Investing for beginners 

The concept and practice of investing can be a daunting subject, especially for the beginning investor. Apart from its complex nature, advancements in technology (like the internet) have made the investment landscape even more dynamic and complicated.  

Thanks to the internet, new investments have sprouted up, transactions have sped up, and the way people can do business has changed forever.  

With so many more investment opportunities and ways to invest, it’s even more difficult nowadays to advise your clients where they should invest their money. Although the added investments offer more opportunities for higher returns, they also come with higher levels of risk.  

Another major challenge of investing is market volatility. Financial markets where everyone from beginning investors to savvy veterans are likely to invest in are inherently volatile and often unpredictable. The volatility can be due to several factors like government regulations, geopolitical conditions, and investor sentiment. So how does a beginning investor know what to do and where to invest? 

In this article, InvestmentNews offers some fundamental tips for beginning investors to navigate the complicated field of investing.  

Know the investor’s risk appetite 

The important first step in investing is to know what the investor’s acceptable level of risk is. This is also known as their “risk appetite” or risk tolerance.  Few investment concepts are as important as risk appetite. This can heavily influence you or your clients’ investment strategies and decisions.  

An investor’s risk appetite is not a specific amount. It’s how willing an investor is to bear a financial risk, hoping to earn a potential profit.   

Another similar but crucial metric is risk capacity. This is the amount that an investor is willing and able to bear given their current financial situation. One way to determine an investor’s risk capacity is to ask what percentage of their investment they would be comfortable to write off as a loss, should the investment project fail.  

A reasonably acceptable loss would be at a level higher than the current prevailing inflation rate. As of November of 2023, the inflation rate in the U.S. is at 3.1%.  

Factors that influence risk appetite

These are the most common factors that can have a significant impact on investors’ risk appetite:  

 Age 

Younger investors would be less risk-averse and more tolerant of risky investments, since they still have a lot of time. Should they incur any losses, they have the time to manage their investment portfolios and adjust their strategy.  

Older investors simply don’t have the same luxury, and it's uncertain if they’ll have enough time to mitigate losses.  

Investment goals 

The cost and nature of investors’ investment goals can likewise influence their risk appetite. The more important the investment goal, the more risk-averse or avoidant the investor will be.  

For example, if an investor started putting money into an investment to put up a college fund for their children, then they would be less tolerant of risky investments.  

Conversely, if their investment goal was more trivial like raising money for a summer cottage, then they would be more tolerant of risk in their investments.  

Time horizon 

This is the “deadline” for achieving a financial goal. Financial goals with long time horizons, like raising funds for retirement, can mean a more flexible risk appetite. A financial goal like this could make investors choose riskier investments like a combination of individual stocks and mutual funds.  

On the other hand, a financial goal with a shorter time horizon would make investors choose lower-risk, more liquid investments. Some examples are money market mutual funds or high-yield savings accounts.  

Different types of risk tolerance 

Every investment has its own level of risk, and investors who are aware of their degree of risk can better plan their portfolios. Investors themselves may be classified according to their risk tolerance:  

• investors with aggressive risk tolerance: this type of investor is more familiar with the markets. They’re not afraid to lose money in the pursuit of potentially bigger and better returns. Their knowledge and experience allow them to better understand the volatility of assets like securities and apply strategies that give better results.  
• investors with moderate risk tolerance: the moderate-risk investor is concerned with growing their money without losing too much of it. This type of investor usually applies what’s called a balanced strategy. Most moderate investors put together a portfolio made up of a mix of stocks and bonds in either a 60/40 ratio, or in an even 50-50 split.  
• investors with conservative risk tolerance: the conservative type of investor tolerates minimal to no volatility in their investments. Investors who are close to retirement or are already retired make up this category. They often adopt short-term investment strategies to preserve a principal asset or investment.  

Setting up investment goals 

Another important step in investing is for the investor to decide on their reasons for making the investments. There are three common investment goal types:  

1. short-term – these are goals that can enhance one’s lifestyle, such as taking a holiday or buying a car 

2. medium-term – goals like these include more serious purchases like paying for college tuition or buying new property 

3. long-term – this includes goals with a long time horizon and can have a lasting impact on investors’ lives, such as planning for retirement or for financial independence 

Steps in financial goal planning 

Complex tasks like investing can be more manageable when done step by step. Here’s what advisors can suggest to their clients to make the investment process more efficient and practicable.  

1. Consider your goals for investing 

Investors should think about why they need to invest. Is it for a short-, medium-, or long-term goal?  

