Inflation! The only thing you see the news talk about these days. But have you ever wondered what else inflation negatively affects other than your food and gas prices?
The stock market!
If you're a first time investor, understanding some basic investment types and strategies will help prepare you for your first investments.
Stocks vs ETFs/ Index Funds
There are two basic types of securities that you can invest in: individual stocks and ETFs (Exchange Traded Funds)/index funds.
When you purchase one or multiple shares of a stock, you're taking up ownership of that specific company.
Stocks are best to purchase when you...
personally believe in the future growth of the stock
understand the financials of the stock in and out
think they have an edge over their competitors
Famous examples of individual stock tickers include TSLA (Tesla), AMZN (Amazon), and INTC (Intel).
ETFs/index funds are essentially a basket of different stocks traded as one share.
ETFs/index funds are best to purchase when you...
want to diversify to reduce risk
want a more passive approach to investing
are a beginner
Famous examples of ETFs/index funds include the S&P 500, Russell 2000, and QQQ.
Dan works in finance understands market trends. He looks at the financials of some important stocks for his clients. He's now ready to use some of his own savings to make his own investments. How should he start?
Dollar Cost Averaging or Lump Sum?
There are two mainstays of investment strategies the vast majority of people follow: lump sum investing and dollar-cost averaging.
Dollar-cost averaging (DCA) is when an investor takes a small, pre-decided amount of money to invest at a certain interval.
Investors may use this strategy to simplify things while reducing the risk of losing all their money.
Lump sum investing is when an investor takes all or a large portion of the money to be invested.
Investors may use this strategy when they speculate the market may be going up in the near future while taking larger risks in doing so.
Rebecca, a beginner investor, wants to use her money to invest in the stock market. She wants to invest her savings at the end of every month at the same time she receives her monthly salary. Which strategy should she use?
The Bottom Line
It's important to note that investing shouldn't be taken as a "get rich quick" approach.
As an investor, it's important to...
The S&P500, the most popular index fund to invest in, gives an average annual return of 11%. If you decide to put in $10k and wait 10 years, you should expect it to grow to $28k! That's almost triple your money without even any additional contributions.
stick to what you know
Peter Lynch, Warren Buffet, and Charlie Munger are all famous investors who recommend only investing in companies' products that you have used or are knowledgeable about. An average investor who shops at Walmart often would do better investing in that company than say, a bio-tech company they know nothing about.
not blindly follow the latest investment trends
In early 2021, GameStop's (GME) stock rose up to about $120 then back to a low of just $10 in the span of 3 weeks! If you bought from the top, then you would have lost $110 per share — A -92% loss of an investment!
As the famous investor Warren Buffet once said, “Don’t risk what is important to you to get something which isn’t important to you.”
Which investment strategy would work best for a first time investor with little to no experience in finance?