This is the seventh in a series of eight articles expanding on the steps of the article:
8 Steps to Build Wealth
Step 7: Begin Investing
There’s only so much you can learn about investing before you have to roll up your sleeves and start trying it out. There are nuances between theory and practice, and experience is the best teacher. For the sake of this article I’m assuming you’re investing in stocks, but many of the concepts carry over to any investment type.
My recommended approach to your first few investments is to view the investment capital as though it were tuition money. That is, worry less about the actual performance of these investments and instead focus on what you learn from them. Tuition is money that you pay to a school to learn, and you don’t get it back. So, don’t put in money that you’ll be needing any time soon, and don’t put in more than you can bear to lose. Start small and work your way up. In all probability, if you follow wise investing practices and invest in a company that produces a product or service that you understand, that has a low debt level, and that has a reasonable stock valuation, you should do fine. But, there is always risk in investing, and the last thing you want is to put too much focus on success in your first investment attempt just to encounter failure and put off investing altogether! So relax, do your research, gather some money, and make your move.
For new investors, I particularly recommend investing in a company that pays dividends. Dividend stocks are great choices from the beginner investor all the way up to the master investor, but they tend to be particularly beginner-friendly stocks. This is the case for a variety of reasons. Many dividend paying companies are well-established businesses. They’re usually not cutting-edge, super-risky investments, and they are often companies familiar to you. They generally require little portfolio maintenance because they are usually great to hold for a very long time. In addition, instead of waiting for your stock to go up in value, you’ll begin collecting regular dividend payments rather quickly, so regardless of what which way the stock price moves in the short term, you’ll have your own small source of growing passive income. This will boost your confidence, help you make the good decision to hold onto the stock for the long term and let your dividends grow, and set you off on the right path.
-Try looking through a list of the dividend aristocrats, companies that have increased their dividend payouts for at least 25 consecutive years. You might find that some of these best-of-breed companies make great investments.
-Make a stock watch list so that you become familiar with several companies and pick one or more of the best ones to allocate money to. This will ensure that you buy mostly on reason rather than emotion.
-Write down your investing thesis, which is a statement of why you think the company is a good investment. Write down the primary qualitative and quantitative aspects of the company that make it seem to be a good investment, and also write down the risks of this company that you can identify (many of the risks will be listed in an annual report of theirs). In addition, write down a list of events for which selling the stock would be logical. You never want to buy and sell on emotion, so keep this statement handy for when emotional situations might arise with your company (a missed earnings statement, bad news, a huge change, etc.).
-Ask yourself, when you are considering purchasing stock of a company, why you are not buying stock of one of their competitors instead. What makes this company more attractive as an investment?
-If you’re following the logic of this site, you’ll ideally want to buy a company and hold onto it for a very long time and collect dividends. This will keep fees and taxes low and will keep you help you reduce emotional decisions in your portfolio.