Investing has its jargon, its theories, and its strategies. All these add up to what seems like a high barrier to entry. Anyone looking from the outside in might be easily put off. However, it can all be distilled. Everything in the complex financial world can be broken down and understood in numerous ways – each suiting each new investor. The motivation is the financial security we all aspire to have. To begin, it’s about key principles and having confidence in what they are and applying them. Below are three examples.
Understand Risk vs. Return
‘Risk’ and ‘return’ are two terms that have begun to pervade all kinds of industries. As datafication has spread from financial services to football, the layman is very aware of how to use these terms.
But what do they mean? Generally speaking, the higher the risk you’re willing to take on, the greater the possible gains. But we can’t neglect the balance inherent in that: where there are higher risks, there is also a higher chance of losses.
However, with higher risk also comes a higher likelihood of losses. Low-risk investments like government bonds or money market funds offer stable but minimal growth. Higher-risk vehicles like stocks provide the potential for larger returns but can also fluctuate wildly.
As a new investor, it’s crucial to have a realistic grasp of your risk tolerance. You can take the low-risk investment route with government bonds and money market funds – they’re stable but growth can be minimal. You can also take the high-risk investment route with stocks that are more prone to fluctuation but may yield higher returners.
Don’t invest money you may need in the short term, as you might be forced to sell holdings when values are depressed. A diverse portfolio balancing risk levels is ideal for most. Educate yourself, but don’t blindly chase high returns without understanding the accompanying hazards.
Start With What You Know
When you’re inexperienced, investing can seem like exploring an alien world. Unfamiliar terminology and concepts can breed frustration. Fight this by starting with investments you inherently understand. Are you passionate about a particular industry or company? Considering investment vehicles linked to areas you’re already familiar with can build knowledge and confidence.
Similarly, tech-savvy investors may want to start with trading apps or robo-advisors that break investing down into simple concepts and processes. Beginning with the familiar provides a solid foundation to expand into more advanced strategies over time. Invest in what you know first, then broaden your horizons.
AI is increasingly crucial in setting benchmarks for stock analysis. Consider FINQ, a platform that exemplifies utilizing AI and data for smart investing. FINQFULL offers a relative, and continuously updated daily ranking of stocks, ensuring the rankings reflect the most current market conditions without promoting day trading. The platform’s portfolios—FINQFIRST for the top 10 stocks, FINQLAST for the bottom 10, and FINQEDGE for a combination of both—enable investors to make well-informed decisions. With this system, a stock ranked number 1 is optimal for that day, while a stock ranked 500 might be considered for short selling. This approach allows investors to confidently select strategies that align with their goals, based on precise, up-to-date insights.
Take Advantage of Automation and Dollar Cost-averaging
Perhaps the greatest tools for new investors are automation and dollar cost averaging. By setting up automatic transfers from checking to investment accounts, you’ll get in the habit of investing regularly with minimal effort. Dollar-cost averaging simply means investing the same dollar amount at regular intervals. This allows you to buy more shares when prices are low and fewer when prices rise, smoothing out market volatility.
Combining dollar cost averaging with tax-advantaged retirement accounts like 401(k)s or IRAs is a powerful one-two punch that allows you to build wealth automatically over decades through the power of compounding returns. Automating good investing habits from the start can set you up for sustained success.
Conclusion
The key for new investors is to start slowly and simply, focusing first on core concepts and personal areas of interest or expertise. Have a plan, understand risk versus potential returns, and automate good habits. With patience and discipline, investing can unlock abundant future financial security. While wealth building takes time, there’s no better moment to start than today.
