The main purpose of investing is to invest money in an asset that will become a source of stable passive income. Potential profitability depends on where the investor invests money. When working with real estate, the average yield is 10% per annum. Investments in financial instruments such as stocks or options can bring the owner up to 100-200% per annum. For example, AMD (Advanced Micro Devices) shares alone brought 131% in one year.
Working and reasonable ways to start investing for a beginner are to use ready-made solutions, while a novice investor is little familiar with the specifics and peculiarities of the work of stock markets and financial instruments.
The common misconception that investing is hard is dispelled by successful investors. As Peter Lynch (one of the most successful traders of our time, under whose management Magellan Fund became the largest in the world) said:
“All the math you need in the stock market is taught in fourth grade.”
Below you will find various ways to start investing for a newbie from scratch and ways that are available to everyone.
What you need to know about investments
Investing in a general sense is investing money in various assets or financial instruments to obtain passive income.
Common and proven options where everyone can start investing are:
- Real estate objects (the most profitable option is investment in commercial real estate: parking, retail and office premises or apartments);
- Shares of the largest companies;
- Bonds of corporations or federal loan (OFZ);
- Precious metals;
- Buying a ready-made business for a franchise;
- Venture or hedge funds;
- Business and equipment.
Simple investment classification:
- Real investment . Acquisition of real objects: real estate, buildings, land participants, equipment.
- Financial . An investor’s purchase of financial assets: shares, shares in a company, provision of loans or borrowings, investments in a starting business project with subsequent participation in the distribution of the company’s profits.
Over 10 years (2010-2020), the value of 1 share of Nvidia Corporation increased from $ 17 to $ 540, increasing the initial investment by 3076% . If then the investor bought 10 shares and sold them in November 2020, then the starting $ 170 would turn into $ 5400 – a great example of how to start investing with a small amount.
Every day, new technological, medical innovative, and other breakthrough companies enter the market where you can invest.
It is interesting to look at the successful experience of other countries. For example, in the US, 52% of families invest in the stock market on average $ 40,000. Families with an annual income of less than 35 thousand (19%) invest an average of $ 8400, and families with an annual income of more than one hundred thousand have an average investment of $ 138,700.
The New York Stock Exchange (NYSE) has a daily turnover of about $ 1.5 trillion.
On the NASDAQ, where Facebook, Tesla, Intel, Apple and others are traded , deals worth $ 1.3 trillion will be concluded in one day.
Sooner or later, each person wonders how to join these huge financial flows and start investing profitably.
Investment myths
Since investing for many is considered something unknown, this has generated a large number of myths that exist and do not allow many who want to try their hand at investing.
Myth number 1. Investments require large investments.
On the contrary, many experienced professionals advise to start investing in projects gradually. To start with minimal amounts, especially since there are plenty of options: investing in the stock market or Forex does not require large amounts. You can invest in securities: stocks or bonds with a minimum investment: from 1000 rubles.
Another thing is that it will not work to create passive income to ensure a familiar lifestyle with minimal investment.
Myth number 2. Investing is available only to people with higher education in economics.
Investing is not as difficult a science as rocket science or medicine, which requires a lot of theoretical and practical training. There is a huge amount of training material in the free access, which is enough to master the basics. Moreover, in the financial markets, information is available equally both to you and to professional traders. The market changes daily, so there are still no separate faculties and institutes for investing and trading on stock exchanges, or creating a business. Success in this comes only with participation, not learning.
“You don’t have to be a rocket scientist. Investing is not a game where a guy with an IQ of 160 beats a guy with an IQ of 130, ”says Warren Buffett.
Myth number 3. Investing carries high risks.
Investing is not short-term trading, it is long-term investments in stable projects. The profitability from long-term investments can indeed be lower from active trading, but here the risks are lower.
Myth number 5. Investments cannot be a source of stable income.
A well-designed investment portfolio with respect for risks and mandatory diversification of assets is able to generate a stable income. Almost the entire US pension fund is on the stock market.
With accumulated investment capital over a lifetime, retired Americans can afford to live and travel well. This has been happening for more than 60 years, what is not stability?
Myth number 6. You should invest in one large project that will bring a lot of income.
It is possible that one good project will bring more profit than others. But it will rather always be an exception. One of the main rules of investing is diversification of the investment portfolio, which means investing in projects that are slightly different in terms of profitability and risk in order to minimize potential losses.
Mistakes of novice investors
You cannot completely avoid mistakes. Investments are risks that can bring a loss. It is important that the size of the loss is several times less than the profit received. Common mistakes are typical for novice investors:
Expectation of fast and big profits in a short time
Many beginners come to the stock market or Forex with the aim of making money quickly and easily. As a result, the pursuit of quick profits leads to high risks and loss of the deposit.
It will be possible to create a stable passive income by painstaking and thoughtful work on yourself and on trading strategies. Successful investors are advised to expect an income of 10-30% per annum.
With an average return of Buffett of 20% per annum, he became a billionaire, read the article on how compound interest works , and you will understand that even 20% is a very large return.
Lack of constant development and self-education
Investing is about continual work and skill development. Success is achieved by those who constantly broaden their horizons, keeping up with the latest financial news and strategies.
Using credit or borrowed funds for investment
You can only invest money that is not needed in the near future. Experts advise, in principle, not to rely on start-up capital allocated for investment.
