Our best investing help for beginners: Focus on building a diversified portfolio of high-quality stocks or ETFs that you can hold for a long time
Our investing help for beginners is the same as it is for all investors: buy high-quality, mostly dividend paying stocks (or ETFs that hold these stocks) and spread your investments over most if not all of the five main economic sectors.
Beginner investors should also learn to cultivate two important qualities: a healthy sense of skepticism and patience.
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Investing help for beginners: What it means to approach investments with healthy skepticism
If you ask investors who have a few decades of successful investing behind them about investing help for beginners, few, if any, will point to any one investment or investing technique. Instead, most will talk about the value of everyday qualities like patience, consistency and a healthy sense of skepticism—in short, the kind of qualities that bring success in all aspects of life, not just investing.
Approaching all investments with a sense of skepticism helps keep you out of fraudulent stocks that masquerade as high-quality stocks. It will also keep you out of legally operated, but poorly managed, companies that promise more than they can possibly deliver.
Investing help for beginners: Having a plan helps—but make sure it’s a sound one
One of the most common investment platitudes you’ll ever hear is that investors should “have a plan (or system) and stick to it.”
This is good advice if your alternative is to invest without any sort of plan. However, unlike the time-tested value investing approach, many of today’s investment plans are not worth sticking with.
The best investment plans or systems use a variation of our value investing approach. That is, they revolve around choosing high-quality investments and diversifying your holdings. Our three-pronged value investing program takes that general description a little further. We advise you to invest mainly in well-established companies; focus on companies that are outside the broker/media limelight; and spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources; Consumer; Finance; Utilities).
You’ll still need to make your own investment decisions. But our three-part value investing framework will temper the effects of your bad decisions and help you cash in on your good ones.
Investing help for beginners: How ETFs make choosing stocks easy
We still feel that investors will profit the most with a well-balanced portfolio of high-quality individual stocks, but ETFs can also play a role in a portfolio. Here are some tips on how to find the best-performing ETFs.
The top ETFs track major stock indexes. All ETFs trade on stock exchanges, just like stocks, and because they hold a group of stocks, they can make life easier for someone who is new to investing and isn’t sure yet which particular stocks to pick.
As a result of low turnover, the best ETFs to buy won’t incur the regular capital gains bills generated by distributions that most conventional mutual funds pay out to unitholders. The best ETFs offer very low management fees and well-diversified, tax-efficient portfolios of high-quality stocks.
Investing help for beginners: Focus on investments you can hold for a long time
The best stocks to hold in your portfolio all have one thing in common: They give you reason to believe they might be worth holding on to indefinitely.
Most of these stocks have an established business and a history of sales gains, plus some earnings, if not dividends. To put it more simply: these stocks have a clear business plan that seems to be working.
Losing patience can cause you to sell your best choices right before a big rise
All too often, investors buy a promising stock just as it enters a period of price stagnation. Even the best-performing stocks run into these unpredictable phases from time to time. They move mainly sideways in a wide range for months or years before their next big rise begins. (Stock brokers often refer to these stocks as “dead money.”)
If you lack patience, you run a big risk of selling your best choices in the midst of one of these phases, prior to the next big move upward. If you lose patience and sell, you are particularly likely to do so in the low end of the trading range, when stock prices have weakened and confidence in the stock has waned.
Beginning investors can add stocks as the value of their portfolio increases
When your portfolio gets into the $100,000 to $200,000 range, you should aim to hold, say, 15 to 20 stocks. If you’re married, it’s best to treat your family holdings as one big portfolio, even if you and your spouse keep your money separate. That way, you can be sure you aren’t operating at cross purposes, or investing too much of the family fortune in a single area.
Beginning investors should avoid frequent online trading as it can lead to ill-advised actions like buying the wrong stocks or selling too quickly. Have you used online trading as a beginner? What experiences did it afford you?
What kind of help do you wish you would have had as a beginning investor?
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