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For those new to stock investing, it's a great idea to read about the best steps to take. Investing for beginners can be simple when you're prepared.
That's why we created this guide to investing. We will tell you how stock market appreciation can affect your overall wealth, the risk-reward parameters to consider in investing for beginners, and how to allocate your portfolio. We will also give some tips about specific stocks to buy.
Let's get started.
Investing for Beginners: A Brief Overview
Over the decades, the U.S. stock market has returned the highest percentage on money invested in it than any other asset class. The investments on average have had higher returns than bonds, real estate, precious metals, or commodities.
The important thing to remember is that these returns take place over the long term. If you're interested in knowing about investing for beginners, one of the core concepts is that stock markets fluctuate. You can expect stocks will go down as well as up.
A 20% drop in the broad market averages such as the Dow Jones Industrial Average (DJIA) or S&P 500 over a roughly two-month time frame is considered a bear market. A steadily rising market in the same time frame is considered a bull market.
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The market will always be either bull or bear, and not one forever. But new investors need to know that, over the past 100 years, the DJIA has returned 22,000%. In other words, $100 invested in 1916 would now be worth $22,000 for the descendants of the original investor.
There have certainly been bear markets during that period. But the rise of bull markets has counterbalanced and exceeded bear markets over the long term.
Investing for Beginners: Risk-Reward Parameters
Because stocks fluctuate, another core concept of investing for beginners is to plan a portfolio to maximize reward and minimize risk. When choosing stocks for a portfolio, the best strategy is to choose stocks that offer maximum reward with the least risk (i.e., least chance of a prolonged downward trend).
How to find stocks that maximize reward and minimize risk?
There are three methods.
First, look for stocks that produce goods and services that people steadily need or want. Money Morning top pick Becton, Dickinson, and Co. (NYSE: BDX), for example, sells medical supplies and patient safety products. Many of its supplies are designed for single use. That means that users of the products need a constant supply. Demand is steady year after year with these type of stocks.
In addition, the state of the economy, geopolitical situations, and politics have minimal impact on products people need or want.
Second, look for stocks whose products or services benefit from trends. Money Morning Chief Investment Strategist Keith Fitz-Gerald has identified Six Unstoppable Trends that will keep on happening regardless of world events. They are medicine, technology, demographics, scarcity/allocation, energy, and war/terrorism/ugliness.
Stocks well positioned to benefit from these trends are poised to reap the rewards.
Money Morning top tech pick Facebook Inc. (Nasdaq: FB), for example, earns its status as a Money Morning favorite partly by its heavy investment in a coming tech trend, virtual reality (VR). In a few years, FB founder and CEO Mark Zuckerberg has said he thinks VR will be used in education (to facilitate communication between students and teachers), medicine (to facilitate communicate between healthcare providers and patients), and entertainment (you may be able to see sports as if you were courtside or have VR singers seem as if they are in your living room).
The tech trend of VR is one of the reasons that Money Morning expects FB's share price to rise to $250 per share by 2020. From current levels, that's nearly a 100% return.
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The third investing for beginners tip is to look for stocks that combine stock price appreciation potential with excellent dividend yields. Interest rates are currently at historical lows, so good yields can counterbalance low bond yields. Money Morning recommends stocks that are "dividend aristocrats." Those are stocks that not only have excellent yields, but also have a long and stable history of paying dividends – and of hiking the dividend payout regularly.
Dividend aristocrat PepsiCo Inc. (NYSE: PEP), for example, has paid a dividend to investors for 44 straight years. The current yield is 2.80%. Plus, PEP makes products people want: its flagship beverage, of course, but also such brands as Quaker Oats and Lay's Potato Chips.
Investing for Beginners: Engage in Prudent Portfolio Allocation
Investing for beginners also includes allocating stocks in your portfolio so you don't too heavily rely on one type of stock.
We use the Money Map Method. It includes a 50-40-10 Strategy, referring to risk-adjusted tiers to allocate your portfolio.
The larger percentages are tied to more stability, and some growth. The smaller can be higher risk, but also high reward.
Keith Fitz-Gerald goes into these breakdowns in detail here.
Investing for Beginners: Learn How to Purchase
Another key tenet of investing for beginners is to hold stocks for the long term. They can be periodically reviewed, of course, but no investor – beginner or not – should try to time the market. Traders do that, and it takes years' worth of experience to do so successfully.
The best strategy is to dollar-cost average and buy a certain defined amount of stock at periodic intervals. That way, those investing for beginners are assured they will not be chronically buying at peaks and will reap the benefits of any pullbacks, as more stock can be purchased with the defined amount when the stock declines.
Now – for more on how to get started investing, check out How to Get Started Investing with $1,000 and How to Make Any Year Your Wealthiest Yet, Through Investing
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