its entirety but I don’t. I’m learning little by little what I need to do and what I should know and be doing to be an informed investor. Many people freely give their money in hopes it gets invested well but we should know exactly what’s happening.I want to know everything I need to know about my money and investments.
    Canadianbudgetbinder recently posted..Pet Budget: Homemade peanut butter dog treatsMy Profile

  3. Every investors should know their purpose in investing, that’s one of the essentials to be a successful investor. Am I right with that?
    Mark Ross @ ThinkRichBeFree recently posted..Why You Should Invest In The Stock Market Today And Not TomorrowMy Profile

  4. Peter Jones says:

    Canadianbudgetbinder: Absolutely you should know everything you can about your investments. That said, the idea of a managed fund shouldn’t always be a turn-off; there’s an advantage to having a pro do the trading for you. Just make sure that fund comes with a great deal of transparency.

    Mark Ross: You are absolutely right. Many first-time investors don’t really think about things that way, which is why I included it.
    Peter Jones recently posted..Author Interview: Luna LindseyMy Profile

  5. Victor says:

    Thanks Peter for such an informative and elaborate post. My father began investing at a very young age. Instead of investing in stocks, he started to create his coin collection of old pennies, coins of different countries including the famed gold coin, Austrian Ducat http://www.meritgold.com/product-detail/gold/bullion/austrian-1-ducat. When I grew up, he handed down his collection to me. Bottom line: Start investing, though start small.

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