10 Things Every Beginner Investor Should Know | Ultimate Beginner Guide
Have you ever taken a false step in your life and then thought to yourself, "Oh Man, I wish I had thought this through or listened to that one advice before, Or I wish I had watched that one video from Who was that guy? the smart millennial or whatever". Everyone makes mistakes, and that's okay. Mistakes help us to learn and grow. But In the financial world, mistakes can cost you a lot of money and even .... your life. You don't necessarily have to make mistakes if there is a way to avoid them.
We can learn from the experiences of people who have walked before us on the same path and then use that wisdom to change our course in the right direction. So in this blog, I'll give you important 10 tips that I have learned from my short investment journey. This blog might only take a few minutes now, but the future investor in you will thank you for taking this time.
Hey friends, I am Srijith and in this channel, we talk about how to effectively manage the two most important aspects of everyone's life, money and time. Intro.
This is the second blog in the series where we talk about starting your stock market investment from Germany. I hope those who read the first blog, may be excited to jump onto the investment train and put their money to work. But before you go there, there are a few factors that you could look out for to improve your chances and maximize the returns. So without further due, let's get started.
1. Define your Goals and Review your current situation.
Before you rush to move your money to an investment plan, you should think and define your goals, both in the short term and long term. For instance, a short-term goal could be a vacation to Spain next year, while a medium-term goal might be a down payment on a house in three to five years. Similarly, a long-term goal would be to save money for retirement. If you don’t know your goals or why you invest your money, you’ll make mistakes and lose sight of the big financial picture. So first thing, define your goals.
Next, analyze your current financial situation. Are you planning to get married in the next few years, buy a house, or have kids? Or do you want to be more independent and maybe switch between different jobs? How much money do I need every month for your expenses? How much money do I have to invest? I would suggest you sit down with a pen and paper and write these numbers. And when you do that, be realistic about it. Make sure that you leave yourself with enough money to pay for your regular monthly bills, loan payments, etc. Our ultimate goal is to make money. Still, everyone’s needs are different, and your investment should be based on your needs.
2. Get rid of debts.
Do you have some bad debits from your credit card? If the answer is yes, you’re probably not in a position to invest yet. Interest rates on credit cards are usually higher than the returns you get from any investment. In no world does it make sense economically to skip paying a pending credit card bill with 20% interest and then put all that money on a mutual fund that gives you a 5% return? But all debts need not be necessarily bad. Good debts are the one that helps you generate income and build your net worth, such as loans for your education, your business, or real estate. But you have to get rid of those bad ones that drain you out. So take your time, and identify those bad debts, especially high-interest ones like credit cards. And do everything you can do to get rid of that debt. Then come back here and start your investment journey.
Why do you need an emergency fund? In polite terms, shit happens. We all are living through one right now. I am one of the lucky ones who wasn't much affected by the pandemic. But I know many whose lives turned upside down in such a short term. It is so important to prepare ourselves for what life throws at us. One way to do that is by building an emergency cash reserve. This is the money that you can fall back on if needed. I am in this investing game for the long term, and I believe so, are you. But if you don't have a backup fund when you need one, you will be forced to sell your long-term investments when circumstances change unexpectedly.
As we discussed in the first point, once you make a timeframe and strategy for your investment, you have to stick to it. And for that, having an emergency fund will help. How much should be in this rainy day fund? It’s a good idea to put in 3-6 months of your living expenses. But remember that It should be liquid – meaning that money is available whenever you need it, and you can make a withdrawal at any time without additional penalties. This money is your safety net, and make sure that you have yourself covered for that unexpected fall.
2. Know where to stop
No investment is risk-free, and you need to be somewhat brave if you want to make some money out of it. But on the other hand, there are also other important things in your life than money. Family is important. Relationships are important. Your peace of mind is important. You need to know when to apply brakes, slow down, and stop taking risks that might harm all these. Just because you can afford to take more risks with your investments doesn’t mean you should. Try to figure out your risk tolerance level. How do you do that? Ideally, you have to consider so many factors like your age, your investment time frame, your expenses, and your financial situation.
But forget all that, I will give you a simple way to calculate it “Imagine you had 100,000 euros invested in stocks and the market fell and your account balance fell by 30,000 euros. How are you feeling? I know, you won't be happy, But are you losing your sleep? Would you be devastated?” If a potential loss of that size stresses you out, then it’s signaling that you have to re-balance your portfolio to favor less risky investments. Where you invest and how much you invest are tied to your risk level.
