Often Beginners Planning to Trade Bring a Knife to a Gun Fight. Lock and Load With These Bullet Proof Trading Tips.
You’ve heard it’s one of the most reliable ways to build long-term wealth. You’ve seen those sophisticated investors with their portfolios of profitable stocks. And you want in on the action. Just one question. How do you get started?
Yep, starting out can seem pretty confusing, and even intimidating. But it doesn’t have to be that way. Stick with us for our top tips and we’ll guide you through getting your investment portfolio up and running. Tips that will work for stocks, currencies, crypto, and commodities.
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With that pitched in, let’s move on to the tips that serve young investors well.
First, Fix Your Personal Finances
We hear all of the young investors. You’re itching to start investing and building wealth. And we’re encouraging you to do that. But if your personal finances aren’t in order — fix those first.
That means if you have high-interest debts, pay those off. They’ll be costing you more than what you’ll make from your investments at the beginning. For example, the stock market averages a 10% return a year. So if we’re talking stocks, that’s roughly what you can expect. If you have credit card debt, you’ll probably be paying closer to 15% interest on it — sometimes more. Basic rule of thumb — any debts with interest above 6% — get rid of those before you start investing.
Also have an emergency fund that can cover your expenses for at least three months, or better six in case of an emergency. Your portfolio’s there to build you long-term wealth. And if something bad happens, the last thing you want to do is sell it to cover your day-to-day expenses.
Never Invest in Anything You Don’t Understand
This is a simple rule to get clear from the start. If you don’t understand how it works — don’t invest. Do your research. And don’t let somebody else do it for you.
That way, you’ll never say yes to fast-talking salespeople who tell you they can make you rich if you just send them your money and leave it to them. Yep, right — sure that’s going to work out.
And you won’t get fooled by hype when everybody’s talking about the next new big thing. Remember, once everybody’s talking about it, the time to invest has probably passed.
Does that mean you’re going to have to do lots of reading and research? Yep — it sure does. More on that soon.
Set Your Investing Goals
‘I want to get rich’ isn’t a valid investment goal. Sure, all investors want to do that. But an investment goal needs to be more specific.
First, have a rough time frame in mind. And it should be a long timeframe. Get-rich-quick schemes don’t fit into well-thought-out investment plans. Realistically, think years, or more likely decades — that gives you the best chance of building wealth.
That’s not to say that shorter-term opportunities never come up — like picking stocks that have crashed in a recession and then waiting for them to go back up in value. But getting that right requires more knowledge and experience. So wait until you’ve got plenty of those before you start looking at shorter-term opportunities.
And set an amount you want to start investing regularly. It’s impossible to name a number, or even a percentage of your earnings, because that depends on your current circumstances, and long-term goals. But it’s fine to start low and increasing it over time.
There’s only one last page left on 2020’s calendar. While we’re on the topic of goal-setting here’s an article explaining How to set GOALS for the New Year?
Understand Your Own Attitude to Risk
Think about this early on. It’s going to affect the kinds of stocks or other options you’ll want to invest in. Ask yourself — are you the type who likes to play it safe? Or do you like to live a little dangerously?
Keep in mind the golden rule of finance. Whenever you invest, the higher the risk, the greater the possible return. And of course, the higher the chances it’s going to tank, and wipe you out.
Either way, you’ll probably want to put together a portfolio that combines safe and stable options with ones that are riskier but have more opportunities for growth. Exactly what that combination is depends on how you feel about risk.
Start Building up Your Financial Knowledge
When investors invest, knowledge is best friend. Now’s the time to start acquiring it. This is a habit you’ll want to pick up ASAP. And never grow out of it, as you’ll always want to be exploring new areas and keep up to date with markets.
So start reading the financial news. Choose some stocks you can start watching how they move. And see how what’s going on in the world affects them. Join forums where people discuss stocks, crypto, or commodity prices. And very important — start reading books.
We’re going to recommend a great book for you to start with — ‘Unshakeable’ by Tony Robbins.Think of it as essential reading before you go out and invest in anything. A step-by-step guide on building wealth.
And we’ve made it super-easy for you to get a copy. Just go to alux.com/freebook and you can download the audiobook from Audible. Thanks to our friends there, if it’s your first purchase from them, it’ll be free. Listen to it, take notes, and once you’re good to go, start investing. Really, what are you waiting for?
Understand Fundamental Analysis
This is a key tool in financial knowledge. Take a look at any finance app or website that lists stocks. And look at that long table of numbers that appears, usually just under the graph. Does that look like an alien language? Or can you make some sense of it and get a snapshot of the company’s current performance?
If you can, that means you have some understanding of fundamental analysis. That’s one of the basic tools you’ll use to assess how promising a stock is. And if it’s totally new to you —start learning about it.
You’ll learn about things like:
- the dividend — or the percentage of earnings paid out to shareholders at regular intervals. Not all companies pay dividends. And just because they don’t, isn’t necessarily a bad thing. Ones that do, tend to be more established, and safe — think Microsoft or Coca Cola. One’s that don’t tend to be younger and more innovative — think Tesla or Netflix. Usually riskier — but, remember that means more opportunities for growth.
- Price/Earnings ratio. Or the company’s entire stock value divided by its earnings over the last year. It’s one of the basics used to evaluate a company. And just because it’s high or low isn’t necessarily good or bad — you need to take it in context. A high P/E ratio means the stock price is high relative to its earnings — that means investors are betting that its earnings will grow. And a low figure could mean it’s a more established company. It could also mean that it’s a bargain — but not always.
Yep, none of these figures means that much on its own. You need some knowledge. But once you get the basics down, you’ll realize it’s not that complicated. So start learning about fundamental analysis now — and how to use those figures to assess a stock.
