As I approach this new part of my life where I am now considering being a more active investor, possibly trading individual stocks and managing a taxable brokerage account, I know how complicated it can be. Not only is there a lot to learn for a beginner investor in order to overcome his/her fears, but there are a lot of things that weigh in on each and every decision.
There Are Different Approaches to Investing
As someone who is going through this for the first time, I know first hand what it feels like to be overwhelmed. As I was doing more research on how to invest, to be quite honest, I was expecting there to be one way of investing that was the “right” way. What I first failed to realize is that there are different approaches to investing. That’s right – it’s not that easy as learning how to invest. Because, when you are learning from someone or some website, odds are that they abide by one or multiple different approaches.
What am I talking about? While I don’t have time to go into it today, there are different “philosophies” that investors use when investing. For example, one approach is value investing. As I have recently learned, value investing is the way of looking at individual companies and determining their value. Stocks are purchased under the assumption that because of the way they do business they are currently under-valued. In other words, in the future this will change and the investor would earn a profit as the market adjusts to what it should be. This is value investing.
Yet, this is only one way of investing. There are many other approaches to investing. When I learned this, I felt like the curtains were being pulled back and the world of possibilities opened up. My internal brain was talking to myself, “You mean, I don’t HAVE to invest this way if I don’t feel comfortable?” That’s exactly right! And neither do you.
Values to Hold in Balance for Young Investors
While learning that there are different approaches to investing can be freeing, allowing you to adopt your own modified approach to investing, this isn’t to say that there aren’t universal values that young adults need to consider when they start investing on their own. As I jump into this new arena, I have taken note of the new concerns that I have so that young investors may better understand what they should be considering.
Time to Manage/Supervise Portfolio
Believe it or not, there are different ways of investing that affect how much time it will take to stay on top of your portfolio. Two portfolios that are invested exactly the same way to begin with can have completely different results with different time involvement by the investor over the course of their lifetimes. When decided when and where to invest, you need to consider that some investments (like ETF’s or Mutual funds) take significantly less time to manage, while individual stocks can need more attention to recent news and trends.
Duration of Owning Stock
Another thing you need to consider when investing for the first time is how long you intend to hold this investment. Is it going to be a short-term investment, riding an upward wave, or is it going to be more of a long-term investment. While nothing is set in stone, it will affect how and when you buy the investment. If it is a long-term investment, the purchase price isn’t as important.
While this may seem like an obvious value (which investor doesn’t want a huge potential growth), one thing you need to consider is how much potential growth does this investment hold. If there isn’t a lot of potential growth, this should affect your strategy as well. It may affect the duration that you plan to hold that investment or may affect how much money you plan to put into this investment.
Last, but certainly not least, is the diversification of your portfolio. Diversification, or spreading out where you invest your money, is intend to protect you from big losses. If one area of the market drops, it’s unlikely that other areas will do the same. A well-diversified portfolio not only diversifies among stocks, but also with types of investments and markets (as well as many other categories, I’m sure). This is quite complicated and I will expand in a future post, but the basic idea is whether you are planning on investing most of your portfolio in one stock or area of the market. This is important for a young investor to consider because most investors start with very little money to invest. While you have more time to recover losses, it is probably still a good idea to value diversification. This could very well influence your decision on where you will start investing.
Investing for the first time is never an easy task. There are many values and competing opinions out there that need to be considered. While it may take time to formulate your approach to investing, don’t let it keep you from investing. Do as much research as possible and take gradual steps – but the important thing is to start investing. You may lose money early on, but if you pay attention and learn from your mistakes, you will more than make up for it over the course of your lifetime.