3. Investment period
Another crucial factor you have to think about is the investment period. Anything to one year, we speak of a short period, up to five years of a medium period, and beyond that of a long investment horizon. Investments of short periods generally require constant monitoring and expert knowledge of the various possibilities. To make considerable returns, you need to have time and patience to make that extra effort. I don't want to spend much time monitoring the stock ticker every day and figuring out what changed from yesterday. As I told you earlier, I am in this for the long run. And I believe If you want to do better as an investor, the single most powerful thing you can do is increase your investment time horizon.
4. Magic Triangle of Investment
Now I will teach you a simple mechanism to distinguish bad investments from good ones. This is called the magic triangle. This one has got 3 corners. [Me saying from the side, Smart]. And these are Security, How safe your investment is and how less likely you are to lose your money, Liquidity, How easily you can convert your investment into ready cash, and Returns, how much profit you can make from your investments. These three criteria compete with each other, and with serious investments, only two of these three goals can be achieved at a time. Suppose someone tells you about that one great investment that promises you the maximum return, always available capital, and absolute security. In that case, it's time for you to wake up because you are probably dreaming.
6. Master the art of diversification.
A good rule of thumb is not to put all of your eggs in one basket when investing. The concept of owning a wide variety of investments is known as diversification. You can invest your money across various equities such as funds, stock, bonds, maybe some real estate or commodities, or even collectibles such as Pokemon cards. Yeah, That's a thing. 1998 Japanese Promo Card - HOLO - Illustrator Pikachu. This one was sold recently at an auction for $375,000.
Just like diversifying based on the type of equity, like stocks and bonds, you can also further diversify into different sectors like the US stock market, emerging markets, or renewable energy sector. I will cover how to create a well-diversified portfolio for beginners in the later blogs of the series, so do watch out for that. Keep in mind that the market constantly fluctuates over short terms, and things always go up and down. It’s safer to have a mix of everything to help your portfolio survive market volatility. That way, you will have some investments that make profits, even when others are falling.
7. Put your investments on autopilot.
You have the money and the motivation, but all these won't help if you sit and procrastinate and don't regularly invest. You shouldn't move it to tomorrow. Today is the time, Now is the time. An excellent way to overcome this mindset would be to set your long-term investments on autopilot. Set aside a certain amount of money to be automatically invested each month. This is called dollar-cost averaging. This has two benefits. It forces you to save. This way, you won’t have to remind yourself to move money over (it’s like a “set it and forget it” model. And secondly, it takes the emotional factor out of investing.
If there is one thing, you need to master to be successful in stock market Investment. No, it's not a financial degree or early access to information. It is your emotions, and you need to have better control over them. By investing regularly without worrying about how the market performs, you can not fall into short-term fluctuations. Some investing platforms make automating your investments easy by allowing you to pull directly from your bank account. You just choose the frequency and amount that works best for you,
8. Ask for help.
One of the best investing tips I got as a beginner investor was investing only in those things I understand. You need not be an expert, but you need to know what you are doing and where your money is going. Read, research, and gather some information about your investment. You can find the information on the internet, you can watch YouTube videos, and read blogs. And if needed, always ask for help. A lot of investing can be done independently, but talking to others and learning from their experiences can help you avoid the potholes and learn lessons the hard way.
9. Spend wisely.
And finally, there is no point in filling the bucket with a hole in it. Spending your money wisely is one of the most important steps you can take to put yourself in the best possible financial situation. A common trend is that once we age more, and start to earn more, we fall victim to the trap called “lifestyle creep”. Lifestyle creep means that as you make more money, what once seemed like luxuries become necessities. The once-in-a-month eating out or takeaway can soon become a once-in-a-week thing. When you get a pay raise or move to a higher position in your job, it is normal to think you deserve to live better. It reflects what car you buy, where you dine, everything you do, and the strange thing is that you may not even notice it. Just because now you can afford an Audi instead of a Honda doesn't mean you should. Instead, you should do your very best to live the same way you’ve always lived. You can’t control how your investments perform, but you can always control how much you save.
Alright, that's everything I got. I hope this will be helpful to you on your investment journey. I know this was a considerably lengthy blog. But I just couldn't skip one point for the other, because I think all are equally important and the earlier you understand these things, the more mistakes you can avoid. In the coming blogs, I will explain the stock market basics and how to open your broker account in Germany and start trading. Thank you so much for taking the time to read this blog. Until I see you again, stay safe.
Disclaimer: The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. It is important to do your own analysis before making any investment.
