5 Tips for Beginning Investors

Welcome back to We're Talking Money, Short Takes edition. Today we're going to be talking about the five tips that every beginning investor should know.

Tip number one, I'll just jump right into it: be prepared for a downturn. So when you actually look at the statistics of the market going down, market volatility, they're pretty staggering when you start to dive into them. So what we see is there's going to be a correction every two years, that's 10 percent or more market dropping. A bear market, that's 20 or more, every seven years. And then we see a crash, that's 30 or more, once every 12 years.

So being mentally prepared for a downturn and financially prepared for a downturn, knowing that it's going to come eventually. We know that it's going to rebound. We just have to not make rash decisions and be forced to sell. An individual investor rarely outperforms a professional money manager. It's not that they can't do it, it's because their emotion drives their decisions, where money managers tend to take the emotion out.

And that brings us to point number two: creating a diversified portfolio. It's been proven for years, decades, that diversification is a bigger, greater determinant in performance than anything else. And someone's going to come in and talk to us about diversity. It's something that I've been pushing, that I've been wanting to push for a long time. Being diversified, having different investments that react differently, so we call that a reverse correlation. You don't want those things correlated. You want to get distinctly different types of investments. If they're all the same, then when the market goes down you feel it the same across your portfolio. The idea is diversifying and allocating properly so that when the market goes down, part of your portfolio may feel it, but other parts will then perhaps be rising, so it helps offset.

And Dustin, I know you were going to talk about these ETFs versus mutual funds. There's a pretty big cost difference. Mutual funds are a little bit more expensive. They do allow you the diversification. If you're just getting started, you don't want to do all the research and all these individual stocks with different sectors and different pieces to help diversify your portfolio. You can have a mutual fund manager do it for you, but you will pay for it. There's hidden costs in there called expense ratio. Now the ETFs, exchange traded funds, same thing as a mutual fund, except they're not quite as actively managed and they're much less expensive, but they're still giving you that nice diversification.

Point number three, you were talking about this before: emotional investing. It's not about what you know, but it's how you will react to things when they happen. It's hard when emotion kicks in. It's hard to suppress those feelings. Emotions are a very powerful thing. No matter what your rules for investing, you can easily talk yourself out of that. "I'm not weak." Then prove it. Control your emotions, discipline your mind.

Here is the greatest piece of advice that I can give a new investor: figure out what you're trying to accomplish, set your goals, stick to it. Don't jump in and out of the market, and just because it goes down, don't jump out. Think about buying more when the market's on sale, not selling and hoping that you can time getting back in. That's the greatest fallacy, or the greatest mistake that investors make.

Do you want to talk about number four? Dollar cost averaging. Most people, if you're in a 401k plan, you're already doing it, right? Every week you have money taken out of your paycheck, and it's over every two weeks, however you get paid, and it's going into your 401k. And so that means every few weeks markets could be up or down, and if the market's higher, you're buying fewer shares. If the market is lower, you're buying more shares, hence the term dollar cost averaging. Whatever the result is of the cost of those shares, the point is to always be buying. And you will certainly hit spurts of the market where it's higher, you'll buy less, but you'll also hit times where it's lower and you'll be buying more, and then when it comes back you really benefit.

When we see it with our clients who are worth five, ten million dollars now, that's how much they have in their investment portfolio, it amazes us. When we're younger, it's all about the discipline. Pick a plan, develop a plan, stick to it, go. I love it when a plan comes together. If you're constantly in and out of the market, if you're vacillating all the time, wondering what in the heck should I do, that doesn't work. Fear and emotional investing is not a strategy. A strategy requires discipline, and it requires lots of consistency.

Number five: long-term investing. This is very, very powerful, one of the tips. If you're thinking about this over 10, 20, 30 years, in 40 years, for people who are just getting started, it doesn't matter what the account does in the short term, because even though the market's going to go like this, over the course of a long period of time it's going to be projecting that way. You'd be hard pressed to find any period of 20 years or greater where what you put in the market would have come out at a lower amount. In other words, any period that you pick, if it's 20 years or more, there is about a 99 probability that you made money.

What's that smell? A cologne? No, money. Okay, we smell money. Okay.

Well, these are the five tips for the beginning investor, what you need to know. Be sure to share, to like, comment anything else you'd like us to talk about. We certainly appreciate your view, and we'll talk to you soon.

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