5 Basic Principles For New Investors

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Last Updated on May 29, 2020 by Mark P.

When the economy is in shambles, people jump in to learn how to invest for the first time. When the economy is doing remarkably, people are still learning how to invest. Either way, there is no such thing as a bad time to learn how to invest, so you might as well learn it now, especially if you’re reading this. I’m not a certified financial planner and you should do your own research, but here are my personal principles that I feel new investors should know before they start investing their hard-earned money.

1. Don’t get a loan to invest

Dave Ramsey, the debt killer and cash king, has investing as his last step in his infamous baby steps, and the reason is simple- investing should only be made when you have established a good emergency fund, you’ve cleared your debt, and you have a stable earned income. When you invest in the market, you’re more likely to make impulsive decisions, so taking out a loan so you can invest debt is perhaps the worst decision you could make, because that will only result in impulsive and disastrous decisions down the road.

2. Are you a day trader?

Here’s the truth, if you are not a professional day trader, attempting to play the stock market like a game will only give you one guaranteed result, losing money. I can tell you this because even the best day traders lose money at some point, so what makes your odds any better? Work with a certified financial planner you trust so you can begin a stable path to investing and earning passive income instead of playing a game where the house almost always wins.

3. Understanding dividend investing

One thing you certainly never learn in school is financial literacy, nonetheless what dividend investing is. Dividends are a percentage of overall profits paid out to investors for holding their stocks with them. By focusing on investing in good and healthy companies that have a reliable dividend, this is a great way to build wealth and develop a reliable stream of passive income in the stock market.

4. Creating a well-diversified portfolio

Go online now and you’ll hear many so-called “experts” tell you to invest entirely in one sector. The truth that real experts will tell you is that most millionaires become millionaires because they patiently built equity in a diversified portfolio of stocks including real estate, healthcare and pharmaceuticals, retail, telecommunications, and many others. This prevents you from leaning into one sector too heavily that will harm your portfolio if and when that sector enters a bubble or an economic crash.

5. Don’t invest money you think you will need in cash later

You lose money when you pull out when the value of the stock goes down, but you lose again when you take into account the long term dividends you might also lose as a result. Investing is like getting into a long term relationship with a business partner. So when you invest into a company, go into it with the intention of being with them for the foreseeable future, through good times and bad, and this will ensure you build your wealth as a result. By having cash in an emergency fund, you’ll ensure you won’t be tempted to touch your investments.