Have you struggled with how to invest your money? As a beginner investor, does it seem too intimidating or complicated? Investing your money wisely doesn’t have to be a complicated process. All you really need is a little basic investing knowledge, some patience, and wise counsel to make your investments grow exponentially over your lifetime.
I’m sure you’ve heard plenty of awesome stories about your friend's uncle Bob hitting it big in the stock market with investments that made a ton of money out of a small investment and thought to yourself “Man, I want to do that!”. I know I’ve been influenced by those incredible investment stories in the past.
But those stories about making huge money fast are actually very rare.
The reality is, the overwhelming majority of millionaires got there by investing money wisely over a long period of time. Most of them used basic, time tested strategies that every beginner should know.
Below, I’ll show you 11 tips for wise investing every beginner can use.
11 Tips To Invest Your Money Wisely
Avoid Individual Stocks
It’s easy to get caught up in the hype of investing in individual stocks and lose all your money. The problem with individual stocks is that you’re risking money on one company. If the company has a bad quarter or suddenly goes bankrupt, you can lose most or all of your investment overnight. This happens more often than you think (I know this from personal experience!).
Never Invest In Something You Don’t Understand
If you can’t clearly explain what you’re investing in to someone else so they can understand it, then you don’t need to invest in it.
For instance: tons of people are buying Bitcoin and other cryptocurrencies like crazy right now, but most couldn't tell you the first thing about how it works. That's a dangerous game that can make you lose a lot of money very quickly.
Invest Pre-Tax and Tax Free Money First
Investing Pre-Tax money- This simply means you’re investing in an IRA, 401k, 403b, or other retirement account. Therefore, every dollar you invest in one of these accounts is not taxed as income, so you will save money on your income taxes for now. However, you will pay taxes on money you withdraw later during retirement.
Investing Tax Free Money- Investing in a Roth IRA or Roth 401k. The dollars you invest in these accounts is taxed just like regular income. However, when you retire and withdraw money from the account, you don’t pay taxes on the withdrawal.
If your employer matches your contributions to your retirement accounts, take advantage of that. There is nothing better than free money!
Invest 15% of Your Income
Consistently investing 15% of your income every single month will grow your wealth in a huge way. Have the money automatically deducted from your paycheck and deposited straight to your investment accounts. Automatic deposit into investment accounts is absolutely the best way to have discipline when it comes to saving and investing. All you have to do is set it and forget it!
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Don’t Be Too Conservative
The opposite of taking too much risk (i.e. individual stocks) is to be too conservative when you invest. Keeping all of your money in a money market account or CD’s (Certificates of Deposit) is a terrible way to invest your money!
Yes, these investments are very safe, but they have a very low return on investment. The returns are so low that they don’t even keep up with inflation, so you actually end up losing money over time with these lackluster investments.
Seek Wise Counsel- Pay a Professional
It’s always good to seek wise counsel about your investments from a professional such as a financial advisor or financial planner. You should seek out a pro who charges a flat fee or by the hour. Hiring a financial planner that takes a percentage of the money you invest as compensation will put a huge dent in your investment returns. Ultimately that will cost you tens of thousands (or more) over the long term.
A great financial planner will have the heart of a teacher and make sure you understand everything about what you invest in.
Here’s a great article from my friend Jeff Rose of Good Financial Cents on how to hire a great financial advisor.
Don't Invest to Make Money Fast
After 20 years of investing, I’m finally starting to learn to be patient with my investments. I'm not trying to make money quickly. Remember that investing is a marathon, not a sprint. It's totally normal for the value of your investments to go up and down over time. But as time stretches on, they will almost always go up in value. So be patient if your investments are not performing very well right now.
Don’t think about your investments in terms of how they are doing today, or the last 6 months, or the last year. Think about your investments in time spans of 20-30 years or more. Taking a long term view helps you keep things in perspective.
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KISS Your Investments
You’ve probably seen the acronym before. Using the KISS (Keep It Simple Stupid) philosophy is simply wise investing. There are a lot of complicated investment strategies where people will try to convince you that you can beat the market.
Those almost never work.
If they do, they don’t work for long.
The best investment strategies are very boring, but they work like a charm. The simplest method is to invest in index funds that match the returns of the market as a whole. Another simple strategy is to invest equal amounts in mutual funds covering 4 different categories:
- Growth
- Growth and Income
- Aggressive Growth
- International
If you're looking for income, another boring but profitable strategy you can try is the Dividend Aristocrats ETF to generate a consistent return on your money.
Watch The Fees
Investment fees can eat you alive if you’re not careful. There are several fees you need to be aware of:
- Transaction Fees- The fee charged every time you buy or sell shares of an investment. These fees are generally pretty low.
- Front End Loads- Some mutual funds charge a fee as high as 5-6% of the total amount invested to purchase shares of that mutual fund.
- Annual Fees- A fee charged every year you own shares of a mutual fund. These investment fees have a very wide range from as little as .2% up to as high as 5-6%.
Fees can be really insidious. Every time you pay an investment fee, that’s money that does not get invested and never has a chance to grow.
Obviously, the more investment fees you pay, the more investment growth you give up over the long term. High fees can literally cost you tens to hundreds of thousands of dollars in investment returns over your lifetime.
No Emotional Investing
TV shows and the internet like to portray investing as an exciting, fast moving game of hot stock tips and frequent trading. The reality is that good investing is actually very boring.
It’s almost exciting as watching paint dry.
Don’t check your investments every day. For that matter, don’t check them every week or every month. Check them once every quarter.
When you constantly check your investments and see the day to day movements in price, it’s way too easy to get your emotions involved. You end up making terrible investment decisions based on an emotional response. Again, I know this from personal experience.
Stay Out of Debt
You really didn’t think I’d forget about this one, did you? If you have no debt, you have more money to invest. The more money you invest, the more opportunity you have for your investments to grow into a huge pile of wealth! If you do have debt, you should do everything you can to fix this money issue as quickly as possible.
If you want to get out of debt, you can check out my Celebrating Financial Freedom online course here (every reviewer has given it 5 stars!)
Investing for Beginners Doesn’t Have to Be Complicated
Whether you're a beginner investor in your 20's, or you've been investing for decades, most people think of investing as a complicated process that they will never understand. But if you learn the basics all beginners should use detailed above and stick to them, investing your money will be a much easier (and rewarding) task than you ever thought it could be!
By the way, you can find more detailed info on these basic concepts in these excellent resources:
The Little Book of Common Sense Investing
Question: Do you have any other favorite tips for investing your money wisely? Leave a comment and tell me your favorite.
The investment tips above should not be construed as professional investment advice. I’m a dentist and a blogger, not a certified or degreed investing professional. Some of the links above are affiliate links. If you decide to use them, I sincerely appreciate the support!
Keep is simple is my motto!
No doubt, that’s the best way I’ve found to invest!