10 Questions From a Beginner Investor
If you’re researching investing, you’re most probably having some uncertainties that need to be addressed.
By no means a complete list can be compiled to answer every question a beginner might have, but here are a few I’ve heard lately. So, if you overcome investing fear but still aren’t ready to take the leap, let’s see if this post can help with some of your concerns.
Isn’t investing risky?
Compared to what?
The best way to resolve this concern is by distinguishing between:
- Investing and trading
- Investing and gambling
- Investing and betting
I rarely talk highly of things I created, but I think I did a pretty good job of illustrating the difference between each of those in Become an Investor. And the best part? You don’t need to buy it to read it – the first chapter is available on Amazon as a preview, so you can check it out for free right now. The link is below.
Become an Investor on Amazon
But what about investing being risky compared to not investing?
Then you need to learn about inflation. The post Cash vs Stocks in 30 Years is also a great resource to target this concern.
I think Elon Musk has revolutionary ideas. Why not invest everything in Tesla?
Interesting…
Not the most thorough financial analysis, but a sweet one.
Well… Don’t ask me. What do you think is the answer to the question if you should invest in Tesla because you think Elon Musk has a vision?
I mean, I agree with the statement, but doesn’t it imply that the board or CEO of every other successful company lacks vision? Because every cent you put into something is a cent that won’t be used elsewhere, so why TSLA specifically?
At the end, if you did your due diligence, you can enter with an adequate part of your portfolio. But make sure to have the rest of your wealth allocated in a diversified portfolio and get properly compensated for the systemic risk you’re assuming anyway.
What is a diversified portfolio?
Diversified portfolio is a portfolio that’s composed of various uncorrelated assets and/or asset classes.
For example, a diversified stock portfolio would hold various companies from different sectors, regions, and sizes.
In this way, if a specific sector is adversely affected by a certain event, the potential losses from it would be overshadowed by the potential gains in the others. If a specific country experiences economic downturn, the portfolio might still perform just fine because of global diversification. But most importantly, diversification is the protection against firm-specific risk. It fully eliminates the risk of being overexposed to any single entity.
Basically, if you’re diversified properly, you’re investing in the market. And that’s the smartest way to go about it for individual investors.
Knowing that house prices always go up, isn’t real estate a better alternative?
You can invest in whatever you want.
But if you ask me, there are two requirements.
The first requirement, and it’s a really important one, is that you should understand the market you’re investing in. There are no exceptions here, all should apply:
- You’re familiar with the real estate market from a perspective of an investor
- You understand the regulatory framework around real estate investments in your country/area
- You can forecast rent and house prices using reason and understand the significance and risks of being wrong
- You understand which areas are prosperous, which are saturated
- You know completely and thoroughly how property management works
- You understand all expenses and government interventions related to owning rental properties
- You understand how banks work, how they make money, and how to use leverage
And much much more.
Anyway, the second requirement is almost as important as the first one: know the alternatives.
So, whenever someone says “real estate doesn’t lose value“, which may or may not be true, you can say “the stock market doesn’t lose value even more“.
And this is true, as house prices generally grow with inflation (or slightly more in certain areas), while the economic growth, which is reflected in the stock market’s performance, is not only superior, but required in order for the housing market to boom. Historically, stocks outperformed real estate as an asset class.
And have in mind that almost no investments are mutually exclusive. You can always diversify in as many asset classes as you want. But buying physical properties has overhead and is not easily diversifiable. Don’t get me wrong, I approve of real estate as an investment. I just don’t think it’s suitable for beginners – many think it’s far easier than it’s actually is.
Should I wait for a stock to go down before I invest?
No.
You don’t know whether it will ever recover (as many didn’t in 2008 and 2020). You also don’t know if it will go even lower, making you miss the bottom. And most interestingly, what if your expectations are below what will actually happen and you never see the bottom you’re expecting?
It’s improbable that you’ll “buy the dip” as a beginner. You’ll either lose money from catching a falling knife, due to inflation, or, in the extremely unlikely scenario of hitting the bottom: will win big… With an equally unlikely chance of replicating it again in the future.
And have in mind, the stock market is efficient enough so that making investment decisions purely on price movements doesn’t work. If you think otherwise, you’ve most probably watched someone’s covert marketing material of him using technical analysis to explain things in the past. Nobody can do the same for the future. 🙂
What can you do instead?
You can buy the market without timing the market. Even if the whole stock market gets affected by a global event, you can rest assured that you’ll make gains in the long run.
How do I know that the market will recover?
The market always recovers.
If it doesn’t, that means that the world is over as we know it – including a failure of our monetary system, democracy, semi-capitalism, semi-free markets, and everything we’re used to, in which case it doesn’t matter how you invested your money… In other words: monetary losses in some currency would be the last concern you’ll have in such a scenario.
As long as we’re advancing in productivity, innovation and technology, economic growth is a guarantee.
How do I know which companies to invest in?
Good question and pretty related to what we’ve discussed.
The right answer would be: in as many of them as possible.
But not equally.
Weighted.
Index investing is a concept you can learn more about. It basically means that you can use an index such as the MSCI World as a benchmark for your portfolio. This index tracks the performance of more than 1600 companies from various developed markets and is market-cap weighted. That means that the larger a company is, the larger allocation it will have.
When you’ve found an index to match your portfolio’s performance to, you can use index funds or ETFs to track it.
What is an index fund? What is an ETF?
Index funds are passively managed funds which aim to match the performance of a specific index.
ETFs are exchange traded funds – funds that can also track an index but trade on exchanges, same as stocks.
These are the two most optimal ways to diversify without managing a portfolio of thousands of stocks yourself.
I have a friend who got rich by investing in X. Should I jump in?
No.
Why not?
Why yes?
If we were assuming the status of an investor for everything and looked for things to change our mind, most people would’ve been broke by now. For example, opportunity cost is something that has to be addressed – unless there is an unlimited amount of money, in which case investing in anything doesn’t make sense and the currency’s value converges to zero.
Anyway, if someone didn’t explain to you in the tiniest detail or sent you reference to educate yourself, than he may be attempting to include you in a multi level marketing scheme. Something you certainly don’t want to be a part of.
As long as money is the only evidence presented – stay away.
Past performance doesn’t guarantee future results.
Maybe you’re too late and missed the wave.
Unverified income doesn’t count as income.
If someone has interest in you investing, make sure he’s not biased.
Remember: good investments always make sense when you do proper due diligence. There is absolutely no need to try to replicate other peoples’ past success stories in the future.
Need additional help?
Still not ready to jump in?
Don’t worry, I got you covered.
Check the The Ultimate Guide to Long-Term Investing for Absolute Beginners, where I turn laymen into people able to make investment decisions on their own and without paying a cent to financial advisers or portfolio managers.
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