Investment Basics For Beginners

Before we begin with investing 101, its important for me to say that I'm talking about investing and not speculating. Speculation is not a long-term winner for most people. Yes, some people get lucky and end up winning big with speculation. However, those same people typically end up losing those big winnings eventually because they had to take big risks to get the big win and they continue to take those big risks to try to win more. In the end speculation is just like gambling.

I'm not saying that speculation is wrong. Speculating is OK if you recognize thats what you're doing. However, many people speculate and call it investing. Make sure that when you think you're investing you're not actually speculating. If you answer yes to any of the following questions, then you're speculating:

• Are you acting on a "hot tip?"
• Are you acting upon a guess as to how events in the short-term or long-term future will turn out?
• Are you putting money in because you think the market has "bottomed out?"
• Are you taking money out because you think the market will fall soon?
• Are you acting on some article, book, blog post, or overheard conversation about the future of some industry?
• Has someone sold you on an "investment" that promises quick and easy returns that seem too good to be true? If it were such a money maker, why are they selling it to you?
• Are you investing based upon a formula somebody gave you?
• Are you investing based upon how a stock chart looks?

Again, its OK to speculate. Just make sure that you know you're speculating. In fact, some amount of speculation may be necessary for you to get it out of your system. Speculate with a small amount of what you plan on investing or, better yet, don't use real money. I did a little speculating when I first started investing. The engineer in me said, "this is just another system I can break down and figure out. I'll make millions and retire to a tropical island in no time!" I learned my lesson and have now gone back to the investment basics. I didn't lose all my speculation money. I just did worse than the no effort solution and lost money as a result.

A really great example of people speculating when they thought they were investing was around the summer of 2008 when oil prices went higher and higher. To many people they seemed like they would go to the moon! I saw ads for "investing in oil." Those ads were fraudulent because had you followed their advice you would have been speculating. Generally, if the X in "investing in X" is very specific, then its speculation. We all know how "investing" in oil turned out for those people. A good example from today would be "investing in gold."

As an investing beginner just trying to nail down investment basics, I suggest you stay away from speculating. Unfortunately, speculating is fun and entertaining while real, prudent investing is boring. The prudent method of investing won't let you brag to your friends how you picked a stock that doubled in a week, but you also won't have to feel shame for the stock that tanked by 90%.

Most people think of the Stock Market exclusively when thinking about investing. The stock market is a big part of the best way to invest money. However, there's more to investing than the stock market. If you want to know basic information about the stock market, head on over to stock market for beginners.

• Before you even think of investing, pay off any high interest credit card debt. Credit card debt is a huge drain on anyone's finances. Think of this as tax-free, guaranteed high return on your money. You just can't beat 10-30% guaranteed tax-free returns on your money. The only exception to this rule is first putting money into your 401k up to your company match.
• Make sure you focus onsaving money. The more you save, the more you can invest and benefit from smart investing.
• Why should anyone invest? Why not just park your money under your mattress until you need it? The answer is inflation slowly erodes your buying power. Therefore, you are effectively losing money if you let your cash just sit there doing nothing.
• There are many different ways of investing money. Your life situation will determine which method(s) you choose. If you need the money sooner, then you will want to be safer with it. If you aren't looking to pull the money out for a while, then you can be more aggressive.
• Its important to know about bonds. As you'll see in more detail in the investing in bonds section, bonds are an extremely useful counterpart to stocks.
• Index funds are the basis to easy investing. You won't have mastered investment basics until you understand them. An index fund takes a list of investments and puts some money into each of them. For example, Total US Stock Market index fund would put money into each of the US Stock companies for you when you bought the fund. Therefore, you can invest in the entire market with one simple action. You can do this with just about any investment type or sub-type thats out there. I love index funds for many reasons. For more details on index funds click on the link at the beginning of this bullet point.
• One of the best things about investing in an index fund is that it instantly gives you diversification . From diversification, you get reduced investment risk. When you're invested in 1,000 or more companies, its much harder to lose a big chunk of it due to a company going out of business than if you had all your investment money in 1 company.
• Asset Allocation is one of the most important factors in determining your investment success. What makes Asset Allocation so important? The answer lies in Asset Correlation. Asset Correlation is a big key to the big picture of, not just Asset Allocation, but all of investing. Let me rephrase for emphasis. Understanding Asset Correlation will greatly help you setup the best portfolio for your needs - whatever they may be. When your assets don't move up and down together, your portfolio is much less risky.
• Its good to know the difference between a money market fund and a money market account. Having a good chunk of money in a money market account (my preference over a fund) is an investment basics key because it helps you not panic if your stock investments suddenly drop. Also, if you suddenly need money for something in your life, you won't have to sell out of your portfolio when it could be at a low point. Most importantly, having money in a money market account will leave you feeling more secure about your investments. This results in better decision making and, therefore, better investment results.
• Don't be fooled by Average Annual Return (AAR) statistics on funds. That number can be extremely misleading - and not just for beginner investors. What you want to look at is Compounded Annual Growth Rate (CAGR).
• A great basic investing habit is the practice of dollar cost averaging. This helps remove or reduce the impact your emotions can have on your decisions. With major Mutual and Index Funds, you can easily automate the dollar cost averaging.
• Make sure you understand family economics if you have a family. The ins and outs of a family are similar to a mini-economy. Understanding basic decision making in this area is useful.
• It is important to know saving money basics, practical money saving tips, saving money on electricity, money saving websites, and saving money tips on big items, so that you can maximize your investment funds. After all, if you have no extra money to invest, then there's really no point in knowing how to be a good investor.

For more ideas on advanced investing, GoldenTree Asset Management and other advisory firms can help you make informed decisions about your investments.

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