Investing is a powerful tool for wealth accumulation, but few people actually manage to wield it to improve their financial stature. As much as investing can help grow your net worth, it can also lead to financial losses if approached carelessly.
5 Best Tips for Beginner Investors
To help minimize risk and maximize ROI, here are 5 tips for beginner investors for financial success:
1. Figure out What Financial Market to Invest in
There are different financial markets, each with its own pros and cons from an investor standpoint.
Money markets, over-the-counter markets, derivatives, bonds, and currencies each have their own characteristics and economic catalysts or movers.
As an investor, you’ll want to limit your activity to one or two markets when you start.
If, for instance, you go into real estate investing, learn and master all the specific terms, concepts, and tools in the space, such as what is a DST and what factors affect property valuation.
Only once you’ve mastered the fundamentals should you start exploring new financial instruments and hedging strategies across multiple markets.
2. Set Aside Money for Investing Activities
Money that you cannot afford to lose is money that you’ll absolutely lose when you start investing.
Inexperienced investors come in with $1,000 that they had earmarked for next month’s rent and end up over-trading or leveraging their positions too much that it only takes a few big losses or a lot of small ones to blow out their account.
When you invest with money that you’ll need next week or month, the process becomes more stressful since each basic point of a movement that goes against your position are dollars lost that you’ll have to recover quickly, which means you’ll likely trade again even though there are no signals to logically base your position off of.
3. Choose Long-term Positions Over Short-term Trades
There is a fine line between investing and speculating or trading that tends to be blurry for many people, especially novice investors. Trading or speculating has the proclivity of being riskier than traditional investing strategies since the lifespan of a position is often as short as a couple of minutes.
This makes short-term positions more vulnerable to market volatility. When you invest in an asset, be patient and let its value grow over time. If you are skeptical about the relative strength of long-term investment strategies, study the year-over-year and total returns of long-term investor Warren Buffett.
4. Use Logic Rather Than Emotions
The realm of investing has no room for emotions. Falling in love with a company’s stock despite the lack of underlying value or being hopeful that a losing position can turn into a winner given enough time are some of the most common ways that investors lose big.
Cut the emotions out and stick to logic and reasoning when choosing what to invest in, when to cut losses, and when to sit on your hands. Avoid feelings of optimism or pessimism in any position you buy into. Instead, build your confidence by conducting market research and having a high-probability strategy.
5. Move on Quickly
If an investment doesn’t pan out, don’t latch onto it emotionally and financially. You’ll only keep losing more money and time if you don’t learn how to cut your losses short. Keep in mind that there will always be opportunities to capitalize on in the financial markets.
That said, you don’t want to cut a position out too early before key market players have had time to mark positions of their own. To find a middle ground, set a stop loss even before you open a position. When the price hits that predetermined stop loss, then close the position.
Bonus: Don’t Follow the Herd
While some people did make a killing in the recent AMC and GME trading frenzy, arguably more people lost money in the whole chaos as prices of both stocks quickly reversed back days after the frenzy.
Rather than follow the herd, do your own homework with regards to what an asset’s value really is and how much you should be paying for it.
Financial success isn’t achieved overnight or without losing on a few bad investments. Use the aforementioned tips for beginner investors provided in this article to minimize the risk and shorten the learning curve.
Image Source: Money Crashers