Investing has never been more accessible than it is now, and we can thank technology for that. However, it still doesn’t mean that it’s easy. It’s estimated that over 80% of investors fail with the stock market, and a lot of it has to do with them starting without the proper strategy. Others may pick certain financial instruments or markets thinking they would be perfect for them when it’s the opposite. In this article, we’re going to look at some of the best investment options for beginners and some techniques you can use to increase your chances of success.
Things To Know Before Starting
Before we can start looking at what options could be the best for you as a beginner, we first have to build your investor profile. This will be very important as some investment options might not allow you to reach the objectives you had in mind or could ask for more of an investment than what you expected.
The first thing you have to assess is how tolerant to risk you are. Someone who can’t tolerate risk would not be able to handle investing all of their money in equities and might be more interested in cash equivalents. The same person cannot expect to get crazy returns, however. Also, just because you feel like you’re risk tolerant enough to be 100% invested in stocks, it doesn’t mean you should be.
Two other things you should consider are your time horizon and how much money you need in the short term. If you only have a few years left until retirement, then you might not want to take as much risk as someone who’s in their 20s. This also means that you can handle more risk when you’re younger and gradually reduce it over time.
If you need money in the short term for a purchase, then you should also reduce the risk. Besides, you should be looking at more liquid investments.
Last but not least, you have to check how much time you have to spend on trading. Some options will require that you stay attentive at all times while others are much more hands-off. This will be very important when it comes to which financial instrument or markets you want to invest in.
Now that you have a clearer idea of who you are as an investor, let’s take a look at some of the best options out there.
Mutual Funds and ETFs
ETFs are the hot new kid on the block and they’re indeed a great product, especially for beginners with limited experience. Mutual funds and ETFs are extremely popular among investors and make up for about 30% of all investments in the country.
ETFs and mutual funds share some similarities but are also very different. An ETF is made up of a collection of stocks, like mutual funds. The only difference is that these are traded on the stock market just like any stock.
What this means is that they are much more volatile, but also more liquid. ETFs can be used to track certain indices or follow the performance of certain industries. ETFs can vary greatly in risk, so you have to be careful there. There are ETFs for virtually every sector, but exotic ETFs can be very risky, so you should think twice even if you think you understand a certain industry.
ETFs will buy the biggest companies in different sectors which will allow them to track their performance. You can go for all-in-one managed ETFs, equity ETFs, or bond ETFs if you have lower risk tolerance.
A mutual fund, on the other hand, will have a portfolio manager and can only be traded at specific times of the day. Another major difference is the fees. These can make have a big impact on how much money you take home and always have to be considered when looking at the performance of a fund.
The truth is that the majority of mutual funds do not outperform the market. One 2018 study found that about 75% of equity fund managers in the country underperformed when compared with the S&P/TSX benchmark index. So, their utility is highly questionable there. If you absolutely want to go for a mutual fund instead of an ETF, however, we suggest you look at the Vanguard family of funds, as they offer a good compromise, and their fees are reasonable.
If you want to buy ETFs, however, you can always look at Robo-advisors like Wealthsimple. Here is a useful blog post from Wealthsimple if you want to learn to buy stocks. They teach different ways that you can buy stocks including some that don’t require a broker. They also speak about different financial instruments in there, how to pick the best stocks to invest in, and some stock market terminology.
If you do decide to buy stocks directly, know that it’s a bit tougher than working with ETFs. For one, it requires more risk tolerance, but you also have to be much more involved. The reason why investing in stocks is a bit riskier is because your assets won’t be as spread out as they would in a fund. A company is much more likely to tank than a whole sector, so that’s something you have to keep in mind.
Another thing you should know is that more advanced traders are diverting their assets away from stocks because of the work involved. If you’re a serious investor, then you will need to spend a lot of time analyzing stocks before you pick them.
If you’re going to go that route, one of the things we would suggest is that you don’t only pick domestic stocks. That’s because home bias could end up clouding your judgment. Other than that, make sure that you learn how to read financial reports and basic chart analysis. You will also need to get yourself familiar with technical indicators like the RSI, for instance.
Next, we have bonds. These are probably the best option for the risk averse. Bonds are a way for organizations to raise funds by asking private investors to act as lenders. Each bond will have a rate of return and due date when the money will be paid back to you with interest.
You can pick bonds based on risk and all bonds have a rating that tells you how risky they are. You can never expect the same type of return on these as you would on the stock market, but the risk of a safe bond defaulting is very small. Either way, bonds are a great way to balance your assets between fixed income and equities.
The Forex Markets
Some people may be surprised to not see this one at number one, but they shouldn’t be. While forex is often marketed as a top option for beginners, it doesn’t mean that it’s necessarily the best option for you.
One of the reasons so many people gravitate towards forex is because the concept of money is much less foreign to them than stocks. Most people understand how currency exchanges work and have used them at least once in their lives. This gives forex the illusion of being more accessible.
The reality is that big players hold most of the cards and have inordinate power over the direction in which the markets are heading. It is also not the best option for someone who has little to invest in. In this case, most will start using leverage, which can be extremely dangerous.
Leverage is when you can control larger sums than you invest. If a broker offers a 1:200 leverage ratio, that means that you could end up controlling $200 in assets while only putting one dollar down. Know, however, that the leverage is capped at 1:45 in the US.
When using leverage, the broker lends you the money, so if you end up with losses, you will have to pay them back. This is how so many new forex investors get in trouble. But, if you’re going to be investing in forex and you don’t have much, you will have no choice but to use it. Here, we suggest that you go with something small, like a 1:10 or 1:20 ratio to begin with, and have a sensible strategy to avoid major losses.
With that being said, forex does have a few things going for it. For one, it is the most liquid market on the planet. You can literally start trading at 2 in the morning if you want to. This could be great if you have privy knowledge about a specific foreign market and want to trade exotic pairs. There are also fewer fees, simpler tax rules, and it’s very well adapted to automated trading.
These are only some of the top investment options that would be suited for a newcomer. Make sure that you look into all of these and consider mixing and matching until you find something that works for you.