The following is a guest post courtesy Commodity.com:
Investing is a time-honored way to build a nest egg but it’s not easy. These tips for new investors can help you navigate the waters.
For a long time being a “saver” was considered prudent. Now it might be doing you more harm than good. Consider that 10-year inflation-indexed Treasury notes have been negative most of the year. They do not even keep up with inflation.
Investing your savings can be an excellent way to grow your wealth. To help you get started we’ve compiled our top three investing tips.
#1 Trading is High-Risk
Since the mid-March market plunge and the spread of the coronavirus, there’s been a surge of interest in online trading. Day trading is different from investing in that it involves making short-term bets over seconds, minutes, hours, or days. When markets are volatile, traders seek to profit from swings up or down.
However, statistics show that the majority of all retail trading accounts lose money. Successful trading requires discipline, hard work, knowledge, and patience. It’s not a get-rich opportunity.
#2 Algorithmic Trading and Passive Management Could Replace Actively Managed Funds
Over 44% of American households have invested at least some money into a mutual fund. These are actively managed funds that attempt to beat the market in order to provide strong returns to families. The problem with this approach is that to provide value, these funds need to beat the market to a degree that exceeds the fund’s fees. But consider that in 2019, only 3 of the top 20 mutual funds beat the market.
In response to human error, passively managed funds often represent a safer choice. Index funds are almost always passively managed and often offer a better return than actively managed funds.
In the long term, actively managed funds may be able to leverage artificial intelligence though. Algorithmic trading could help to remove human emotions, such as greed and FOMO (fear of missing out), from the equation, bringing better results. But this is not the general state of things right now.
#3 Cryptocurrency Comes With High Returns and Huge Risks
The cryptocurrency market has continued to quietly grow since its trough at the end of 2018. The top ten cryptocurrencies combined currently have a market capitalization of almost a quarter of a trillion dollars — with bitcoin making up more than 72.8% of this value.
“Hodlers” are bitcoin investors looking for long term gains. They are hoping for another major breakthrough — to a new higher base level. But there is no way of saying if this will happen. Additionally, cryptocurrency is volatile, so if you need to liquidate it quickly, you may be forced to take a substantial loss.
But a small percentage of your portfolio in a major cryptocurrency, could potentially provide large rewards.
#4 If You Had Purchased $180 of Amazon Shares in 1997 They’d Be Worth More Than $230,000 Today
It’s a lot riskier than a fund but sometimes investing in individual companies can help you strike gold. At $135.4 billion in 2020, Amazon is Forbes’ fourth most valuable brand and has grown by more than 40% in the last year.
One lesson is when buying big tech stocks, have the patience to hold them over the long term.
Also consider: investors who foresaw this potential would have been able to reap gains significant above the average market growth of 12%, even if they only invested last year! The downside of this approach is that it requires considerable market knowledge that is likely beyond most normal investors.
A safer approach for most investors would be to target an index fund that contains a balanced portfolio of stocks, so that you can take advantage of the overall market life, rather than betting on the success of a single company.
Bonus Tip: Balance Is Everything
If there’s one lesson you should take to heart before you start investing it is balance. Any portfolio that focuses too heavily on a single sector, company, or asset-class is heavily exposed to sudden market shifts.
You should balance your portfolio, hold it over long periods of time, and make slight adjustments in response to the overall market. For example, in today’s market, rebalancing some of your assets into gold would be a sensible move to hedge against recession.
If you keep this in mind and don’t risk money you need to survive, then you will be well on your way to financial independence.
Disclaimer: These are the author’s opinions and should not be construed as investment advice. Before making any investment, consult a Certified Financial Advisor, neither the author nor the publication are responsible for any losses you may occur as a result of your investment.