How to Make Smart Investments: Guide for Beginners

Investing, if done correctly, can be the difference between retiring a millionaire and retiring with mounds of debt. There is so much power in the world of investing, but it can be difficult to navigate and get started. Benzinga takes a look at the basics of investing and how to do it in a safe and personalized way. 

Understanding the Basics of Investing

Investing involves putting money or other assets into use so that they can gain value over time. The rate at which the investment gains value is referred to as the rate of return. Across the many types of investments, the rate of return can vary. However, a general rule is that the higher the risk, the higher the return. While it may seem appealing to put all of your money into a high-risk investment to generate higher returns, this practice may not be a great idea depending on personal circumstances. 

Types of Investment Best for Beginners

Let’s take a look at some of the most common types of investments.

Stocks

When you think of investing, the first thing that likely comes to mind is the stock market. Also known as equities, stocks are a way to purchase partial ownership of a company. This partial ownership entitles the holder to a portion of profits as well as voting rights. Additionally, a collection of stocks can be placed into vehicles such as exchange-traded funds (ETFs). ETFs allow investors to diversify their investments across many stocks and eliminate some of the risks associated with investing in single companies. 

Bonds

A bond is a promise to pay back the principal amount with some interest on top. From an investor’s perspective, this means that you can give someone money, and they will pay you back the money along with interest on a specified date. The total amount that you make on the investment is known as the yield and can vary based on many factors, such as economic conditions, business conditions and market expectations. 

Real Estate

Real estate is perhaps the least liquid and most expensive of investments, but it has proven to be one of the more solid investments. Real estate investment can take many forms, such as house flipping, where you buy properties and do some renovations before aiming to sell them for more or buying rental properties, where you can earn monthly income from renting a property out to tenants. However, these methods require lots of capital to get started and can be very risky. Other ways to invest in real estate include real estate investment trusts (REITs), which are similar to stocks in that they entitle owners to the profits from large real estate investment groups. 

Commodities

Commodities are one of the oldest forms of investment but have evolved in the past several decades. Some of the easiest and most accessible commodity investments are precious metals, such as gold and silver. These commodities are often seen as a hedge against inflation, as there is a limited supply in the world. Other commodities include oil, coal, soybeans, corn and hogs. These markets tend to be more illiquid and volatile. 

How to Make Smarter Investments 

Now that you have a basic understanding of the most popular investments, let's take a look at the practical implications.

Setting Financial Goals

When determining where, how much and for how long to invest, you should take a look at your financial goals. Some things to consider when making goals are how long you plan to invest and how much you are willing to risk. Formulating complete answers to these questions can lead you in the right direction in terms of an investment plan. 

Choose the Right Investment Strategy

Many investment options are available, each with its own set of pros and cons. It is important to understand the differences between the many options. Some of the major investment strategies are growth, value and income. 

Diversification is important for beginners because it reduces the risk of owning specific companies and will likely produce better returns than a beginner attempting to select the correct stocks. To help with this, robo-investment advisers are becoming more popular in creating personalized portfolios for beginners. 

Educate Yourself

Financial literacy is important when it comes to investing. If you are going to invest blindly, you likely will not perform well. For beginners, online courses are a great place to start. Some of the best courses can be found on Coursera, Udemy, online university courses and Benzinga’s Education Center.

Start Small

Starting with small investments can have many benefits, as it allows beginners to learn without too much risk. If you become confident with your abilities on a small scale, it will benefit you when you have more to invest. 

Focus on Long-Term Investing

Long-term investing is also a great strategy for beginners. Investing for the long term not only allows investors to reap the rewards of growth but can out the impacts of market downturns. Markets fluctuate over time, but long-term investments can eliminate some of the losses from these downturns. 

Managing Risk

Managing risk for your portfolio is more advanced and requires further education. Strategies such as stop-loss orders can allow you to effectively manage risk. Additionally, asset allocation and regular rebalancing of portfolios can also be an effective way to manage risk. 

Seek Professional Advice

While most financial advisers charge for their services, they can often provide meaningful and helpful guidance for your investment journey. Financial advisers can help make informed decisions on your investments. If you are able and willing to pay for the service, it may be beneficial for beginners. 

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Smart Investments Require Focusing on Several Factors

Smart investing relies on many factors and varies from person to person. However, a basic understanding of the types of investments, as well as the variety of strategies associated with the different types of investments can be a great place to start in terms of developing the knowledge and skills to make personal investment decisions. Once you have the basics down, you might want to look at investing on a small scale to develop confidence before investing fully. 

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