Investing has rules and they can be confusing for new investors. In this article we will look at five rules of investing every beginner investor should pay attention to.

Start Early

The effect of compounding on your investments over a period of time is significant and should not be ignored.

Starting early will allow your investments a longer time to grow and compound. (Let it cook now!). 

It isn’t all smooth sailing as a glance at the past twenty years (not that long) shows there has been at least significant two recessions.

Recessions get a lot of attention and similar to negative headlines, fear is the overwhelming feeling people are presented with. This is not unusual since bad news seems to grab our attention more.

Data from any of the main indices such as the S&P 500 or NASDAQ for example reveals how much return investors who were in the market have enjoyed. 

Starting early and staying in the market is key. Remember, it is not just about you. You can start early for your children, nephew, nieces and other family members.

In a future article we will explore how best you can go about doing this.

Diversify

By diversifying, you are not putting all your eggs in one basket but what exactly does this mean? Since you are investing as a beginner, it is not smart to invest all your money in one stock such as Apple, Vodafone or your favourite company. 

As you gain more exposure, it is not smart to invest all your money in one asset class either. Inflation, recessions and other economic events can cause a total wipe out in the value of some asset classes. Think of the Great Financial Crisis and the impact on the Real Estate market.

The idea here is if that company you invest all your money in under performs or even goes bust, you do not lose all of your money.

Think back to the stratospheric performance of the ‘pandemic stocks’ such as Zoom and Carvana and where the stock prices are now. Had you invested all your money on one or two of those companies, you could have lost a huge portion of your portfolio.

The same principle of diversifying can apply to Real Estate investing but for now we will stick with stocks.

Looking at what the wealthy do, they do not always appear to follow this advice – if anything, it looks like they invest a lot of their money in a few companies. 

The temptation exists to follow the wealthy in this instance but stop and consider the access to information they have and the financial situation they are in.

They can afford to take those risks while many of us cannot – at least at the early stage. Until you get to that point where you can take some more risks, diversify your investments.

One way to diversify your investments in the stock market is by investing in Mutual Funds or Exchange Traded Funds.

Pay close attention to the costs

Investing can be expensive although it does not have to be. As a budding investor, how do you determine the costs associated with investing? We will cover this in more detail in future but here are a things to keep in mind.

Your style of investing has an impact on the costs associated with your investment. If you adopt an Active Investment style, the costs are higher for the following reasons.

1: With an active fund, the fund manager aims to beat a benchmark and as a result, they make decisions to buy or sell securities in order to meet that goal. The fund manager relies on data from analysts to make this decision and there is an associated cost for this research information.

2: When the fund manager buy or sells any securities, there are transactions costs associated with each sale and purchase.

3: Many of these fund managers fail to beat the market (the benchmark they set out to outperform) so in the end, you could have kept more of your money by investing Passively.

A passive investment style is cheaper and there are different ‘shades of cheap’ so simply adopting a passive approach does not mean you are getting the best value for money. 

With a passive approach, you invest in an index fund and wait. That is it – the shares are not added to the fund or sold because inflation is high or for some other reason. The key is to stay in the game longterm.

The Expense Ratio is an important metric you will come across and it is generally higher for actively managed funds compared with Index or Passive Funds.

You can read more on Active and Passive Investing strategies here.

Set your Goals

Goals keep you focused and disciplined and investing is no different. Your goals are important for a few reasons.

1: They allow you to track your growth in your investing journey.

2: They allow you to have something to look forward by stretching you.

3: Goals present an opportunity for you to be accountable and improve.

There are a number of ways you can set an investing goal and here are a few examples of what the goal could look like.

Your goal may be to simply begin investing and this may entail choosing your investment style, finding the asset class and a broker to open your account and start investing. 

Quite a few steps were skipped in the comments above and as you become more familiar with our articles, you will understand who a broker is, the different account types you can open and the role the broker plays.

Here are examples of simpler goals you may want to consider as you begin your investing journey.

Example 1: Invest at least 30% of your monthly income in a Low Cost Index Fund

Example 2: Earn Passive income in the form of dividends from your portfolio

Example 3: Gain exposure to Fixed Income assets 

Example 4: Add Real Estate to your portfolio 

Keep Learning

Change is the only constant and once again, investing is no exemption. To save on costs and diversify, it is necessary to invest in a low cost index funds and hold for a long time.

The question is, how many Low Cost Index Funds are out there? How do they compare between providers? Should you buy the S&P 500 or an index that tracks the total market?

Should you get exposure to Asia, Africa, Europe and other markets? And if the answer is yes, what is the best way to go about it?

You can search for answers on the Internet regarding those questions and you can read books on those topics.

As a beginner investor, learning in a fundamental aspect of investing. You should not leave everything to the ‘gurus’ out there.

It may seem daunting at first but having your goals and coming up with a low cost way to invest will keep you from many of the dangers out there.