This article has been reviewed by a finance professional, but is one author’s individual perspective. We encourage you to speak with a financial professional before you make investment decisions.
If you’re like me, you have difficulty figuring out how much you spend on lattes every month, let alone figuring out how to put together a budget to make that amount seem more reasonable. So, when more complicated and involved financial topics come up, such as how to invest strategically, it’s easy for me to zone out.
Don’t worry if this describes your attitude toward financial discussions that go beyond the basics—money talk can be kind of exhausting. Unfortunately, it’s also necessary to understand if you want to live a financially responsible life. I’ve developed an opinion over the years that young professionals and people who are just starting to become truly financially independent could really use some education on the investing front. Most everyone has at least a vague sense that his/or her money could be working harder for them if it was invested. However, unless you specifically study this stuff in college, it’s hard to know how to make it happen. Human beings aren’t naturally endowed with a Warren Buffett gene (yet).
This was something I struggled with in the early days of real-person employment, and I was pleasantly surprised the first time I actually ended up seeing the benefits of strategic investment. I didn’t exactly get in on the ground floor with Google or anything like that, but seeing any gains through the stock market made me feel that I could actually make my money work for me. And while it might have felt a bit like free money at the time, it’s important to remember that the stock market is not like a lottery – returns represent compensation for taking risk and making well-researched decisions!
In order to help others experience this feeling, or at least explore the idea of investing a little bit of money sooner rather than later, I wanted to share these very basic investment tips I’ve come across over the years that can do anyone looking to get a baseline understand the way I did, a lot of good.
1. Appreciate The Full Picture: The Past, Present, And Future
In a collection of expert opinions on common mistakes made by beginner investors, one thing that made a particular impression on me was understanding the importance of getting the full picture. If you’re new to the market, one of the best resources at your disposal is history. For example, stock price charts can help indicate how companies have traded over time and can potentially reveal informative patterns, like whether investors favor certain industries during recessions.
Past performance provides you with a lot of information when making your decision, and as everyone knows, those who don’t know history are doomed to repeat it. But remember that past performance is only part of the picture, and there is no guarantee that past performance will be replicated in the future. There are a number of other current factors, including industry trends and economic indicators, that should be considered when making an investment, and you should be sure to read industry research to see where experts think a particular industry or company is heading.
2. Determine Your Timeline & Goals
This was some of the first advice given to me before I ever tried investing my own cash, and it’s something I still take to heart today. If you’re going to become a career day trader, this probably won’t apply so much, because you’ll be conducting transactions constantly with the underlying goal of maintaining an income. But if you’re simply looking to grow some funds on the side, there are all kinds of different possible timelines and goals to consider.
An article on how to invest your first $1,000 separated this conversation into two broad categories: short and long-term investment. Generally, if you’re seeking a short-term play for a specific reason (the example in the article is trying to make a down payment on a new car within a year or two), you’ll probably want to stick to a low-risk approach. Invest conservatively and you’ll have a better chance of at least making a little bit of money toward your specific goal. On the other hand, a long-term investment (perhaps even a retirement fund) can be a little bolder, as the lengthier timeline allows for more ups and downs along the way to profit.
3. Set Stops & Limits
Human beings don’t like to admit to making mistakes. It’s just how we are, and sadly enough, this is a problem when it comes to managing a financial portfolio. A common mistake for beginner investors is to allow this inherent human stubbornness to impact decisions in the market, specifically by refusing to recognize when it’s time to cut losses. It’s an ugly reality: at some point, an investment is going to lose you money, and it won’t always bounce back on its own.
A financial post on the traits of successful traders recommends avoiding this kind of issue by setting stops and limits on your stocks in advance. Basically, this means setting a lower limit at which you’ll sell the stocks and start fresh, regardless of what you think might happen in the future. Setting this up in the beginning is a great way to impart some discipline on your future self. In the moment, it’s difficult to determine when it’s time to sell. However, if you’ve already set that point, it’s not as hard to follow your own directions.
4. Stay Familiar But Diverse
This is advice I’ve found helpful not just in strategizing but also in keeping investing from becoming boring. The ideas are presented in an article about beginner investment tips, and they’re not difficult to grasp. Basically, investing in familiar companies allows you to stick to what you know: the companies you’re more likely to understand, keep track of, and be able to project. Meanwhile, investing in a diverse range of industries is a separate strategy that keeps you from getting too familiar. With money tied up in various industries, you’re less likely to suffer a significant loss if a sudden shift in the market impacts one or the other.
The financial strategies are pretty clear here, but again, I also like this tip from the standpoint of trying not to get bored out of my mind whenever I look through stock charts. Tracking companies and industries you actually have a personal interest in is a lot more fun; just be sure you don’t let your own attachment to those companies’ products impact your logic!
Keep all of these tips in mind, and you can find yourself on the right track. We can’t all be off the charts successful (no pun intended) when it comes to investment, but basic sound strategy can help you to grow your funds in a steady, effective manner.
Amanda Cole hails from New York City, where she spends most of her time writing and reading about finance. She also loves documentaries and searching for the best dumplings in the city.
Image via Flickr