Investing 101: Creating an Investment Strategy for Beginners

investing 101 creating investment strategy for beginners

Are you looking to grow your money? Look no further.

Investing goes hand in hand with growing money. The earlier you start investing, the more significant the returns will be. 

Investing at the age of 25 will reward you with 3x as much than if you waited to invest until you are 45. That's a big difference between $300,000 and close to a million.

If you are interested in growing your money and setting yourself up for success in the future, keep reading this guide to learn the unbeatable investment strategy for beginners.

Diversification Is Key

The financial markets are very complex, being made up of advanced algorithms and various institutions feeding money and creating liquidity. It is nearly impossible to time the market perfectly, that's why diversification is key when investing.

Diversifying your portfolio is one of the most beneficial investment tips for beginners. 

You have most likely heard the saying "don't put all your eggs in one basket," this is especially true when it comes to investing. 

Most people assume diversification is just investing in different stocks, but it goes far beyond that. Diversification means owning multiple equities across a variety of industries. The reason diversification is vital is because it will lessen the impact if one or more equities drop in value.

The same is true for the opposite. You also have more opportunities for growth.

Stocks do, from time to time, drop in value. For example, Boeing was an excellent investment that many analysts recommended, and people believed in it. After another one of their planes crashed and they were forced to stop production of the 737 max, the stock dropped sharply, erasing billions in market value.

If Boeing investors were smart, they would have a diversified portfolio that could have lessened the blow from Boeing dropping in price.

To truly diversify your portfolio, try investing in different sectors and alternative investments, including but not limited to:

  • Technology 
  • Real estate
  • Financials
  • Consumer staples
  • Communication
  • Health care 

With a healthy diversified portfolio, you can efficiently reduce your standard deviation, or in other words, lessen your risk.

Start Compounding Early

Compounding is one of the most important terms when it comes to investing and finance. It is what gives investors the returns they are looking for over the years. 

Compounding is the means by which you receive a portion of a companies earnings through a dividend, reinvest those earnings, and then receive additional profits off of the reinvestment. 

So the earlier you can start investing, the more significant the returns will be down the road. But, as previously mentioned, you don't want just to throw your money at anything. It is recommended to develop a plan that outlines what investments you will make and how often you will contribute to the account.

Developing a plan will require extensive research into what companies fit your needs - growth, value, high dividend yield, etc.

If you don't have a significant amount of money to invest while just beginning, it's okay, you can start investing little by little.

Suppose you initially invest $5,000 into your brokerage account. Even adding just $50 a month will add up significantly. With a 10 percent return each year, you will have around $23,000 after ten years.

Now suppose you double your contribution and wait an additional ten years. With a $100 contribution each month, you will have over $100,000 in 20 years!

Risk Management

If you talk to most economists and successful investors, they will tell you the same thing — risk management is the game.

Some people live by the saying "no risk, no reward," but with the stock market risk is inevitable. The difference between a wealthy investor and a degenerate trader is their ability to manage risk. 

Diversification is one way of managing risk, but there are various other aspects to it you should also understand. 

One of those ways is by looking at how the stocks in your portfolio correlate. Correlation is a way of measuring how two different stocks move in relationship to each other. A correlation of 1 means that the two stocks move in synchronization with each other, whereas a correlation of -1 means they move opposite of each other.

You can also take a look at a stock's beta coefficient. Beta measures the volatility of a particular stock in relation to the market as a whole. If a stocks beta coefficient is:

Less than 1 - It is implied that the stock is less volatile overall than the market as a whole.

Greater than 1 - It is implied that the stock is more volatile overall than the market as a whole.

Equal to 1 - When a stock's beta is equal to 1, it is implied that the stock's volatility is in line with that of the market.

Some stocks and assets may also have a negative beta, like gold, for example. When a stock has a negative beta, it implies that the asset moves opposite of that of the market. 

Make Sure to Do Your Due Diligence

Often referred to as DD in the investment community, due diligence is taking the time to make sure you fully understand the asset you are investing in. 

Some common things to study while doing your due diligence can include the company's:

  • Financial reports 
  • Value metrics
  • Stock price history
  • Management & Owners
  • Competition
  • News headlines
  • Industry
  • Risk potential
  • Earnings predictions 

Due diligence is a vital part of any investing strategy. During your due diligence, you will ultimately decide if the asset fits your investment plan or not. Developing a DD plan will help you screen through stocks quicker and help you make better decisions about what assets you will decide to invest in.

If you don't feel comfortable looking over companies financial reports and making an investment decision, there are other alternatives for you. You can always try a Robo-advisor, which are artificial intelligent platforms designed to make smart financial decisions for you based on sophisticated algorithms.

Additional Tips for an Investment Strategy for Beginners

While developing an investment strategy for beginners, it is crucial to define what your risk tolerance is and how you are going to manage that risk. One of the most helpful investment tips for beginners is to develop a plan that works for you and to make sure you are following through with your due diligence.

For more informative articles about investing and finance, check out the rest of our website! Visit the Investing section of our Bootstrap Business Blog right now for investor insights.

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