Investing is a good thing, so everyone should start now. Newcomers often wonder “what is the best investment strategy for beginners?”. Look no further, today we have an actionable investment strategy for beginners that you can easily implement now, no matter where you are in the world or how much you want to invest.
Before we start, disclaimer time! You are always responsible of how you manage your own money, and you should take everything you read with a grain of salt. In other words, do what you find in this guide (or not) at your own risk, we will not be held responsible for any gain nor loss you may incur.
In this investment strategy for beginners, we assume you know how to buy and sell stocks and other assets and can do that easily. Considering that, we just tell what the best strategy (what to do) is, in our opinion. If you are a complete beginner, and have no idea where to start, you may want to check The Ultimate Investing Guide for Beginners.
Now that the disclaimer is done, we can start with the investment strategy for beginners.
4 Tips on an Investment Strategy for Beginners
Before we just shout out the investment strategy for beginners, it is worth explaining the main drivers behind it. Once you understand them, you can execute the strategy more confidently.
1. There is no Investment Strategy for Beginners
You read it right. There is no investment strategy for beginners, in the sense that there is no investment strategy you can adopt at a beginner and change later as you become more expert.
This is because changing an investment strategy is a costly and painful process. To change your strategy, it means you have to liquidate all your positions, that is close your positions and take either a gain or a loss on them, depending on their status. Some positions may not be in the best time to close, but you have to do that to free the cash you need to execute your new strategy. This without even mentioning transaction costs, that erode your capital every time you transact – that’s the commission your broker takes.
Now there’s good news. As a beginner, you can adopt an investment strategy even investment professionals would be satisfied with. Yes, a strategy you can adopt now, and that you do not need to change over time.
2. Time Horizon
The holder you long your investment, there more chances it has to become profitable. If your investment is extremely volatile (swings largely between ups and downs), the more time it passes the more you can be confident that by the time you sell it you will be on the “up” side.
So, to put it simply, the best investment strategy for beginners is to buy and hold an asset for as long as you can. We will see later how to pick assets that you can hold and not “junk stocks”, but for now assume you have some good quality investment: you need to stick with that for as much as possible, unless exceptional events arise that lead you to reconsider the quality. Beyond these rare exceptions, this strategy is clear.
Considering this, we can also derive another rule: the shorter your time horizon, the lower the volatility your investment must have. If you plan to stay in the game for long, you can take extra risk and get extra reward as a consequence. Instead, if you want to exit the game soon, you may want to avoid extra risk, and renounce to the extra return.
This leads to one of the common error investment beginners tend to make. Often, when they have a short-time horizon, they tend to buy high volatility stocks or assets (e.g., cryptocurrencies), lured by their high potential returns. That’s not the way it work, this is just gambling. Picking a time horizon does no mean “let’s pick an investment that is risky enough so that has the potential to give me the desired level of returns in my time horizon”. Instead, it means assessing what your time horizon truly is, and based on this pick the investment that has the reasonable expectation to give you the most returns.
Another common error is the use of leverage. If you use leverage (that means borrow more money to invest), you inevitably increase the risk – multiplying the chances of return or loss. So, increasing leverage is the same as picking a riskier investment, and not an alternative to pick the correct time horizon. Put it simply, an asset with low volatility that may be suitable in the short term most likely will not if bought with leverage.
What is short and what is long term? No golden rule here, but as a rule of thumb we can say that short term is up to 3 years, while long term is at least 10 years.
3. Diversification, For Real
Even beginners know the importance of diversification. That this, do not put all your eggs into one basket, and never do a “bet the ranch” investment. A good investment strategy for beginners has diversification in it indeed.
Here is where most beginners start to fail, even if they understand the concept of diversification. Most will stop short of achieving true diversification. In fact, true diversification is achieved only by using different asset classes, and in each class multiple different assets. Don’t be scared, this is simpler than it seems.
An asset class is a type of asset, such as stocks, treasury bonds, commodities like gold or oil, cryptocurrencies, corporate bonds and so on. Instead, an asset is just the individual asset, such as Apple’s stock or Google’s stock, US Medium-Term notes, Gold, Bitcoin, J&J Debt and so on. You should spread your investment across several asset classes, and in each buy different assets. With stock, it is worth considering also the industryof a company – buy P&G and Microsoft will result in more diversification than Google and Microsoft, because Google and Microsoft are both in the tech sector.
Sone beginners fail diversification on the other side, because they diversify too much and too broadly, so they stretch their capital too thin. There is no golden rule, but according to Ray Dalio – and statistics – with 30 assets you achieve a good level of diversification, and buying any more brings only minimal improvement.
4. Crypto
Long story short, investing in cryptocurrencies is probably not a good idea. That is true for everyone, but especially for beginners. This is way in our opinion a good investment strategy for beginners has no cryptocurrency in it. Not even the slightest.
This is because cryptocurrencies are extremely volatile, they are still an untested technology and – as of 2021 – they are still a niche investment with not enough liquidity. They are hard to buy and sell quickly and for a predictable price. In other words, at the moment they are somewhat a gamble.
True, you can get rich with gambling, but most likely you will end up broke. This is an investment strategy for beginners guide, not a “get rich quick scheme”. If that is what interest you, sorry to break it down but there is no shortcut whatsoever. It will not be crypto, nor any other investment.
The Investment Strategy for Beginners
It is now time to disclose an investment strategy for beginners that can implement all the 4 tips above and requires minimum effort on your side.
This investment strategy for beginners address the elephant in the room: as a beginner, you are often too naïve to make a good investment decision for yourself. So, we should try to minimize those decisions.
The approach we propose is to buy ab ETF – Exchange Traded Fund – that mirrors the market. That is, you buy this investment, and this equals buying a little bit of every stock and asset in that market. There are many ETFs out there, each mirroring a different market – US stocks, commodities, German corporate bonds, and more. With buying an ETF, you achieve diversification naturally.
Probably, the best ETFs are the ones who mirror large markets, such as the S&P500 for the US and MSCI ACWI for the entire world. I prefer the latter, as it offers more diversification exposing you to all geographies, including emerging markets. You should buy either of those, and then forget about it. Don’t trade it (buy and sell it) frequently, just keeping to maturity.
Worth noting, you should consider this strategy with 5 years or more time horizon. Anything below that, you may want to take an ETF based on Government Bonds, but your returns will be substantially lower.
If you want the ISIN code for an ETF, I personally use at the time of writing the iShares ETF that mirrors MSCI ACWI, you can find it as iShares IE00B6R52259.
Conclusion
In this brief investment strategy for beginners, we showed the most important areas of concern you want to address when developing your investment strategy, and then explained an investment strategy that addresses them all “in autopilot”. With this in mind, you are free to start investing on your own. If you want to dive deeper, the Ultimate Guide to Investing has more answers for you, including a mathematical explanation of why this strategy is simply the best.