Choose a Broker and Be Aware of Fees
To buy stocks, young investors need to choose a broker to buy them through. Of course, brokers aren’t going to work for free — and there are going to be fees involved.
Do shop around, and compare fees. Because those fees can wipe out your long-term returns. A 1% fee might not sound that much, but over years, that can compound and can cost you a lot. Some investment accounts may have other management fees as well— you want fees to be well under 1%.
Pick a Strategy
Investing strategies fall between two extremes.
At one extreme, you can buy for the long term and wait for their value to go up, in line with the stock market. Or if you’ve chosen well, beating the stock market. That’s a buy and hold strategy.
And then there’s buying and selling within a short time frame — usually days or weeks, expecting short-term swings to happen. That’s called active trading. Or really short term is day trading — where you’ll buy and sell in a matter of hours or even minutes
The shorter-term strategies are a lot riskier. And most investors who make solid gains use the longer-term strategy — buy and hold. And that applies to crypto too.
Of course, a buy and hold strategy doesn’t mean you’re going to hold onto everything forever. With stocks, you’ll read the annual reports and look at quarterly earnings statements. Remember, pretty soon you’ll know all about fundamental analysis, and you’ll be able to spot the signs that it’s time to sell.
But basically, the surest strategy is the long-term buy and hold.
Start With Index Funds
To get started, you’ll want a solid base of stable investments you can rely on, before you start branching out to the risky ones. And the best way of doing this is with index funds.
Those are funds made up of a spread of the highest-performing shares from any stock market. Like the S&P 500 — that’s the leading 500 companies in the USA. Or the FTSE 100 — that’s the highest-valued hundred companies on the London Stock exchange.
As they’re spread over a number of the most reliable companies, they’ll be safe. And they’re a great starting point for investing for all young investors.
Then Start Picking Individual Stocks, Commodities or Crypto
Sure — individual stocks are riskier. But remember the golden rule? That means bigger potential for gains. Even if you have a lower risk tolerance, at some point you’ll probably want to invest in some individual stocks.
Here’s a tip. When you’re starting out, invest small amounts, and watch how they do. Because they’re small amounts, you won’t sweat much. Bit by bit, you’ll build up your knowledge and confidence. And as you do this, you can increase the sums.
Another tip. Start with brokers that allow fractional share purchases. That means you can invest in, say, Tesla or Amazon without buying an entire Tesla or Amazon stock. At the moment, that’s around $500 a share for Tesla and over $3000 for Amazon. With fractional shares, you can start out with small amounts — let’s say $20 a go. Platforms like RobinHood, eToro and Revolut allow you to do this. And they can be a good place to start investing.
Stop Trying to Time the Market
Wouldn’t it be great if you could go back to early 2017, when Bitcoin was still low — buy a load of Bitcoin — and then sell in December 2017, just before it crashed.
Well, unless you happen to have a time machine, or are psychic — and we think both of those are equally unlikely — you can forget about pulling that off. Professional fund managers and shark investors often get it wrong. So what makes you think you’ll get it right?
There’ll be longer periods of time when the outlook looks good or bad for a particular investment, meaning it’s time to buy or sell. But trying to time it exactly is extremely difficult. And likely to end badly. And that’s another reason why short-term strategies are risky — and long-term ones are far more successful.
So you’ve decided to invest in a load of tech stocks? What happens when tech stocks all tank at the same time? Yep, that happens. And your portfolio takes a hit. That’s why you need a diversified portfolio. And you can hedge against one stock, or sector going down.
You can also diversify into gold — when the stock market goes down, gold usually goes up.
Regardless of whether you have a preference for stocks, commodities or crypto, don’t put all your eggs into one basket. A wider spread will protect you, and help you end up with bigger gains.
Try Dollar-Cost Averaging
This is the name of a specific strategy that investors rely on to bring great long-term returns. Basically, it means investing the same amount in an index fund at regular intervals — usually monthly, on the same day of the month.
It takes away the detailed work of trying to time the market. Which, remember, you don’t want to be doing. And you buy it without even thinking about its market price at that given time. What is important is being consistent in the amount you invest — and the regularity. Historically, it’s proven to give good returns in the long run and is an excellent strategy if you’re new to investing.
Here’s one not to do. Leveraging means investing with borrowed money, in the hope you’ll make a profit and pay it back.
Think about it like this. Invest $1000 and it goes up 10% — and you’ve made $100. Decent, but not spectacular.
But if you leverage and use that $1000 to borrow another $9000 from your broker — you invest $10000. With the same 10% increase, you’ve made $1000. You pay back the $9000 you borrowed — amazingly some brokers don’t even charge interest on it. And you’ve just doubled your $1000. Easy money, Right?
Well, there’s an obvious question. What if the stock goes down 10%? That means you’ve lost $1000 — the entire amount. And if it goes down further, you could end up in debt.
Leveraging may look tempting — but it’s risky. That’s a good reason to avoid it. Only even think about using leveraging if (a) you fully understand it. And (b) you’re sure it’s within your risk tolerance.
Take Emotion Out of the Equation
Investing should always be rational, and not driven by emotions. When emotion comes into it, that’s when investors do things like panic-selling when prices start to go down. If they stayed calm, they’d have just ridden it out, and waited for investments to regain their value.
And it’s when you get carried away by the hype when everyone’s talking about investing is the new big thing, that in reality has already passed.
Also, remember, good investing isn’t usually exciting. Just listen to what the world’s most famous investor, Warren Buffett has to say. ‘If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.’
Yep, if you want excitement, go to the casino instead.
Which investing tip do you find the most useful?