Investing For Beginners — Everything You Need to Know.

Investing for beginners is never easy. There are always barriers like not having enough knowledge, time, or even money.

But no matter how young you are, it is never too early to start planning for your retirement.

It’s actually really important to do just that… Start as early as possible.

You hear this time and time again right?

You need to invest.

But the strategies for actually investing for beginners can leave you feeling overwhelmed. At least it did for me.

You don’t want to just put money aside in a bank account either.

Why?

Because your money will begin to lose its value simply as a result of rising inflation rates.

Instead, we have to use the best vehicle we have at our disposal.

THAT’S RIGHT. THE STOCK MARKET.

Throughout history, this has yielded the highest return with reasonably low risk.

So how do we go about doing this?

Unfortunately, that’s where most people get stuck. We see this as a gamble almost right? And it is… but only if you don’t know what you’re doing.

But if you know what you’re doing, then it’s the furthest thing from a gamble.

When I started to think about investing, the biggest thing holding me back was the fear of losing my hard earned money. I was under experienced and lacked sound strategies to pick and choose which stocks would outperform the market.

So naturally, I decided to not invest at all.

This was a huge mistake…

So, like the geek I am, instead of investing I read all I could about the subject. Googling “investing for beginners” probably 15 times per day…

Finally, after months of analysis paralysis, I realized something super awesome!

And it was that I didn’t need to invest actively.

Active investing is the most commonly talked about type of investing. But for beginners, it’s really not the best way.

So I discovered the absolute best way to go about investing for beginners!

But first, what’s the difference between passive and active investing?

ACTIVE INVESTING

Active investors choose their stocks and actively monitor them in order to outperform the market. The market, in this case, being all the stocks that are traded on a given exchange.

In other words, you try to read charts and do a bunch of other fundamental analysis of hundreds of different stocks to buy low and sell high.

If I were trying to actively invest on my own, I would select from a number of stocks that I thought were going to do well this year and trade them on a day to day basis. I would buy and sell based on rising and falling prices of stocks and hopefully end the day with a profit.

The benchmark for “doing well” would typically mean to outperform market averages. Historically, the market averages a 7% return per year. So, if I chose 10 stocks and they averaged a return of 12%, I would have actively invested and outperformed the market.

This is so much harder than it sounds. And it only is really profitable if you have a lot of money to invest. Which I didn’t. Again, investing for beginners is never easy and if this is a pain point or barrier for you, don’t worry. There’s another option.

PASSIVE INVESTING

Passive investing, in its simplest form, basically means that you are betting on the entire market, the market again meaning a large group of stocks that are traded on an exchange.

When you invest passively, you can buy something called an index fund, or an ETF (exchange-traded fund)

So, let’s say instead of buying one share of Microsoft stock for $100, you choose to buy a tiny sliver — one hundredth to be specific — worth of 100 different stocks. So with that same hundred dollars, you now own a tiny part of 100 stocks, instead of just one.

This exemplifies the notion of not putting all your eggs in one basket, right!

And this is super cool because an index fund diversifies for you. You don’t have to choose all these different stocks yourself.

This also mitigates your risk because let’s say 10 stocks absolutely tank, the other 90 will balance out your portfolio.

You are going to perform the exact same as the market. And for really advanced investors, that’s not good enough. But for you and me?

Well, we can become really rich by slowly investing and statistically earning the market average, around 7–10% per year.

If you chose to passively invest, you are also betting on historical trends.

As I mentioned, the stock market as a whole historically goes up around 7% per year.

Now year to year this is not guaranteed. One year you might earn 20% and the next you earn 5%. But over a 10 year period, things will absolutely even out. And that’s why it’s important to invest in the long-term!

BENEFITS OF ACTIVE INVESTING

Now, I’ll try not to be super biased and state the benefits of both of these types of investing.

The main benefit of active investing is the possibility that you, or your advisor, will outperform the market.

However, a recent study done on the S&P Dow Jones indices shows that over the past 1, 5, and 10-year periods a whopping 90% of active managers performed below market averages.

So, if you feel confident that you, or your financial advisor, is in that 10%, then, by all means, pursue this strategy.

The biggest thing to remember here is that an active manager of let’s say a mutual fund — another grouping of many stocks that are hand selected — will charge fees for their services.

This is often in the form of a percentage of return. If your financial manager, someone who is doing the investing of your money for you charges a small fee of 2% of the return, this now means that in order to match the market, you have to earn a yield of 9% — just to match the market average!

BENEFITS OF PASSIVE INVESTING

The main benefit of passive investing is that it requires little decision making, and you are granted peace of mind knowing that the worst that can happen is a 7% return over time — “Over time” meaning you invest now, and leave your money in a fund for 10, 20 or even 40 years.

It’s all about investing for beginners and caters to people with less skill and investing knowledge.

The downside of passive investing is that are choosing to forgo the opportunity to outperform the market. But again, this is hard unless you’re a stock market wizard.

The main reason I do not try to actively invest is that the general market has become so overpopulated with financial advisors, investors, and stock market gurus that 90% of the market is considered to be professionals at what they do.

In this scenario, I am a small fish in a big pond.

If I were to actively invest I would be betting that my skill as a 21-year-old would be good enough to beat a market where 90% of the people who invest do this as their primary job.

More detail about this theory resides in an amazing book called A Random Walk Down Wall Street by Burton G. Malkiel, the first book about investing I ever read.

HOW I CHOOSE TO INVEST

With all of this in mind, I chose to passively invest in what are called indexes. These are essentially a group of stocks that represent the entire market. The S&P 500 index is a group of America’s top 500 stocks, each company with a total market capitalization of $6.1 billion or more.

Essentially, if I bought this, I would be buying a tiny piece of each of these 500 companies. There are a multitude of strategies out there and gurus to go to who knows more about investing than anyone it seems.

However, investing for beginners is hard and if you want to invest for a long period of time, I believe betting on the market is the best, most cost-effective way to go.

Now, I know that many investors who have chosen to actively invest will not agree with me and say that active investing is the way to go. Hell, it’s a multi-billion-dollar industry.

However, I chose to be a passive investor because, one: I lack experience in trading; two: I lack knowledge and strategies on how to choose the “winners” in the stock market; and three, I prefer my chances of betting with historical trends, and not betting on myself to beat the 90% of people who trade stocks for a living.

With all this in mind, you need to make your own decision on what is right for you, your family and your lifestyle.

ONE LAST THING…

Now obviously, sometimes it’s fun to take a risk. And so I recently investing in specific stocks that I analyzed.

I was… well lucky enough to earn almost a 50% return this year alone. Now, this isn’t normal and I DO NOT attribute this to my super-advanced investing skills. Quite simply, I was lucky enough to invest at a good time and chose some solid stocks that did really well this year.

Again, I’m not an investing guru, just an ambitious college student.

That being said, if you are interested in learning the exact process, tools and applications that I use to pick these stocks, check out this article. It’s dedicated to investing for beginners but actually in specific stocks. Enjoy!