By Andrew Altman
For a beginner, investing can be as intimidating and confusing as ordering something other than coffee at Starbucks. The problem is if you get your drink order wrong, you can always exchange it. If you get your investments wrong, it can cost you far more that the price of a latte.
The good news is investing doesn’t have to be complex or intimidating. Almost every brokerage and fund company offers numerous programs that can help new individuals learn the basics of investing and gradually work their way to a more confident place in the market.
Without doubt the best option for a beginning investor is to employ one of the safe and time-tested standard practices and use it to build forward momentum. It isn’t necessary to produce outsized returns. It is only necessary to turn successful investing into a habit, and then build from that success.
Dollar Cost Averaging
The standard investing technique that produces a combination of the best returns over time and the least risk investment by investment is called “dollar cost averaging.”
Using this technique is simple, provided you are committed to a regular schedule of investments and you are purchasing instruments with a variable cost, like stocks or mutual funds.
If you buy ten shares of stock every thirty days, and the price of that stock increases five dollars every month, you are using dollar cost averaging. The reason your technique is safer is because a decrease in the price of that stock will not affect all your shares equally.
Your earliest purchases, say, 12 months ago, will likely still be more valuable than what you paid for them, even if the loss is significant on your most recent purchases. This strategy is very easy to track using the features of an online brokerage.
Time In the Market is Key
The reason dollar cost averaging produces above-average returns is because its nature enforces a “buy and hold” strategy rather than one that attempts to time the market.
Statistically speaking, individual shares of stock are by far the most profitable investment, with an average return of more than ten percent a year throughout the 20th century. One thousand dollars invested in 1900 would be worth nearly $20 million by the end of the century.
Buying and holding on to your shares is historically proven to be an effective strategy.
Monthly Mutual Fund Shares
Once you have familiarized yourself with dollar cost averaging, you can put it into practice by enrolling in a program of regular investments in a mutual fund.
Most fund companies allow individuals to bypass the minimum purchase requirements of their most popular funds by agreeing to invest a certain minimum amount every month. If you participate, you’ll have the option of simply reinvesting any interest or dividends in new shares over the course of your position’s gains.
Use Index Funds
This kind of program can be very powerful, especially if you choose a fund that closely tracks a major index.
Many of the industry’s largest mutual funds are good choices for this kind of investment program because while they may not offer spectacular gains, many choose dividend-paying stocks and index-listed stocks for their portfolios, which means you can not only benefit from increases in share price, but you can obtain new shares over time with quarterly or annual distributions of the company’s profits.
Once you have built a significant value in your portfolio, it will be time to spread your investments out. Choose mutual funds that have few, if any, overlapping stocks. Put a little in bonds and a little in individual shares of stock. Consider a certificate of deposit and possibly one or two government bonds.
This is important for risk reduction, as you do not want most or all of your portfolio at risk if a particular fund or stock experiences a significant loss.
Investing is one of those subjects that you can study for many years and still not master completely. That said, with a few basic preparatory steps, you can dramatically increase your returns while cutting your risk. In the long run, you’ll likely experience good returns and an increase in your portfolio’s value.
Andrew Altman runs www.slickbucks.com to help folks learn to manage money cleverly, and how that clever management can make you wealthier.