Over the past 10 years, I’ve learned a lot about the stock market and what it takes to start investing and successfully and build wealth.
Most new investors trip up because they make some simple mistakes, which are quite easy to avoid if you know what to look for in the first place.
However, if you don’t know what to look for, these mistakes could become costly learning experiences.
With that in mind, here are my five simple steps to start investing.
Start investing with what you can afford
To start investing, you should only invest what you can afford.
Research shows that most newbie investors lose money initially. More than 70% of new traders lose money in their first year using products such as CFDs and spread betting.
To put it another way, the odds are stacked against the average investor.
As such, it’s essential not to invest more than you can afford to lose as there is a high chance you might lose it all.
Buy what you understand
Unfortunately, no book or formula guarantees success as an investor overnight. It is a continual learning process.
Even Warren Buffett, who’s been investing for more than 70 decades, says he is still learning every day.
Beginner investors shouldn’t rush into the market. It takes time to learn what works and what doesn’t. Even if something looks like a great investment opportunity, if you don’t understand it, stay away. There will be other opportunities.
Rushing into something you don’t understand only increases the chance that you will end up losing money. With the odds stacked against the average investor from the very beginning, we want to do everything possible to improve our chances of success.
Stick to the blue-chips
Blue-chip stocks should feature at the core of any portfolio. These companies don’t usually produce market-beating returns, but they do produce steady returns, and there’s a much lower chance of something going wrong.
Beginner investors should stick to blue-chips for this reason. Small-cap stocks have outperformed blue-chip stocks over the long run, but the chances of failure are significantly higher.
It may be better for beginners to stick to large companies while learning the ropes before getting involved with smaller, higher-risk enterprises.
Once again, this is all about improving the odds of success over the long term.
Don’t rush when you start investing
One of the biggest mistakes people can make when they start investing is to rush the process.
As I’ve tried to get across in the points above, it takes time to build an investment process and learn how to be successful in the stock market. There are no short cuts. If something looks too good to be true, it probably is.
When you start investing, it’s best to take it slow and learn as much as you can. It takes time, but the profits will come if you’re careful. However, by rushing into investments, the chances of losing money rise significantly.
Don’t lose money
Finally, if there’s one step everyone should follow when they start investing, it is: don’t lose money.
Investing is a marathon, not a sprint. Over the long term, the stock market has produced an average annual return in the region of 10%. Therefore, this is a good benchmark as to the sort of return investors can achieve in the market.
At this rate of return, an investment would double in value roughly once every 7.2 years.
However, if an investor lost 20% in year 5 out of 7.2, it would take two-and-a-half years to recover these losses. That means it would take roughly 11 years to produce the same return.
Put simply, it may be best to try and avoid investment losses at all costs.
The tips above could help you achieve this aim.