Three Investing for Beginners Lessons: Start with Index Funds, not Stocks

Submitted by Van Beek on February 23, 2011 - 17:14

The biggest loss I ever made on a single investment was the investment in the stock of a company that I knew best. This is a great lesson for beginners who want to start investing. It was in 2000 and I bought shares in the company that I was working for. I know that company inside out. I know its industry. I know the competitors. It was and is the dominant global market leader in its market. And still I lost more than 60% of my investments in that company.

What happened was that the down trend in the overall market and in the industry had much more impact on the stock price than the great performance of this company relatively compared to its peers. The lesson I took is that a buy-and-hold approach of individual stocks of great companies is not the best way to start investing.

3 Investing for Beginners Lessons

Here are 3 investing for beginners lessons that I wish I had learned 15 years ago.

1) Start investing in index funds and avoid individual stocks.

To diversify your risk as a beginner, you would need to spread your investments over a bunch of companies. An index fund is doing that for you. It is much easier to follow the trends in a few indices than in a bunch of different stocks.

2) Review the long-term trend in the stock market indices on a monthly basis.

The trend is your friend. Long-term trends last between many months to a few years. As a beginner, you want to ride these trends with your index funds. When the trend is up, you can use index funds like the SPY or IVV that follows the S&P 500. When the trend is down, you can even decide to short the index with for example the SH.

3) Take baby steps and do not invest all your savings in one go.

Money management or how much you invest is essential for your returns as for your peace of mind. Take steps that you are comfortable with. Start small and increase your investments over time when the market continues in the anticipated direction. When you are more experienced, you can start taking bolder steps.

On a final note a warning: never invest with borrowed money. Only invest the part of your savings in the stock market that you do not need for at least 5 to 10 years.