Risk & Market Basics
Posted on November 30, 2020
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I get lots of questions on where to even begin with the stock market. In response to this, I want to provide some fundamentals for beginners wanting to start investing.
First up, risk and the fundamentals of the market.
The rule of thumb with the stock market is to buy low, sell high. This means, you want to sell the stock for a higher amount than what you bought it for – this is what generates profit in your pocket.
The first thing I like to tell people about market investments is that anyone can do it. You don’t need to already be rich or have loads of extra money lying around. I like to look at a brokerage account as my savings account – only I get much higher interest on it than I would in a traditional bank account. There are a variety of ways you can set up your investment portfolio that range from very low risk to much higher risk. Risk determines your chances of losing your earnings or investment.
- The lower the risk, the less return (or earnings) you are likely make on your investment – but you have a smaller chance of losing anything.
- The higher the risk, the higher the return – but you have a higher chance of losing.
Ideally, we would all want a low risk-high return type of portfolio, but that simply does not exist on its own.
It’s important to note that this talk about risk should not allude to the idea that you are gambling. Investing can definitely be a smart financial decision (if done correctly), as it is based on actual established companies and informed decision-making. The market will always recover and grow in the long term, so keep in mind that risk is largely a factor of how long you are willing to wait for your return.
In my opinion, the best way to mitagate risk is to diversify your portfolio. This means buying different companies, in different sectors, with no relationship to each other. That way, when one company (or sector) is at a loss, you could still see an overall positive return because your other stocks are doing well.
The amount of risk you are willing to take on is based on your personal preference. However, I would advise considering a few factors to determine your desired style.
- Age: If you are younger, and you have quite a few working years ahead of you, I usually recommend a higher risk type of portfolio to maximize your gains. If you are older, and nearing retirement, you might consider something less risky with a more safe and steady flow.
- Length of Investment: Are you planning on investing in a fund or company short-term (less than 1 year to 2 years) or longer-term (longer than 2 years)? Short term investments tend to be more risky (because you are looking for quicker returns in a shorter period of time).
- Experience with the Market: If you are new and just starting out, it is best to not go all in on the risk levels. You might want to play around with some safer funds and bonds until you can see more trends and get used to how it all works.
What can I buy?
- Mutual Funds: This is hands down what I recommend for beginners! Funds are groups of stocks put together by a fund manager. They are usually grouped by sector or some type of similarity. The risk is lower because a lot of funds are well balanced and diversified already (within the given sector). They are also ranked by rating – so if a fund has performed well in the past, it will show in its Morningstar Rating, which helps when trying to select a fund to buy. Usually, this type of investment item will have a very small load (fee) for the management involved, but the good ones should cost less than 1%.
- Stocks: These are actual shares of individual companies. If you buy stocks outright, it is highly recommended that you spread your money among different sectors within the economy. For example, if you buy something in consumer finance sector (like a bank), also go buy something in a different sector, like health (a drug company for example). This will keep your portfolio more balanced for optimal growth.
- Bonds: Pretty low risk and a low amount of return overtime. I like to throw a few of these in to diversify my portfolio, but I do not invest a lot in these as there is much more opportunity elsewhere. During the COVID market crash, these types of investments helped offset any losses in my portfolio because they largely remained steady and less affected by the rest of the market. They, however, have never been anywhere close to my best performers overall.
- Metals: Usually has an inverse relationship to the rest of the market. If the market is high, you might consider buying metals. If the market is low, you might consider selling metals.
How do I buy?
This part is speaking specifically for Americans (as Europeans do not have the same ease of market access as US citizens do).
You will need to set up a brokerage account with the firm of your choice. Choose a company with little to no commissions and low brokerage fees – because the last thing you want is someone taking a chunk out of your money. I recommend Fidelity. It’s easy and free to set up an account, you can link your bank details, and get trading immediately.
I strongly discourage using an investment advisor to do your trading for you. They take out a large amount for commissions and fees, for something that you can easily do online on your own. With a little bit of research and knowledge, you will be well on your way to investing like a pro on your own, for yourself! So save your money, and open a Fidelity account instead.
In my next investment posts, I will get more into actual market trading, what to look for, and how to see the opportunities out there. Have a good one, you guys!
Category: UncategorizedTags: basics for stocks, brokerage account, buy low sell high, how do I start investing, how do I trade in the stock market, investing, market basics, risk and return, stock market, stock market basics, stock market risk