Investing can be complicated and overwhelming if you’re just starting out. Hopefully, the investing tips below will help you make sense of it all.
Investing is not the same as saving your money. With savings, your principal and interest are often guaranteed.
But investing always go hand in hand with risk. When you choose to invest some of your money, you’re accepting some risk for the promise of higher returns.
In this post, we provide a list of the best investing tips that every beginner should know and follow.
Why should you start investing?
Investing is one of the best ways to build wealth.
It allows you to use the money you currently have to generate even more money.
By investing, you’ll have a real shot at increasing the value of your nest egg and also beat inflation.
If you have huge debts at high interest rates, of course you should prioritize that. And set some money aside in an emergency fund for financial surprises.
Once you get these other financial goals out of the way or within a manageable level, it is time to focus on investing.
Investing Tips for Beginners
#1 Invest In Yourself First (Get Educated)
Investing can sometimes be complicated, but you don’t need to have an advanced degree or be a finance guru to start.
Notwithstanding, every beginner investor needs to start with a basic understanding of how investing works.
Read about the different types of assets like stocks, bonds, GICs and so on. Learn how to determine your risk profile, diversification, different investment accounts and their features and how the stock market works in general.
There are several options to choose from. You can pick a few finance books from the library or get investing resources online.
Just make sure you start with the basics and not get bugged down with too many complicated concepts.
Over time, you’ll improve your knowledge and become a better investor.
Related Post: How to start investing in Canada for Beginners
#2 Set Some Goals And Have A Plan
Keeping yourself motivated to continue investing is much easier when you have an investment goal and a plan to achieve it.
Your investment goals will help you determine your time horizon, how much risk you should be taking and the type of investments to choose.
For example, investing for a house down payment in 5 years should be different from that of a college education for your kids in 10 years or retirement in 30 years.
And making investment plans, like how much to invest periodically, will be easier when there are clearly defined goals you are working towards.
Tip: Write down your goals, put a dollar amount against them and assign a time frame.
Related Post: 7 Smart Must Have Financial Goals To Take Control Of Your Finances
#3 Match Your Investment To Your Goals
Once your goals have been set, you need to consider the types of investment that are best aligned to them.
If you’re investing for a short-term goal, you should have a lower allocation to risky assets like stocks. Stocks may outperform bonds over time, but there’s no guarantee how they’ll perform in the short-term.
Also, if you need regular cash flow from your investments, you may want to choose investments that pay dividends or coupon regularly.
While knowing your risk tolerance is important, matching your investments to your goals should come first.
#4 Know Your Risk Tolerance
Your risk tolerance, or risk appetite, is the amount of loss you’re willing to take on your investments. It is your ability to stomach drops in your investment value without panicking.
Risk tolerance should be determined by the time horizon of your goals, that is, how far away the goal is. If you’re 6 months away from a goal, you have a lower risk tolerance than when it was 5 years away.
But you need to also consider your emotions. Even with a goal that’s 20 years away, some people will panic if there is a 10 percent drop in their portfolio.
There are several tools online that can help you determine what your risk appetite is. For example, check out this ones from Vanguard.
In summary, your goals, time horizon and risk tolerance will help you decide on the right investments to choose.
#5 Start Small
Another important investing tip for beginners is to start small and start now.
You don’t need to have thousands of dollars to start investing – you can start with a few dollars especially if you’re using a robo-advisor.
Start with what you have and increase your contribution over time. The earlier you start, the more opportunity you have to compound your investment.
Even if you’re paying off debts or building an emergency fund, it still makes sense to invest a small percentage of your income.
It gets you in the habit and makes it easier to continue when you have more money to invest.
A few ideas to consider when investing smaller amounts:
- use a robo-advisor or no/low cost brokerage,
- use apps that round up your spending and invest the change
- invest any extra money like gifts and tax refunds
#6 Invest Regularly
This is one of the most important investing tips for both beginners and experienced investors.
Make it a habit to invest some money regularly, preferably with each pay you receive. It doesn’t matter if it’s a big sum or a small amount.
For example, if you consistently invest $1,000 every month with an average growth of 6%, you will have almost $700,000 after 25 years – with more than half of that coming from investment growth.
When you invest every month, irrespective of what is going on in the market, the odds of success will be stacked in your favour.
How the market behaves in the short term is not in your control, but how often you invest is.
#7 Avoid Trying To Time The Market
This investing tip is related to the previous point. Don’t be deceived into trying to beat the market average returns by timing your entry and exit.