If the investment is for retirement, paying off debt, or purchasing an asset, then the investor should be prepared to make a significant time commitment, with a minimum of five years. But if the investment goal is to reap financial rewards sooner, then saving – not investing – is more appropriate.  

2. Consider the financial risk and plan accordingly 

Beginning investors should realize early that the value of their investments can rise and fall. Their investment goals will largely depend on their appetite and capacity for risk.  

Investors should give serious thought to which risks they can take, and which they cannot. For instance, investors who are close to retirement should avoid riskier investments like stocks. Younger investors can probably afford to take on investments with bigger risks, as they have a longer period of time to recoup losses. 

3. Decide for how long you want to invest 

Beginning investors should decide on their time horizon. The longer the money is invested, the more chances it has of growing over time and reaching its target amount.  

How long they decide to invest their money will depend on how much they want to earn from it. Investors should take note of the time horizons of each type of financial goal and decide how long they want to invest.  

• short-term goals: 5 years or less 
• medium-term goals:  5 to 10 years 
• long-term goals: over 10 years 

4. Make an investment plan 

After investors have decided on their financial needs and goals, considered the risks, and decided on their time horizon, it’s time to consider investment options. 

For beginning investors, have a financial plan composed of simple, low-risk investments like short-term certificates of deposit. More low- and moderate-risk investments can be added to the portfolio later on.  

5. Diversify your portfolio 

As your confidence builds and your funds grow, you can slowly put together a more diversified portfolio of increasingly complex investments. Doing this gives investors the benefit of protecting against the ups and downs of the market, while expanding their experience and knowledge. 

What is a balanced investment strategy? 

The balanced investment strategy is one where the goal is to find a balance of maximizing growth while preserving capital. This strategy is usually employed by investors who have a moderate risk tolerance. Oftentimes they apply this type of investment strategy by cobbling together a mix of stocks and bonds. The asset allocation for implementing this strategy can be 60/40 or an equal 50/50 split. 

The Risk-Reward Principle 

Also called the risk-return tradeoff, this is an investment principle that states that the higher the risk of an investment, the higher its potential returns. Conversely, the lower the risk, the lower the potential returns.  

This is a crucial guiding principle in investing, and it is what savvy investors use when considering potential risks and rewards of an investment. This principle is particularly useful when weighing investment decisions. 

Common investing mistakes to avoid 

Knowing your client’s risk appetite, financial goals, and risk capacity goes hand in hand with coming up with an investment plan. But it’s important to also know some of the most common investment mistakes beginners make and avoid them.  

1. not knowing anything about an investment – while you don’t need to know all the ins and outs of an investment, it’s important to know something about it. Don’t invest in companies with business models that are difficult to understand. As you build your portfolio, start investing in mutual funds and exchange-traded funds (ETFs) to be on the safe side.  

2. not being patient – Rome wasn’t built in a day, so don’t expect to build a financial empire overnight. When it comes to investing, slow and steady wins the race.  

3. trying to time the market – trying to predict patterns in the market is next to impossible. Even the most experienced institutional investors fail at this. A study entitled “Determinants of Portfolio Performance” showed that most of a portfolio’s return is due to asset allocation decisions, and not by timing or choosing the “right” securities.  

4. not diversifying your portfolio – as a general rule, never allocate more than 5-10% to any single investment. Beginning investors are advised to make their portfolios as diversified as possible. 

5. investing with your feelings – emotions are the number one killer of investing and getting decent investment returns. The adage that “fear and greed rule the market” still holds true. Sensible investors do not allow either of these destructive emotions to control their decisions. Instead, they look at the bigger picture.  

Remember that in some investments, like the stock market, returns can swing wildly over the short term. But in the long term, investors who remain patient and calm reap the benefits.  

Start out simply, sensibly, and sustainably 

Those new to investing should start with simple investments and expand their portfolios in manageable increments. Mutual funds or Exchange Traded Funds (ETFs) are excellent starting choices before trying real estate, stocks, and other investments. 

It’s not advisable for beginners to monitor their portfolios daily. A better strategy is to begin with index funds that mirror the market. When starting out, invest in at least three types of index funds. Invest in funds on the U.S. equity market, one in international equities, and finally, take on a bond index. 

Here’s an insightful video on investing for beginners. There’s a lot of good advice on where to start investing, such as in mutual funds and the S&P500. The video goes on to say that investing does not have to be as complicated as most people think:  

If investors choose to be more hands-on with their investments, they should create a portfolio with an asset mix suited to their risk appetite, time horizon, and financial goals. When in doubt, they can always consult other more experienced financial professionals. Better yet, they should watch this space to know more about investing!  

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