Start Safe, Invest Smart, And Sleep Well

When people are told that if they want to get ahead financially, they should invest in the stock market, their reaction comes up just short of panicking. To them, stock market investing invariably means losing money, especially when there is a recession and all they see on the news is how stock values have been going downhill. But it really doesn’t have to be that way. Even if you’re a beginner, you can be very successful in the stock market. This stock market for beginners guide will give you the basic principles you need to do so.

Most of the investment masters (John Templeton, Peter Lynch, Warren Buffett) have laid out pretty simple “stock market for beginners” advice on how they did it. And if there’s one thing that they all agree on, it’s the basic investment principle of moving out your investment return expectations to a longer time horizon. In layman terms, invest in the stock market not to make money today, but to make money in the long run. The ones that are considered the masters aren’t the ones that made a killing ONE year, it’s the ones that boasted the 15 to 20 percent annual returns, year after year, for the last twenty years or so. Because they invest for the long haul, the odds of winning are on their side.

Unfortunately, their sound and simple advice mostly falls on deaf ears, as beginners in the stock market tend to want to invest in the “stocks that are set to explode“. The problem with this approach is that the odds of investing in the next company that’s going to catch fire are squarely against them. And since their investing horizon is so short, time (the successful investor’s strongest ally) is not on their side either. Most of them have no long-term strategy and no plans to reduce their risk. They fall for the first “get rich quick” scheme that is pitched to them, and of course somebody failed to tell them that the person who’d get rich would not be THEM. No matter what you may have read or heard, looking for the “best short term stocks to buy” simply doesn’t work, and the old adage that if you fail to plan, you plan to fail translates very very well in the investment world.

In order to succeed in stock market investing, you need to know why you’re investing, and let that “why” will dictate your “how”.

Investment Purpose: Why Do You Want To Invest?

Be clear on why you want to invest and be successful at it. Maybe you’re tired of being told what to do by someone who’s not necessarily more qualified than you and dream of being able to call the shots in your very own business, say, 10-15 years down the line. Recently I was watching a report saying that in the next 20 years, college tuition costs will probably skyrocket to levels that will make a college education out of reach of most low- and middle-income families, so maybe you want to make sure you’ll be able to pay for your children’s college education. Maybe you’ve seen all those horror stories about nursing home abuse and want to retire comfortably. Just remember to tie your investment goals to an aspect of your lifestyle. If your goal is just a number, it will not inspire your best efforts. It’s the purpose behind the number that will drive you and make you withstand the ups and downs that the market will inevitably go through.

Investment Strategy: How Are You Going To Invest?

The same way you make an itinerary and monitor your progress on a road trip, you will need to devise an investing plan and a way to monitor your investing progress. The principles that all the great money masters have followed over time are basically the same, and countless books have been written about them. Violate these principles, and you’ll simply be setting yourself up for failure, period. Basing your investing goals on timeless, unchanging, and proven principles creates a sound paradigm for effective  and successful investing. Maybe the problem with these principles is that they are very simple, almost too simple to accept.

Investing Success Principle #1

Although it has been said time and again, it doesn’t seem to stick: when investing, time is on your side. In stock market history, there is no 25-year periods where an investment doesn’t yield a positive return. It’s simply mathematical. The longer you hold on to your investments, the higher your chances of coming out ahead. Over time, through ups and downs, bull markets and bear markets, the stock market has averaged roughly 10% annual returns. The longer an investment is held, the closer you get to that expected average. As an investor, if you understand this, day-to-day market fluctuations will not drive you crazy and you will be able to concentrate on the one variable that you can (literally) bank on: TIME.

Once you have a long term point of view you can choose investments that have the best chances for success, based on company fundamentals and you can afford to throw in a couple of picks based on your outlook on the future. You can quit the day trading, the trends analysis, and the short term trades in order to make a quick buck. It’s YOUR money, it should be making YOU rich instead of your broker. Speaking of brokers, remember that the one trading your stock account needs activity to keep his job; he will do his best for you not to fire him, but without active trading, he doesn’t get to make much money (which is why some people swear by fee-based brokers). Long-term investing and strategic thinking are discouraged by the system itself. The investment community has no interest in telling stock market beginner that his/her best bet is to “buy, hold, and monitor”.

Investing Success Principle #2

The ability to make money in your own profession does not automatically make you a good investor. It simply means that you’ve mastered the set of skills tied to your profession. Even if said profession is tied to the financial world, there’s a world of difference between handling other people’s money and handling your own.