Fear of mistakes and withdrawal from investing after the first blunders
Getting it wrong is a wonderful experience. All celebrity investors have learned from their mistakes. That is why it is worth starting to invest in certain instruments with small amounts.
Lack of research before investing
Investing in the financial market doesn’t make sense if you haven’t done proper research. Before investing in any fund, you need to know its type, historical performance, asset size, cost ratio, etc.
Responding to short term market fluctuations
Many investors get scared when the market fluctuates. You must understand that investments are mainly for long-term income. Therefore, you should not react to either a sharp market change or short-term volatility.
Waiting for the perfect time to start investing
When it comes to investing, you should never think about timing the market. Timing in the market is only important when you want to trade, not invest. A great experiment was carried out by large financial companies. They split investors and gave them the same amount once a year to invest in the S&P 500.
One investor invested in the index looking for the best moments, analyzing the market for a long time. The second one invested immediately after he received the money, despite the market situation. The third one divided the money and invested a little once a month. The fourth one invested in the worst market moments. The fifth bought only promissory notes to save money from inflation.
As a result, the second investor, who invested as soon as he received money, earned quite a bit less than the first, who analyzed the market for a long time and looked for the best moments.
Lack of diversification
If you have invested in BMW, Tesla and Ford shares, then despite 3 different companies, you have one sector. Add companies from other industries to your portfolio, such as shipping, medicine, tech giants.
Also, errors may include:
- Too frequent or abrupt rebalancing. The only reason to change the composition of the portfolio is the deterioration of the indicators of its components and the emergence of more profitable and reliable analogues;
- Trying to follow fashion and invest in pursuit. As a result, the investor buys the asset at the highs, and after a drawdown he panics and gets rid of the portfolio;
- Blindly following the recommendations of the media and experts. This source must be considered, but also your own opinion. John Tempolton , a great investor and financier, once said: “The best results come from individuals, not teams. It is impossible to achieve high results if you do everything like everyone else . “
At least one of the above blunders is made by the majority of investors. It is better to learn from the mistakes of others than to experience the effect of them yourself.
Tips for Beginner Investors
Before you start investing on your own, a novice investor should familiarize yourself with the recommendations and advice of established investors, who have hundreds of successful closed deals behind them. Top tips for professional investors include:
Council number 1. Determine your monthly expenses
You must have a good understanding of your expenses and monthly spending. This will help you determine how much you can start investing with. Plus, it can also help you see where you can cut costs that can then be spent on future investments.
Council number 2. Read books about investing
While investing is not that hard to understand, there is still a lot of information to grasp. It is recommended that you delve deeper into some of the personal finance books and keep learning even if you are a seasoned investor.
Council number 3. Diversify
Investing exclusively in certain markets, sectors or companies can expose you to unforeseen problems arising in one particular area. Investing in different asset classes, regions and sectors helps reduce losses and maximize long-term profits.
“ Experienced investors invest in two or three types of assets, gradually increasing the flow of funds from them. It is extremely difficult to make a big profit from one asset ”- Robert Kiyosaki.
Council number 4. Understand the risks you are taking
Before deciding where to invest, you need to first assess your personal risk tolerance. It is important to understand how much of your investment you can truly afford to lose.
If you need money to pay for next month’s rent, you have a very low risk. If this does not affect your life in any way, then your tolerance for risk is off scale.
Risk tolerance is often determined by your so-called “time horizon”. This is the term for the time during which you will be holding a certain investment.
Council number 5. Stick to your plan
Once you start investing for the first time, you will find that it is very difficult to ignore chatter about market movements, commodities, advice on stocks, inflation, interest rates, dividends, gold price, oil price, and so on. A true investor must look at the long-term trends and macroeconomic factors that initially shaped his plan and keep them in the spotlight at all times.
Council number 6. Invest regularly
Sometimes it is better to invest small amounts of money, but often than to invest large sums at a time. Investment research has shown that even professionals believe that it is often better to invest regularly than to invest a lump sum.
Investing small amounts of money is a great habit and your money will grow over time.
Council number 7. Control your emotions
Investing in the stock market can feel like a roller coaster ride, and if you are not ready for it, you can make a few hasty decisions. Never let your emotions drive your decisions, as it can lead to loss of money, setbacks, and can also affect your long-term results.
Emotions are the main enemy of a novice investor. Many important decisions are made under the influence of emotions and lead to losses.
Peter Lynch, one of the most successful investors of our time, advises: “ Think with your head, not with your heart. Be patient and follow your plan . “
Council number 8. Continuous development and training.
Without constant learning, self-improvement and development, you cannot succeed in any of your undertakings or activities. A large number of books written by brilliant investors will help you learn how to choose successful projects and avoid mistakes that famous businessmen talk about.
Conclusion. Investments are a competent and reasonable management of finances
Investments are an opportunity to create a source of passive income, even with small investments. This is an opportunity to improve financial literacy and quality of life.
If you are still thinking about whether to start investing, then definitely worth it. You do not need to save up for retirement, you need to start investing now in order to create a stable passive income in a few years, which will allow you to live the way you want, and not as the environment or circumstances require.
As the authority in the world of finance, Robert Kiyosaki, whose works helped change the life of millions of readers for the better, said : “ people say – I save money for retirement, but why practically no one says: I invest in order to be provided for in retirement ”.
Most people have little understanding of the nature of investing, and myths also play a role. One gets the feeling that this occupation is the lot of the elite. In reality, the situation is different, investment is available to everyone, without exception, with a capital of at least $ 50- $ 100.
