As a beginning investor, the whole thing can feel daunting. After all, what do you invest in? And how do you know when to get in and when to get out?
The good news is that there are investing principles beginners can use to their advantage. Here’s what you need to know about getting started on your wealth-building journey as an investor.
1. Consistency is Key
The first of these investing principles is the idea of consistency. You need to get in the habit of investing regularly.
It’s less about how much you invest at first and more about the fact that you are doing it. Even if you start with $5 weekly, that’s a win — as long as you do it consistently.
Figure out an amount that makes sense for your budget. Commit that amount on a regular date. Every week or month, put the same amount into your investment account. This strategy is known as dollar-cost averaging. With dollar-cost averaging, you don’t have to consider how much to put in. You just stick the same amount.
Dollar-cost averaging keeps you consistent during market downturns as well. You keep putting the same amount into your account when the market is down. Stocks are cheaper, so you get more shares. When the market recovers, you see the benefits.
Finally, set up an automatic transfer to help you observe investing principles like consistency. Many brokers allow for automatic investing, which can keep you on track. You won’t have to think about when to invest because you’ll do it automatically.
2. Start with index products
One thing that keeps many people paralyzed as investors is the research involved with picking stocks. As a beginner, one of the best investing principles is to start with index products.
Look for index funds and ETFs focusing on a broad swath of the stock and bond markets. These products offer exposure to many investments with one share.
Rather than fretting over the “right” choice, you can get access to the entire S&P 500. When the market as a whole does well, so does your portfolio. When the market is down, your consistency through dollar-cost averaging means you get more shares with your money. Over time, the combination of these principles can lead to more wealth.
You can also use bond index funds as part of your effort. Rather than trying to come up with a fancy and complicated asset allocation, start with something simple. Consider a stock-bond split of 90% to 10% or 80% to 20% if you’re young. You can use a mix of three to five index products to achieve this allocation.
Once you have this system in place and you’re using automatic investing in establishing consistency, you can begin researching other investments.
The key, though, is to start with something simple and understandable so that you don’t feel overwhelmed by the process.
3. Reinvest dividends
Even index products often pay dividends. With the help of dividend reinvestment, you can grow your portfolio faster.
A dividend is a payment you receive just for holding an asset. Let’s say you invest in an ETF composed of dividend aristocrats. You receive a small monthly payment based on the shares you own. Rather than taking that money and spending it or letting it sit in a cash account, you reinvest it in the ETF.
Now, each time you reinvest, you buy additional shares (or fractions of shares). The next time your dividend is calculated, it’s slightly bigger because you own more of that asset. You reinvest the dividend, and the process repeats. Automatic dividend reinvestment is one of the most powerful investing principles that beginners can use to build their wealth.
Even if it seems small initially, the ongoing consistency eventually leads to more shares, leading to higher dividends.
Don’t leave money on the table by failing to reinvest your dividends. You might be surprised at how fast your portfolio can grow when you practice consistency in investing and reinvesting dividends.
Sticking to these Investing Principles
Sticking to these investing principles can provide you with a way to get started — and get started quickly. No matter what happens in the markets, keeping to your plan can help you in the long run. Remember that investing is a long-term wealth-building tool.
As you become more experienced, you can shake things up. When you make more money, add more to your investment account. Increase how much you set aside. If you want to try new things with your asset allocation, set aside some money to experiment. However, as you experiment, make sure you’re still practicing consistency with your initial approach. Your money can keep working for you, even while you try new things.