The most basic and realistic goal set by any investor should be to beat inflation. Inflation is the rise of general prices usually caused by a growing economy.
The rise of prices implies that you will be losing your buying power over the years if your money sits still in a regular bank account.
As an example, imagine a man with a net worth of $250000 in 1940. They would’ve been considered very rich back then ($250K in 1940 is approximately the equivalent of $4.5M in 2019). Now, imagine that this same person fell into a coma for 79 years and woke up in 2019. Had they left their money in a regular bank account, they would barely have enough funds to buy a house.
Instead of setting unreasonable goals, new investors should seek to retain their buying power at first. Inflation rates vary between 1 and 3% a year, which is the return you will need to achieve in order to do so.
Diversifying Your Holdings
Most beginning investors think that diversifying their holdings simply means not to put all their money in the same stock.
There are multiple ways of diversifying your holdings, some more effective than others. Buying different stocks to diversify your portfolio can be useless if these stocks are from the same industry.
For example, investing into multiple consumer electronics companies will be practically the same as if you invested all your money in the same company if the economy starts doing poorly. To apply the principle of “not putting all your eggs in the same basket”, you’re going to have to do a little bit of thinking.
A few examples of diversification are: investing in rare metals, fixed-income funds, investing in currencies, or even investing in real estate.
Rare metals are usually popular investments in times of high volatility, such as when there are potential war threats. Gold, silver and other metals retain most of their value because of their rarity and because of the demand for them.
Fixed-income funds usually offer low returns, but are an effective way of protecting yourself against inflation.
Currencies are a great way of achieving good returns no matter how the economy is doing, especially because of the ease of going short.
Buying real estate can be a great asset that generates passive income.
There’s Room For A Bit Of Risk
To achieve returns that beat the market indexes, it can be a good idea to invest a small portion of your money into a company with huge return potential.
This is where imagination becomes one of your allies. Someone with an accurate perspective of where the future is headed could’ve potentially bought into Amazon or Apple before most investors even knew what services these companies offered.
The next trillion dollar company is potentially in the making. Whether you catch it early enough is a matter of using your head and taking a chance on a business plan that has not been proven yet.
The amount of money you should invest in a riskier stock should be proportional to your total account size. Risking about 5 to 10% of your portfolio could bring in great returns with minimal risk. After all, the most you can lose is the amount of money invested, but the amount of money that can be made from a good decision is practically infinite.
Prepare Yourself Mentally
Before beginning your investing journey, it is imperative that you understand that a “safe” investment does not protect you from short term loss. If you want short term results, trading could be more suited for you than investing.
If you believe that your holdings are still high quality investments, you should stop yourself from making changes to your portfolio until your beliefs have changed.
General market conditions can affect your positions but should not be taken as an invalidation of your investment choices. Unless you are prepared mentally to endure short to mid term losses, I suggest that you invest your money into fixed-income funds that will require no decision making on your part.