A beginners guide to investing
Getting startedWhen you have created an investment account, the first thing you need to do is to figure out how much money you want to invest. Remember, you don’t have to put in all of your savings at once. When you know how much you want to invest, you should figure out what to invest in. For the purpose of this article, we will assume an initial investment of USD $10,000.
Diversification is keyAs a long-term investor, you want to maximize your return relative to your risk – which with a fancy word is called risk-adjusted return. To achieve this, diversifying your investments is key. While you could get lucky investing in a couple of stocks from your home country and beat the market, spreading your investment across regions, sectors and asset classes will almost always – over time – give you a better risk-adjusted return. Put simply, this is because your potential losses are lower while you still enjoy the benefits of increasing markets. Depending on what you want, you could e.g. look for a global exchange-traded fund, otherwise known as an ETF.
The strategyWhen you know what you want to invest in and how much, it is time to get started and therefore you need a strategy. Most would probably think that the best idea is to invest all $10,000 in one go. And of course, in some situations that could be the case. But just like with creating a diversified portfolio, as we discussed above, “diversifying” the time you enter the market can help you get a better average price for your entire investment. For instance, you could take the $10,000 and split it into 10 chunks of $1,000. Then start by investing one of them and wait with investing the nine other until one of these two triggers have been met:
Trigger 1: Time
The first trigger could be time. So depending on your patience, you could say that you will invest another $1,000 every week or month.
Trigger 2: Falling markets
The other trigger could be a fixed fall in the market, so you are able to buy more funds for your $1,000 than when you invested last time. The rule could e.g. be that you would put another chunk of your savings into the portfolio if it has fallen by 10%. It may seem counterintuitive and this strategy of course hinges on your expectation that the market will go up within the time until you need to pull your investment from the market. But sticking to this strategy will improve your average price for investing.
What have you achievedWith these two simple considerations, you have a rule-based entry strategy for entering the investment world. This strategy prevents timing your purchase and emotional decisions. It is determined in advance when you will buy (in phases). Either the trigger is time or the trigger is a lower price. This increases the chance that you have paid an average price. A prerequisite for the success of this strategy is of course rising prices in the long term. But you have already thought of that when deciding to invest at all. With this approach, you know that you are well diversified to start investing.
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