Timing the market means you’re attempting to buy at the lowest levels and sell at the highest.
You may be lucky to get the timing right on a few occasions, but it is not a sustainable strategy – not even for professional and seasoned investors.
And anyone that tells you they know the direction the market will go for sure may be trying to sell you something, delusional or looking for clicks.
At the end of the day, time in the market beats timing the market. The longer you stay invested, the higher your chances of success and opportunity for compound interest to work its magic.
#8 Don’t Try To Pick Stocks
Active management and stock picking are hard, even for professionals.
Through many researches, it has been established that broad indices like the S&P 500 index outperforms many fund managers.
In fact, about 9 in 10 fund managers underperform their benchmark index over longer periods.
So rather than looking for the next Amazon or Tesla, buy an index fund instead. You can buy a fund that invests in all the companies in an index or a sector specific fund – for example Technology or Financials. Exchange Traded Funds make it easy and cost effective to do this.
Also, you’re more likely to make mistakes as a beginner investor if you try to pick winning stocks.
You simply don’t have all the information or knowledge to do a detailed analysis of individual investments. Investing in a broad fund will help you manage this disadvantage.
#9 Automate Your Contribution
If you want to check your emotions and prevent it from affecting your investment, you need to focus on this investing tip.
By automating your contribution, you take out emotions from your investing.
You may be tempted not to invest when every news around is predicting a stock market crash.
But when you have set a direct deposit from your chequing to your investment account, or some money is deducted from your pay by your employer, you will be less likely to give in to the temptation.
With this, your investing will be less overwhelming, and you’ll be more likely to stick to your plans.
#10 Diversify Your Investment
Diversification is a key consideration when it comes to investment.
Simply put, diversification means spreading your money across different investments to reduce the risk you’re exposed to.
This could mean investing in different asset classes (stocks, bonds, or commodities) industries and sectors, or across different geographies (US, Canada and foreign companies).
So rather than falling in love with a single stock, you want to invest in several companies across various sectors. Put your eggs in different baskets.
Diversification not only helps with risk; it can also improve your returns and help you weather severe market storms when they happen.
#11 Only Invest In What You Understand
In other words, don’t invest in the latest investment fad.
Don’t rush into putting your hard-earned money into an investment simply because it’s all over the news and everyone is making money from it.
Like Warren Buffet advised, if you don’t understand how a company makes money and what drives its industry in less than 10 minutes, simply move on to other companies.
You can apply the same advice to other investment.
Want to invest in Bitcoin or the latest cryptocurrency? Ask yourself if you truly understand how cryptocurrencies work. Are you investing or gambling?
And if you decide to put some money into it, make sure it’s a small amount you are comfortable with losing.
#12 Invest For The Long-term
One of the biggest benefits of investing for the long-term is that your investment will have more time to compound and recover from any short-term risks.
Granted, you could make huge gains in a short period if you made a lucky pick, but this is hard. It is difficulty to predict short term movements with any certainty.
If history repeats itself though, you’re more likely to succeed with your investments if you simply buy and hold and add more money regularly.
Don’t panic sell when the market is falling. Simply stick to your plan to buy regularly, come rain or shine, and you will benefit from dollar cost averaging.
#13 Monitor Your Progress
You should check how you’re progressing towards your plan periodically.
If you’ve set a 5-year investment goal, make it an habit to check-in on how your investments are doing regularly. It could be every 6 months, a year or any other period that suits you.
And no, don’t monitor your investment value on a daily basis. It is a recipe for making decisions that are heavily influenced by short term events and flunctuations.
By monitoring your progress, you’ll know if you need to increase your contribution to reach your goals, rebalance your portfolio and so on.
There are several apps that let you view all your investments in a single place. There’s Personal Capital for US residents and Wealthica for Canadians.
Or go with a spreadsheet if you want something that is customized for your needs.
#14 Rebalance Your Portfolio Regularly
The assets you have in your portfolio will perform differently. So over time, your asset allocation may be substantially different from your target allocation, based on your risk tolerance and time horizon.
For example: Let’s assume you started with a moderate risk portfolio with 60% allocation to Stocks and 40% to bonds. After 1 year, if stocks have performed really well and your portfolio is now 80% in stocks, you should rebalance to bring it back to your target.
It may mean selling some of the stocks, or simply allocating any new funds to bonds. Selling will immediately rebalance the portfolio but depending on itssize, adding new funds to the lower performing asset class may take a while before you get back to your target.
