As a brief beginners guide to investing, this section should hopefully help people who want to start investing learn a thing or two about the fundamentals behind this often complicated and eccentric process. At the same time, this area of your personal finances could be the most exciting and nail-biting of all of them. So strap yourself in and get ready for the bumpy ride!
Beginner Investing – Keep The Training Wheels On!
If you are new to investing, it helps to enlist the help of a trusted advisor, someone who knows a thing or two about the different asset clases, their historic returns, their risk characteristics and what constitutes a suitable investment. You have plenty of options for filling that “job” of trusted advisor, especially given the wealth of information on the internet today – sites like Morningstar.com offer a broad view of various investments while other sites like the MutualFundSite.org will be more choosy in what they offer for information. As well, investment companies offer simple solutions for the beginner investing types.
Whether you choose an actual advisor to help pave the way to investment success or you tackle the job yourself through the many different resources out there, the point is simply that you need a professional on your side. Most often, that will limit you to mutual fund investments. For those of us who are brand new to this process, an actively managed balanced fund like those offered by Vanguard probably makes the most sense.
Once you establish a track record and gain confidence and knowledge, taking those training wheels off and placing greater investment control in your hands is understandable. Whether that means investing in stocks and bonds on your own, or managing an online trading account that holds ETF’s or a variety of appropriate mutual funds, that will be entirely up to you to decide once you reach that point.
Start Investing Early – Enjoy Compounded Growth
Common knowledge tells us to start investing early to enjoy the power of compounding. This was more true back in the 70′s and 80′s than it is today (back then, rates were a lot higher and unless you needed that interest income to survive, you could add it to the value of our investment and enjoy even more earned interest over the course of your investment life).
Today, with rates at all-time lows, the power of compounding remains important, but you probably will not enjoy large enough rates through cash and fixed-income investments (see Asset Classes for more information on the different types of investments). However, the power compounding, as an investment strategy or theory, still applies to growth-oriented investment vehicles like stocks and mutual funds where dividends and gains are reinvested.
So, start investing early, if you are able to do so. That may mean investing through a pre-authorized contribution to a mutual fund that will allow you to do so. Aligning those contributions with your pay check is ideal as it most often will not cripple your personal budget.
Two Theories For Beginners
The underlying message here is the following: Work with a professional and start investing early and regularly. These messages are fairly straightforward. So take a look through the rest of this section (or our unofficial “Beginners Guide to Investing” section if you will) and learn about progressively more complicated strategies and concepts.