If you’re reading this, you’re a beginner investor looking for various tips on investing well. Which is already a good start! But, unlike many beginners, you haven’t fallen into the Dunning-Kruger effect (or overconfidence effect).
Indeed, investing correctly when you are a beginner requires humility and, especially, knowing the basic principles of investment. Diversification, risk-return ratio, and choice of investments, we will share all the information you need to know about investing as a beginner!
What does investing consist of?
Before getting started and setting up your investment strategy, it is necessary to make a few semantic clarifications to avoid confusion. To invest is to make resources available to increase the stock of productive goods. Thus, investment consists of providing capital (your savings) to organizations (companies, communities, associations…) or individuals (financing your children’s education, for example…). This enables them to produce goods or services. In return, these organizations will give you a part of the profits.
The difference between consumption and investment
In this sense, investment differs from consumption. The latter simply aims to provide for a need without directly contributing to the growth of the productive apparatus (consumption and investment remain closely interdependent in our modern economies).
To explain things simply, let us imagine that you buy an electric car. It is a consumption expense if you use it for your daily commute. On the other hand, if you plan to become a cab driver, it is an investment since it is your productive capital to provide a passenger transportation service. This distinction is fundamental because you will likely make mistakes if you confuse investment and consumption. At least keep these two concepts in mind:
- By investing intelligently, you can get richer if your investments are fruitful.
- By consuming, you will inevitably become poorer (but this is necessary only to feed yourself).
What do we mean by “intelligent investment”? An investment considers the reality that the only possible growth will respect the environment and how we live together. In other words, it is an investment that preaches in favor of a sustainable future, the only trustworthy source of long-term return on investment. Thus, you will see that profitability and socially responsible investment are far from being antinomic!
Why is speculation not investing?
Speculation is a financial operation aiming to make money on the market price fluctuation. It is, therefore, a bet on the value of something in the future. Unlike investing, it is possible to speculate on anything and everything: luxury watches, Pokemon cards, cryptocurrencies, concert tickets, company shares… The speculator’s gain is justified by his risk-taking on the market. His job is, therefore, to predict market trends to profit from them.
But contrary to the image of the greedy vulture that one would like to give to the speculator, he is a vital element of the investment ecosystem. He accepts the risks of those who do not want to take them. Indeed, some entrepreneurs and investors do not want to see the price of their assets vary over time. So they will subscribe to financial products (futures contracts, for example) whose counterparty will be assumed by speculators.
What are the best investments for beginners?
Now that we’ve covered the basics of investing, it’s time to look at savings products suitable for beginners.
- Investing in the stock market as a beginner: a good idea?
More and more trading platforms are springing up to allow individuals to invest in the financial markets. Investing directly in the stock market when you are a beginner is rarely a good idea because of the complexity and time needed to properly manage the allocation of your savings.
You will have to check each stock, measure the correlation coefficients between them to ensure sufficient diversification, and assess the price valuation with the economic fundamentals. In short, it is a particularly time-consuming job for an investment professional. It is unlikely that you will obtain a sufficient return on your investment without it being due to beginner’s luck (cf. the theory of efficient markets).
- Savings books and risk-free financial investments
When you are a beginner in investment, you tend to turn to simple investment products. Often following the advice of your bank advisor (who is often more of a financial product salesman than a real advisor, by the way). The latter will probably propose regulated savings books. However, these savings books suffer from a return that is too low to compensate for the general increase in prices (inflation), so the actual value of your savings decreases as time goes by.
- Is real estate a suitable investment for beginners?
As you probably know, real estate is Americans’ favorite investment. It is a big part of its tangibility and the feeling that real estate prices are only going up! Moreover, the possibility to borrow for asset investment plays a fundamental role in the profitability of this type of investment. Indeed, the loan makes it possible to multiply the profitability thanks to the mechanism of the effect leverages.