But be careful though. Buying or selling every other month isn’t rebalancing.
You should pick a regular time to rebalance your portfolio, such as 6 months or 1 year, and stick to it.
In addition, you may choose to only rebalance when your target allocation is off by a set percentage, for example 10%. This means you’ll do nothing for a 5% movement but rebalance if it’s off by 10% or more.
#15 Pay Attention To Your Investment Fees
Your investment costs matter.
Over time, the fees you pay will add and your returns may lag.
Reduce how often you trade to reduce how much you pay as brokerage fees. Luckily, there are many commission-free brokerages and robo-advisors now.
In Canada for example, WealthTrade charges no commission to trade (buy or sell) and Questrade let’s you buy ETFs for free. US Residents also have several options
If you buy funds with management fees, also pay attention to the fees. In general, actively managed funds will have a higher MER than its passively managed alternative.
The higher fees may be justified if the actively managed fund substantially outperforms, but this hardly happens.
#16 Don’t Be A Day Trader
Day trading is the practice of buying and selling different investments with the hope of making quick gains and exiting the trades same day.
It’s hard, time-consuming and you’ll be up against more seasoned and experienced traders.
To really make substantial gains, you may have to use high risk strategies like options, futures or CFDs. But keep in mind that you could lose substantial amounts of money, or all, with these strategies.
So leave day trading to the professionals. Invest, don’t speculate or gamble.
#17 Ask For Help If Necessary
Another investing tip for beginners: don’t be afraid to seek for professional help if you ever get overwhelmed with your investments.
It could be as simple as determining how much you should be saving or more complicated areas of taxes and estate planning.
Whatever it is, a financial advisor can help you quickly navigate problem areas and answer any questions you may have.
Consider using an advice-only financial advisor to get objective help. Conflict of interest is eliminated or very minimal since they’re only providing financial planning and not selling any investment to you.
#18 Focus On Your Savings Rate
How much you invest is one of the few factors you can control.
Rather than getting obsessed with movements in stock prices, focus your attention on how you can boost your income and increase how much you invest.
Take up a side gig, get a raise or change jobs. And as you make more money, don’t give in to lifestyle creep.
Live within your means and put the extra funds towards your investments and other financial goals.
What is a good savings rate or percentage? It depends on individual situations. For example, it may be difficult to invest more than a few percentages when you’re paying off debts.
But set a target even if it’s small at the beginning, put in the work to achieve it and increase the target over time.
#19 Keep Things Simple
This is a fairly simple and straightforward investing tip for beginners.
When you’re just starting out, don’t start dreaming about all the money you could make and start exploring complicated investment strategies.
Your objective should be learning and laying a sound investment foundation for the future.
With better understanding of how the market works over time, you can start to explore more complex investment ideas.
#20 Understand How Taxes Affect Your Investments
The type of investment you choose and the account you invest through has an impact on your taxes.
For example, the interest received on a bond will be fully taxed at your marginal tax rate in Canada. However, only 50% of capitals gains are taxed and you get a tax credit for eligible dividends you receive.
So all things being equal, you get the best after-tax return with capital gains and the least with interests.
Also, your choice of investment account matters. Investing through a registered account like Tax-Free Savings Account (TFSA), Registered Retirement Savings Plan (RRSP), Registered Education Savings Plan (RESP) and so on will allow your investments to grow and compound tax-free in Canada. USA residents also have 401k and Roth 401k.
After a few years, the difference between investing in a tax-advantaged registered account and a non-registered account will be substantial.
A good financial advisor or tax planner can help you navigate this and determine the best or optimal investment plan for your unique financial situation.
But if you manage your investments yourself, you need to familiarize yourself with how taxes affect your investment returns.
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#21 Ignore the noise
The last, but not the least, investing tip for beginner investors is to ignore all the noise in the market.
Avoid the temptation of checking your prices and portfolio performance every day. In the short term, prices will go up and down, but historically the stock market has gone up over the long-term.
And don’t make investment decisions based on what you just read or watched in the news. The media houses tend to sensationalize events to drive more clicks and view.
Rather, concentrate on the things within your control, like your savings percentage, asset allocation, time horizon and so on.
Final Thoughts on Investing Tips for beginners
We hope you find these investing tips useful. Investing can be straightforward if you keep to some simple principles.
Focus on the things within your control, avoid making costly mistakes and continue to improve your investing knowledge.
You may be a beginner today, but you’ll become more comfortable in your investment knowledge over time.
All the best in your investing journey!