Investing Success Principle #3

Start out small and build your confidence while taking small risks. Invest only $100 or $1,000 instead of your entire savings. Try achieving a 1% higher rate than you would on a savings account. It’s not that much but it’s a good start. There are a lot of things that you will never know unless you’re learning by doing.

Investing Success Principle #4

Imitate the investment masters and read about successful investors. Talk to successful people you may know and ask them how they accomplished their goals. You could be surprised how open truly successful people are. They really believe that there is enough wealth out there and will gladly discuss their hits as well as their misses. And maybe in a way they know that it will take quite a few misses before that eventual hit.

Investing Success Principle #5

Don’t panic and sell if things go down. Actually you should even expect them to. If you buy good companies with sound fundamentals, drops in the market value of the stock will only be temporary and might even be good times for you to buy the stock when it’s “on sale”. It boggles my mind to see people crowd department stores and supermarkets whenever there’s a sale but fail to show up on the stock market when there’s a bear market (which is the stock market equivalent of a sale).

I would love to sit here and explain to you how the stock market works, or give you a primer on fundamental analysis and technical analysis, but you’ll find plenty of that with just a Google search. Just remember that as a stock market beginner, you need to stay away from active trading. Your best bet is to learn how to pick winners and ride them for years.

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Fighting the instinct to run away from a bear market might be one of the soundest financial decisions you can make. Actually increasing your investment can turn out to be an even better decision. Of course, whenever the words “bear market” are used, people cringe and picture plummeting stock values, and panicking investors. While this is certainly true, there’s also another side to bear markets, and if you pay attention to the history of the stock market and to economic theory (which shows that cycles of bull markets and bear markets occur with regularity and persistence), you might very well realize that bear markets can bring about tremendous opportunities to make money – IF you can get to grips with the fact that it’s going to take you a couple of years to realize those gains.

Bear Market Definition

A bear market is a prolonged period in which investment prices fall, accompanied by widespread pessimism. According to The Vanguard Group, “While there’s no agreed-upon definition of a bear market, one generally accepted measure is a price decline of 20% or more over at least a two-month period.” If the period of falling stock prices is short and immediately follows a period of rising stock prices, it is instead called a stock market correction. Bear markets usually occur when the economy is in a recession and unemployment is high, or when inflation is rising quickly. The most famous bear market in U.S. history was the Great Depression of the 1930s.

Effects Of A Bear Market

Truth is, nobody likes a bear market. The Dow Jones Industrial Average dips more than 30% on average, the downward trend usually lasts over a year, and it often takes the market at least another year to recover. But like I said earlier, despite all the pessimistic financial news that they often bring about, bear markets can be tremendous buying opportunities.

According to a study by Ibbotson Associates for the Wall Street Journal of the bear market of 1973 and 1974 (the worst we had experienced since the Great Depression before experiencing the current bear market), the Standard & Poor’s 500 stock index had lost 43%, even accounting for reinvesting dividends, and the index didn’t reach its 1972 level for a good four years, in 1976.

Making Money In A Bear Market

Despite those figures, people who had steadily invested in stocks would have achieved interesting returns. Let’s suppose that, out of fear, you had invested your money in super-safe Treasury Bills over the same period. Well by January 1976, someone who had invested in stocks at the same clip you had would have come out ahead by January 1976, which is not negligible considering that T-Bills were, at the time, paying a quite decent 6-7% a year.

The aforementioned analysis assumed a monthly $100 investment in stocks beginning in January 1973. When the market hit bottom in September 1974, the investor would have invested a total of $2,100 and held stocks worth less than $1,500. But seven months later, the investor would have been about even with the $2,800 that he or she had invested in total over the period. And by the first quarter of 1976, as the stock market was just returning to its previous high, the investor would have had more money than if he or she had invested $100 a month in T-bills.

Despite the brief 1979 dip, the long-term prospects remained favorable. By the end of 1992, the investor’s $24,000 total investment would have been worth $124,000, which is more than twice  the $54,000 it would have earned in Treasury Bills.

Now you may say that these are numbers from 30 years ago, and you’re be (partially) right. But the fact of the matter is, if history is any indication, sooner or later the market will bounce back and you might be kicking yourself then for not having taken advantage of the current stock market trend that’s producing low stock prices.

Understanding The Stock Market: How To Make Money Even In A Bear Market

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