What Are Some Investment Strategies for Beginners?

The process of investing and growing one’s wealth doesn’t come naturally for everybody. For many, it can be quite intimidating. You may worry about the rate of return, or losing money if the market takes a downturn. That’s why we often suggest that you work with a financial planner who can provide much-needed guidance and help ensure that you make the right final decisions that will set you on the best path for the long run.

But, we also understand that not everyone wants to put their financial future in someone else's hands. And thankfully, it is possible to start investing on your own, as long as you know some of the basics. In this article, we’ll walk you through some investment strategies for beginners so you can get started.

Tip #1: Understand Investment Basics for Beginners

Before you jump into investing with your eyes closed, let’s provide some helpful information to set you on the right path. And to start, let’s explain what it means to invest.  

Investing involves allocating money to various financial instruments or assets to generate income or increase value over time. It's about putting your capital to work to grow your wealth. You can do this through several channels, each varying in potential return and risk level.

Common Types of Investments

• Stocks: Ownership in a company. High potential returns but also high risk due to market volatility.
• Bonds: Loans made to a corporation or government. Lower risk compared to stocks, with steady, predictable returns.
• Mutual Funds: Pooled money from many investors to buy a diversified portfolio of stocks or bonds. Medium risk and return, depending on the underlying assets.
• ETFs (Exchange-Traded Funds): Similar to mutual funds but traded on stock exchanges. Risk and return vary by the ETF’s focus.
• Real Estate: Property investment. Potential for high returns, but requires more capital and has risks like market fluctuations and liquidity.

Also important to know is that the risk-return tradeoff indicates that higher potential returns are associated with higher risk. Investors need to balance their desire for returns with their ability to handle risk. Plus, longer horizons often allow more time to recover from volatility in higher-risk investments.

Tip #2: Create a Budget and Investment Goals

The next thing to know is how to create a budget and set your investment goals. At Cash Store, we often discuss creating a personal—or family—budget. With the 50/20/30 methodology, you allocate 50% of your income to your needs, 20% to your savings (and investments), and 30% to your wants. And the great thing about this approach is that it also accounts for your investment strategy. 

But be sure to consider your short-term and long-term goals. For short-term goals, you might consider saving for a down payment on a car or an emergency fund. These goals are hoped to be achieved within a few years and require a more conservative investment approach to avoid significant losses.

Long-term goals, however, could include saving for retirement or your child’s college education. These goals are typically more than five years away, allowing you to invest in options with potentially higher returns, such as stocks or real estate, as you have more time to recover from any dips in the market.

Setting SMART goals can guide you effectively toward these objectives. SMART stands for Specific, Measurable, Achievable, Relevant, and Time-bound. For example:

• Specific: Save $5,000 for an emergency fund.
• Measurable: Contribute $200 every month.
• Achievable: Cut unnecessary expenses to allocate money for savings.
• Relevant: Ensure financial security in case of unexpected expenses.
• Time-bound: Reach the goal within 25 months.

Tip #3: Know the Different Types of Investment Strategies

Understanding different investment strategies is a must as you begin your investment endeavors. Here’s a breakdown of some key terms and strategies:

• Buy and Hold: This approach centers on acquiring stocks or other assets and retaining them over an extended duration, unaffected by short-term market swings. The primary objective is to capitalize on sustained growth and the power of compounding, where the initial returns reinvest themselves to produce further gains.
• Dollar-Cost Averaging: A technique where you invest a fixed amount of money into a determined investment at predictable intervals, regardless of the asset's price. Over time, this can reduce the impact of volatility on the overall purchase as it averages out the buying price.
• Index Fund Investing: This strategy involves investing in index funds designed to mimic the performance of a specific index, like the S&P 500. It’s a form of passive investing where the fund isn't actively managed but follows the index, often resulting in lower fees and broader market exposure.
• Dividend Investing: This approach focuses on buying shares of companies that pay dividends. The aim is to generate income from dividends in addition to the potential price appreciation of the stocks. It’s particularly appealing to those looking for regular income from their investments.
• Robo-Advisors: These automated platforms use algorithms to manage your investments based on risk tolerance and goals. They are a cost-effective way to invest as they typically have lower fees than human advisors and can automatically adjust your portfolio to align with your financial goals.

Tip #4: Avoid the Common Investment Mistakes

Not only is investing important to help set you on the path to a healthy financial future, but it can be exciting, too. That’s why it is integral that you know the common mistakes to look out for.

• Emotional Investing: This refers to making investment decisions based on emotions like fear or greed, rather than rational analysis and strategy. Emotional responses can lead to buying high out of greed during market upswings and selling low out of fear during downturns, which can harm your investment returns.
• Market Timing: Attempting to predict the best times to buy or sell stocks based on market movements. This strategy is risky as it is tough to predict market highs and lows accurately. Frequent missteps can lead to significant financial losses.
• Overtrading: Involves buying and selling stocks too frequently. This can rack up transaction fees and taxes, potentially eroding your investment returns. Moreover, overtrading can lead you to focus too much on short-term fluctuations rather than long-term growth and stability.
• Investing More Than You Can Afford: It’s so important to make sure that the money you invest does not compromise your ability to cover necessary expenses. Investing money needed for essential living expenses can lead to financial distress, especially if market conditions turn unfavorable. Always ensure that your investment amount is aligned with your financial capacity and goals.

Invest Carefully But With Confidence 

Thorough research and preparation are non-negotiable for those eager to start investing. Consider growing your financial literacy by listening to educational financial podcasts or consulting with a financial advisor to develop a stronger investment strategy. These resources can provide you with the foundational knowledge and personalized advice necessary to make informed decisions. 

Taking these steps will help you begin your investment journey on solid ground. In the meantime, follow the Cash Store blog for more great financial insights.

The content on this page provides general consumer information or tips. It is not financial advice or guidance. Each person’s circumstances are unique. The Cash Store may update this information periodically. This information may also include links or references to third-party resources or content. We do not endorse the third-party or guarantee the accuracy of this third-party information. There may be other resources that also serve your needs.