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5 Investing Tips for Beginner Investors
What’s up Profit Zone gang!
Today’s email is about going back to the basics. Without a good foundation as an investor, no matter what type of investor you are, it’s going to be hard to build wealth. Period.
There are 2 main benefits of investing in the stock market.
1) The tangibles
2) The intangibles
The tangible benefit is making money of course. Price appreciation. Dividend earnings. All that good stuff you can actually see.
The intangible benefits of investing however are much more important. This includes building strong money habits that will serve you for the rest of your investing life.
This issue of The Profit Zone will be all about the intangibles. So here are 5 investing tips for beginner investors to get you moving in the right direction.
Tip #1 - Don’t Be Fooled by the Media
If you haven’t noticed already throughout this pandemic, the media’s number one goal is to get views on their content. They create attention-grabbing headlines so that investors like you and I click on them to learn more.
You’ll notice headlines like…
“2 stocks that will fall by 20% next week”
“Why you shouldn’t be invested in this one industry”
“Dividend investors are running for the fences, here’s why…”
Stuff like this generates a lot of clicks because humans are curious creatures. We have a need to find out more about a topic that might affects us.
Here’s the thing though…
Most of these headlines are complete bullshit.
Like I said, the media wants you to click on their content. The majority of the time they aren’t spilling the facts, so don’t let it have an impact on your own investment decisions.
It’s true that the most effective portfolio is usually the one that is left untouched. Don’t let the media scare you into making choices with your own money.
Tip #2 - Know YOUR Risk Tolerance
Understanding your own risk tolerance is one of the first things you should figure out BEFORE you start investing. It will determine what types of industries you invest in, how to structure your portfolio and ultimately allow you to sleep better at night.
I can’t count how many times I’ve asked a new investor their risk tolerance and the majority respond with “low to moderate I’d say” only to then find out that they’re invested in penny stocks, IPO’s and speculative companies that have yet to make a profit. Don’t be that person.
As your investment goals change, so might your tolerance to risk. The younger you are, the more time you have on your side and therefore you might be able to afford to take on more risk for more reward. If you are older and approaching retirement, it may be time to sell all of those tech stocks and put your money somewhere that grows slowly but steadily.
There’s no doubt that your risk tolerance may change over time, but it’s important to know where you stand so that your investments can reflect that.
Tip #3 - Index Funds Then Branch Out
Investing is about creating wealth in the simplest most efficient way possible. Most beginners get in the market expecting to make 1,000% gains right off the bat and it ends up hurting them in the long run. The best thing beginner investors can do for themselves and their net worth is to start by buying index funds.
But why’s that?
When you buy index funds, you’re buying into 1 fund that owns a bunch of different companies. The average person either doesn’t know how to analyze a company or just simply has no interest in doing so. Buying index funds eliminates the need to “put all of your eggs in 1 basket” and instead allows you to spread your eggs across many different companies.
Investing in index funds also allows you to get some skin in the game while building those good money habits along the way. It’s a very passive investing strategy that is quite effective over a long period of time. When you start to get familiar with the market and how it behaves, then you can try your hand at picking individual stocks. But until then, index funds might be the way to go.
Some of my favorite index funds (ETFs) for beginners:
VOO - Vanguard 500 Index Fund ETF (or $VFV if you’re Canadian)
VTI - Vanguard Total Stock Market Index Fund ETF (USD)
VUN - Vanguard US Total Market Index ETF (CAD)
VDY - Vanguard FTSE Canadian High Dividend Yield Idx ETF (CAD)
VGT - Vanguard Information Technology Index Fund ETF (USD)
Tip #4 - Automate Everything
When it comes to investing, automation is your friend. It just makes investing that much easier. When everything is automated you don’t even have to lift a finger while your money grows on itself. The less you have to do, the less overwhelming you make investing and the more likely you’ll stick to it.
2 Ways to Automate The Investing Process:
1) Set up weekly/monthly/yearly contributions to your account. I personally have a $100/week automatic contribution into my dividend account which has made a world of difference for my portfolio’s growth. Every time I log into my account (which is not often) I’m pleased to see a decent-sized cash position ready to be deployed into the market.
2) Use DRIP to your advantage. DRIP stands for Dividend Reinvestment Plan and it’s one of the most useful automations especially for dividend investors. Most brokerages offer it and it allows you to automatically reinvest any dividends earned back into more shares of that same company. When you use DRIP, you’ll notice that your dividend payouts will start growing without you having to do a thing. More shares = more money!
Tip #5 - Keep Costs Low
One of my biggest regrets as an investor is not switching brokerages earlier than I did. Over a period of about 3 years, I was with an investment brokerage that charged me $9.95 to buy and sell stocks. Over that time period, I probably threw away over $200 in fees just from buying and selling. It doesn’t seem like a lot but just imagine how much that would be over 30 years. It makes a huge difference.
It’s important to find a brokerage that either offers low fees or better yet, no-fee trading. There are tons to choose from but choose wisely. Another thing to note, make sure you’re aware of any hidden charges like inactivity fees, minimums or over-trading fees. These can also cut into your profits over time if you’re not careful.
Another way to keep costs low, especially if you’re investing in index funds, is to be aware of the Management Expense Ratio (MER). This is the fee you pay for management, operating expenses and taxes as an investor holding funds.
The average MER for actively managed funds is between 0.5-1% while the average MER for passively managed funds (most index funds) is about 0.2%. The majority of my funds sit around the 0.08-0.12% range which allows me to keep more of my profits over time.
Here’s a graph that illustrates the impact of fees over a 20 year period:
The difference between a 0.25% and a 0.50% fee over 20 years could amount to about $10,000. That’s a lot of money to be throwing away for no reason. Make sure you’re aware of your fees!
TLDR
To sum it up, here are 5 tips for all beginner investors:
1) Don’t be fooled by the media
2) Know YOUR risk tolerance
3) Index funds then branch out
4) Automate everything
5) Keep costs low
That’s all from this issue of The Profit Zone.
See you in the next one!
- Alex (The Dividend Dominator)
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