#Investing
10 Investing Concepts Beginners Need to Learn - Key attitudes and strategic frameworks for intelligent
and successful investors
By MARK KOLAKOWSKI • Updated March 28, 2024
Reviewed by MARGUERITA CHENG
Fact checked by AMANDA JACKSON
Getting started as an investor can be a daunting task. According to the 2022 Investopedia Financial
Literacy Survey, 57% U.S. adults are invested, but just one in three say they have advanced investing
knowledge. Getting started can be especially daunting if you are a methodical person who is cautious
about commencing such an important undertaking before you have acquired sufficient knowledge, expertise,
and confidence.
Meanwhile, creating a short list of everything that a beginning investor should know inevitably runs the
risk of excluding many vital points. Indeed, successful investors are bound to differ widely on what
they would include in their top ten lists if they were pressed to replicate this exercise.
That said, we offer what we hope is a useful checklist to help you get started as a successful investor.
We have chosen to emphasize key personal attitudes and overarching strategic frameworks that, in our
opinion, will help you to become an intelligent investor.
In this article
- 1. Have a Financial Plan
- 2. Costs
- 3. Understand Compounding
- 4. Understand Risk
- 5. Understand Diversification
- 6. Keep Costs Low
- 7. Understand Classic Strategies
- 8. Be Disciplined
- 9. Think Like an Owner or Lender
- Frequently Asked Questions (FAQs)
- The Bottom Line
- Addendum: A Classic Reading
KEY TAKEAWAYS:
- Have a plan, prioritize saving, and know the power of compounding.
- Understand risk, diversification, and asset allocation.
- Minimize investment costs.
- Learn classic strategies, be disciplined, and think like an owner or lender.
- Never invest in something you do not fully understand.
1. Have a Financial Plan
Before you can become an investor, you must have money to invest. For most people, that will require
setting aside a portion of each paycheck for savings. If your employer offers a savings plan such as a
401(k), this can be an attractive way to make saving automatic, especially if your employer will match
all or part of your own contributions.
In setting up your financial plan, you also might consider other alternatives for making saving
automatic, in addition to utilizing employer-sponsored plans. Building wealth typically has aggressive
saving at its core, followed by astute investing aimed at making those savings grow.
Also, a key to saving aggressively is living frugally and spending with caution. In this vein, a wise
adjunct to your financial plan would be creating a budget, tracking your spending closely, and regularly
reviewing whether your outlays are making sense and delivering sufficient value. Various budgeting apps
and budgeting software packages are available, or you can choose to create your own spreadsheets.
2. Make Saving a Priority
Before you can become an investor, you must have money to invest. For most people, that will require
setting aside a portion of each paycheck for savings. If your employer offers a savings plan such as a
401(k), this can be an attractive way to make saving automatic, especially if your employer will match
all or part of your own contributions.
In setting up your financial plan, you also might consider other alternatives for making saving
automatic, in addition to utilizing employer-sponsored plans. Building wealth typically has aggressive
saving at its core, followed by astute investing aimed at making those savings grow.
Also, a key to saving aggressively is living frugally and spending with caution. In this vein, a wise
adjunct to your financial plan would be creating a budget, tracking your spending closely, and regularly
reviewing whether your outlays are making sense and delivering sufficient value. Various budgeting apps
and budgeting software packages are available, or you can choose to create your own spreadsheets.
3. Understand the Power of Compounding
Saving and investing on a regular, systematic basis and starting this discipline as early as possible in
life will allow you to take full advantage of the power of compounding to increase your wealth. The
current protracted period of historically low interest rates has diminished the power of compounding to
some extent, but it also has made starting early to build savings and wealth more imperative, since it
will take interest-bearing and dividend-paying investments longer to double in value than before, all
else equal.
4. Understand Risk
Investment risk has many aspects, such as default risk on a bond (the risk that the issuer may not meet
its obligations to pay interest or repay principal) and volatility in stocks (which can produce sharp,
sudden increases or decreases in value). Additionally, there is, in general, a tradeoff between risk and
return, or between risk and reward. That is, the route to achieving higher returns on your investments
often involves assuming more risk, including the risk of losing all or part of your investment.
As a critical part of your planning process, you should determine your own risk tolerance. How much you
can be prepared to lose should a prospective investment decline in value, and how much ongoing price
volatility in your investments you can accept without inducing undue worry, will be important
considerations in determining what sorts of investments are most appropriate for you.
The Power of Compounding
Realizing its power to create wealth, Einstein referred to compounding as "the eighth wonder of the
world"
5. Understand Diversification and Asset Allocation
Diversification and asset allocation are two closely related concepts that play important roles both in
managing investment risk and in optimizing investment returns. Broadly speaking, diversification
involves spreading your investment portfolio among a variety of investments, in hopes that subpar
returns or losses in some may be offset by above average returns or gains in others. Likewise, asset
allocation has similar goals, but with the focus being on distributing your portfolio across major
categories of investments, such as stocks, bonds, and cash.
