How to Invest As a Beginner?
6 Practical Investment Principles to Help You Get Started
1. Pay Yourself First Every Month
Save at least 10% of your income into an investment account every month, before you pay your debts and other expenses. If you spend before you save, you will probably end up saving nothing every month.
2. Invest as Early as Possible to Leverage Compound Effect
The earlier you invest, the faster you can increase your wealth exponentially with compound interest, and the difference is HUGE. Imagine there are two friends who are the same age, Henry and Jason. Henry begins investing $300 in the stock market every month from age 19 to 27, saving a total of $28,000. Jason does the same, but from age 27 to 65, for a total of $140,000. Assume the stock market grows 10% annually. By age 65, Henry has $1,863,287 and Jason has $1,589,733. Though Henry invested less time than Jason, he made more money because he started earlier.
3. Invest in Long Term
The market can be unpredictable in the short term, but over the past 200 years, it has grown on a macro scale, expecting a 6% to 7% average return from the stock market in the long term (10 or more years). Based on this premise, we shouldn’t wait for the perfect timing and postpone our investment, not only because we can hardly predict when’s the right timing, but also we can easily even out our losses by investing at a lower price next month, so why not start leveraging the compound interest earlier?
An extra benefit for investing long-term is that it’s less stressful at downtimes because you know the market will go up eventually anyway.
4. Invest in Index Funds
In 2016, Warren Buffet announced in his letter to Berkshire Hathaway shareholders that, his investments in an S&P 500 index fund have outperformed 5 top hedge funds over a decade since 2007. A key takeaway here is that it’s very hard to outperform the general market. If you think you’re smart enough (even smarter than most of the top full-time hedge fund managers) to beat the market, you’ll probably lose more money instead. So be patient. Invest in S&P 500 index funds, meaning theoretically you’re owning part of the 500 top companies in the US, including Apple, Amazon, etc, with a smaller amount of money. It is a safe and rewarding way to start investing, with avg. 7–9% return per year in the long run. I would recommend the Vanguard S&P 500 ETF (VOO), and a beginners’ choice (No affiliation with Vanguard).
5. Love the Down Times
“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” — Warren Buffet. I love the economic crash because every thing is ON SALES! Buy more during the economic downturn, and buy conservatively during an unreasonable high. I bought more shares today than ever before during the Coronavirus period, because the US stock market is crashing! And I love it! I can’t wait for the market to rebound and gain my reward. (Today is 2021 5th of Feb, I earned more than 20% from S&P 500 from the shares I bought during Covid)
6. Start Today
Start today, get your hands dirty. The best way to learn is to buy Index funds today. Spend 100 dollars and invest into S&P 500 index funds (just try to buy Vanguard S&P 500 index fund, I have no affiliation with them, just that they are great). When you start having assets, you will start paying more attention to related financial education. And the more you learn and play the game, the better you will get.
Comment below! And let me know what are your favorite investment tips!
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