Editor’s note: This article was first published in June 2015; its reference to summer 2012, when everything was cheap and some penny stocks rose over 500%, reflects the Spanish market at that time.
When a young or inexperienced person asks me what they can invest in, my most common advice is “nothing, until you have experience in what you are doing”. Of course, this advice may be too extreme, because I also bear in mind that diving into investing is what whets your appetite to start learning about it.
Otherwise, if someone is young and we send them off to study and learn before investing, their own inertia will mean that: 1) they never invest, and 2) by the time they are ready to invest, they are probably no longer so young.
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So let’s change the tune, based, as in our previous article, on the fact that financial education, like finance and investing, is not so complex if we focus on the most basic concepts.
1. First tip: leave the big moves to the professionals.
Professionals focus on scoring goals and seizing big opportunities by taking on huge risks, and therefore greater rewards.
The beginner should focus only on avoiding mistakes. The point is to protect your money, not to gamble it.
The tips we are about to give are for building a long-term investment strategy. In principle, you are unlikely to get rich in the short or medium term. What we are going to do is build an asset that, over time, generates passive income.
(Read: 11 simple tips for investing in the stock market)
2. Forget speculation and trading.
I know those “earn €300 a day trading shares” ads are very eye-catching, but as we have said so many times, if you do intraday trading, you are certain to lose money. The trading “coaches” themselves say you learn by losing, and that as a rule people lose around €10,000 before becoming experts.
Once you have experience, you can speculate with trend trading and choose riskier investment strategies.
3. Never invest in a stock or stocks that do not pay you dividends or interest.
At certain moments in the market, as in the summer of 2012, you could “have a go” at anything, from penny stocks to solid companies. Everything was so cheap that everything was going to rise. But clearly, some penny stocks and riskier shares saw returns of over 500%, while solid shares rose more gradually.
A young, inexperienced person should look for solid shares that pay dividends. That way, whether the share price goes up or down, at least we still have the dividend payment (as long as the company keeps paying it).
4. Reinvest the dividends.
Companies pay dividends in cash or in shares (scrip dividends, common in Spain). Since we are trying to build an asset, whenever we have the option we will take the dividend in new shares. That way, clearly, the next dividend payment will be made on more shares.
(See: 5 steps to building a dividend investing strategy)
5. Average down.
Once we have solid stocks in our portfolio, we follow Warren Buffett’s advice: if the shares fall, we buy more. In fact, we can use the famous DCA investment strategy, which basically means averaging down over time. Remember that we are talking about the long term.
6. Save a considerable part of your income.
When you are young, the main problem is that you do not have enough money to invest. And that is what leads many young people to lose what little money they have on risky strategies, trying to make much more, quickly.
Be patient and remember that investing, as a famous investor once said, should not be exciting and fun; it is more like watching grass grow.
So save, and every month, or every few months, put those savings into the stocks you have selected.
7. Earn more money.
Most people have heard about getting rich on the stock market, but it is not quite like that. Obviously, to get rich on the stock market you need money, and the more money you have, the sooner you will get rich. So it all comes down to earning a lot of money so that you can grow it in the markets.
(See: The myth of getting rich on the stock market and retiring young and wealthy)
In other words, before you can be a smart investor, you will have to be an excellent money “maker” in whatever you do: business, a profession, and so on.
And that is all there is to it. If you follow these tips to the letter, with or without experience, you can start investing while you continue to learn about investing.
Further reading
- The most profitable investment according to Warren Buffett, an asset everyone should invest in
- Warren Buffett’s 16 best tips on investing
Featured image: Julie Ceccaldi, CC0 1.0, via Wikimedia Commons.