Once again, your ongoing financial planning process should revisit your decisions on diversification and
asset allocation regularly.
6. Keep Costs Low
You cannot control the future returns on your investments, but you can control the costs. Moreover,
costs (e.g., transaction costs, investment management fees, account fees, etc.) can be a significant
drag on investment performance. Similarly, taking mutual funds as just one example, high cost is no
guarantee of better performance.
7. Understand Classic Investment Strategies
Among the investment strategies that the beginning investor should understand fully are active versus
passive investing, value versus growth investing, and income-oriented versus gains-oriented investing.
While savvy investment managers can beat the market, very few do it consistently over the long term.
This leads some investment pundits to recommend low-cost passive investing strategies, mainly those
utilizing index funds, that seek to track the market.
In the realm of equity investing, value investors prefer stocks that appear to be relatively inexpensive
compared to the market on measures such as price-earnings ratios (P/E), expecting that these stocks have
upside potential as well as limited downside risk. Growth investors, by contrast, see greater
opportunity for gain among stocks that are recording rapid increases in revenues and earnings, even if
they are relatively expensive.
Income-oriented investors seek a steady stream of dividends and interest because they need the ongoing
spendable cash, they see this as a strategy that limits investment risk, or both. Among the variations
of income-oriented investing is focusing on stocks that offer dividend growth.
Gains-oriented investors are largely unconcerned about income streams from their investments and instead
look for the investments that seem likely to deliver the most price appreciation in the long term.
8. Be Disciplined
If you are investing for the long term, according to a well-thought and well-constructed financial plan,
stay disciplined. Try not to get excited or rattled by temporary market fluctuations and panic-inducing
media coverage of the markets that might border on the sensationalistic. Also, always take the
pronouncements of market pundits with a grain of salt unless they have lengthy, independently verified
track records of predictive accuracy. Few do.
9. Think Like an Owner or Lender
Stocks are shares of ownership in a business enterprise. Bonds represent loans extended by the investor
to the issuer. If you intend to be an intelligent long-term investor rather than a short-term
speculator, think like a prospective business owner before you buy a stock, or like a prospective lender
before you buy a bond. Do you want to be a part owner of that business, or a creditor of that issuer?
10. If You Don’t Understand It, Don’t Invest in It
Given the proliferation of complex and novel investment products, as well as of companies with complex
and novel business models, beginning investors today are faced with a vast array of investment choice
that they may not fully understand. A simple and wise rule of thumb is never to make an investment that
you do not fully understand, particularly when it comes to its risks. A corollary is to be very careful
about avoiding investing fads, many of which may not stand the test of time.
A budget is only useful if it is followed. After you prepare a personal budget,
track your income and spending across categories. Then, refine your budget based on what actually
happened.
Asset Classes FAQs
What Do I Need to Know Before Investing?
Before investing, it is critical to know what your goals and objectives are. Whether it be to fund
retirement, purchase a home, or undertake a new business venture, knowing what you're working towards
will help you choose an investment to help you meet your goals. It is also important to know the basics
about investing—such as risks, fees and costs, and investment strategies—and understand the investment
you're prospecting.
What Are the 4 Main Types of Investments?
While there are many investment categories, the four basic types are stocks, bonds, mutual funds, and
exchange-traded funds (ETFs). Stocks are shares of ownership in a company. Bonds are essentially loans
made by the investor to the issuer, who promises to pay the principal at maturity and interest over the
bond's term. Mutual funds are funds in which multiple investors pool their money together to purchase
stocks or other securities, and ETFs are like mutual funds but are traded on national stock exchanges.
Is $100 Enough to Start Investing?
Many prospective investors believe they must have a lot of money to begin investing. However, many
investments have low thresholds, giving new investors opportunities to start their journey. You can
begin investing with $100 or less. For instance, you could purchase shares or fractional shares of
stock, use a robo-advisor to invest based on your goals, contribute to a retirement plan, or invest in a
mutual fund. The options are plenty.
The Bottom Line
As a new investor, choosing the right investments or investment strategy can be intimidating, and the
advice on how to proceed is as diverse as the selection of investments from which to choose. Despite the
innumerous recommendations, building your knowledge and having a solid understanding of investing and
your goals is key to making informed decisions that will likely yield favorable results.
Addendum: A Classic Reading
If there is one book you should read as a new investor, it is Extraordinary Popular Delusions and the
Madness of Crowds by Charles Mackay. Written in 1841 by a Scottish journalist, it is a masterful early
study of crowd psychology. The first three chapters, "The Mississippi Scheme," "The South-Sea Bubble,"
and "The Tulipomania," all deal with financial crazes that ended up in disaster and that foreshadow many
financial schemes, bubbles, and manias of today. As a result, these chapters have been cited by a number
of present-day financial writers.2