I have repeatedly witnessed sad stories when a novice investor suffers serious financial losses. Unfortunately, sometimes this leads to disappointment and even abandonment of plans to invest. It has long been suggested a separate article on how to start investing money, what tools are better to use for a beginner and what mistakes should be avoided. http://palehorseandrider.com/financial-guidance-for-poor-credit-consumers-is-available/ for clarification
What Should Be a Novice Strategy
I have been running this blog for over 6 years now. All this time I regularly publish reports on the results of my investments. Now the public investment portfolio is more than 1,000,000 rubles.
Especially for readers, I developed the Course for a lazy investor , in which I showed step by step how to organize personal finance and effectively invest my savings in dozens of assets. I recommend every reader to go through at least the first week of training (it’s free).
Most often, debutants, even knowledgeable in terms of knowledge and having read quite a few books on the topic of investing, simply do not cope with their emotions. Where better to start, because it turns out a vicious circle: emotional stability, an adequate response to stress usually come with experience!
My recommendation is to start with a strategy that I endow with the three signs necessary for a beginner.
- It should be least dependent on the emotional background. Feelings are the main enemy of any investor and in the first stage they can provoke irrational actions on the basis of panic or euphoria. You should not be comforted by the confidence that you are an adult and therefore are able to curb the inner impulses. Your real behavior and its financial result may unpleasantly surprise you.
- The strategy should not require high qualification from a novice, developed operational skills in financial management. For example, it should be neutral to the presence of an established trading system. That is, there may not be any particular concept at all. Even an experienced high-risk trader often loses money, deviating from a pre-established rigid framework. His trading system is made up of the ratio of stop-loss and take-profit and following several technical indicators. A novice participant has not yet developed such an algorithm.
- A strategy for an inexperienced investor should not require constant intervention, actions such as I / O, portfolio rebalancing, etc. Yes, such passivity does not contribute to fast learning in practice. But it is better to study in parallel, reading useful materials, watching the actions of experienced colleagues or trading on a demo account. It is better than to drain capital and be disappointed in this lesson at the very start.
Frequent manipulations with investments have one more harmful effect: they multiply the commission costs, because the broker has to pay for each order. An experienced investor can compensate for the commission through accurate and efficient action. The chances of a beginner to earn on trading activity are much lower.
Typical Mistakes Novice Investor
Calling signs of the right strategy, let me remind you of the common mistakes of the investor , which beginners often make.
Goal = profitability, when the investor sets himself a task based on the requirements for capital growth. Of course, these goals may be quite moderate, but the problem is different. Task setting should include not only a benchmark in percent per annum. It is important from the outset to identify the level of risk (the maximum allowable drawdown) and capital protection measures. Your risk profile is determined primarily by the ratio of conservative and aggressive instruments in the portfolio.
The perception of the image of the investor as a gambling, constantly risking player who quickly makes decisions in a changing market. Such a view is characteristic of many newcomers, which can have a detrimental effect on their finances. The reliability of a long-term strategy, by contrast, is based on strict adherence to the original plan, regardless of fluctuations in quotes and rates. For an inexperienced investor, it is not the reaction rate that is important, but constancy and resistance to stress.
Attempts to guess the price movement. It seems to many newcomers that they have conducted a sufficiently deep fundamental or technical analysis to understand in which direction the price of the asset will go. Perhaps this is the case. But the market often presents surprises that break the usual logic. Unable to know the future. Example: Facebook shares fell by 10% in the summer of 2018, amid a predictable political scandal. What is important is not so much how accurately you calculated the market situation, but rather how insured you are in case everything goes “wrong.” The investor pays for safety by reducing potential profits. But the one who knows where to stop and where the road to retreat wins.
The desire to get a lot at once. It is difficult for a novice investor to come to terms with the fact that a portfolio designed for long-term profit requires patience and the ability to wait, perhaps more than one year. There are traders on the market who make short speculations. But you need to understand that trading is another occupation and only a minority of professionals win here. As a rule, these people work with complex derivatives, and what they are doing, by and large, cannot be called investment. I wrote about the difference between investment and speculation in this article .
Haste and fussiness are the enemies of a novice investor. What can you hurry up and lose because of this:
- Accept a tempting offer to participate in a project without properly examining possible risks;
- Enter the market or leave it spontaneously, under the influence of fear of losing or losing profits.
The antipode of haste is a long postponement, this is another disease of beginners. Someone considers himself insufficiently prepared and as a result loses the opportunity to learn in practice. Another catches the “ideal” conditions for the start and endlessly postpones the decision.
Another mistake is to enter the market immediately for “the whole cutlet”, with all the available money (or, even worse, taken on credit). I will give 3 rules regarding the amount of investment.
- For the first investment it is especially important that the loss of the deposit does not become a psychological and financial catastrophe for you. The essence of the rule: the more experience, the greater the amount you can afford. I once started with $ 100 .
- Always create a safety cushion for yourself and your family, and only then begin to invest significant amounts. It is usually 3–6 months of life without an external source of income, depending on your family situation.
- Phased purchase in 2-3 receptions. There is always the possibility that the asset may still fall in value.
Invest in one or a group of related assets. For beginners, it is typical to “fall in love” with the object of their investments, to consider it extremely promising. Example: Amazon shares, which looked like technology growth leaders and a stronghold of stability, lost 14% of their capitalization in 2 days due to a slight discrepancy in revenue and forecast in 2 days.
Conclusion: nothing personal, no preferences, just a cold calculation. The antidote here is one: the widest possible diversification, as far as the amount of your deposit allows. Ideally, no more than 10–15% of a portfolio in one asset or instrument. In addition, it is recommended to diversify by country, currency, industry, risk indicators, instruments. But too small crushing has disadvantages, since it is fraught with a decrease in efficiency.
Why You Should Start With Bonds and ETF
Such tools tend to have lower yield potential. Their value is that they contain protection against the risk of losing or greatly reducing the deposit. Therefore, if you have come to investing for a long time, are going to associate with them the future well-being of your family, you should start with conservative instruments tied to a rate or a broad index.
For example, OFZs , in terms of risk / reward ratio, are very close to a bank deposit . The current yield is slightly above the average rate – about 8% per annum. A big plus is the ability to sell bonds at any time. For comparison, prematurely closing a deposit without loss of interest income is unrealistic. The entry threshold is suitable for any investor – the lot is only 1000 rubles. Compare OFZ quotes of different issues can be in the service Smartlab.
If you want to increase the yield of a portfolio, you can dilute it with a small number of liquid stocks, gradually increasing their share. The main thing – in parallel with this to learn and consolidate new skills in practice. Subsequently, as competencies are formed, one can consider Eurobonds of Russian companies (the minimum lot is $ 1000, the yield is 4–7% per annum in foreign currency).
From which market to start – our or foreign? It’s easier and safer to learn a new profession: “Never invest in something you don’t understand.” After mastering the tools of the Russian market, you can try to go to foreign exchanges. Another thing is that this step must be done sooner or later. Country and currency portfolio diversification has always been helpful. Today, this is exacerbated by the regular devaluation of the ruble, a negative news background. And the set of domestic tools is very limited.
If you already have experience in trading on a Russian stock exchange, then you know how to find undervalued stocks. There are convenient services that allow you to compare foreign issuers by multiples: finviz.com, Google Finance, Yahoo Finance, stockflare.com, etc.
In the Russian jurisdiction there are 2 main options for entering into foreign assets. If you prefer to make a choice yourself, then you can select several large issuers on the St. Petersburg Stock Exchange . If you are not ready to filter the paper by the piece, ETF (Exchange Traded Funds) Exchange Funds, whose shares are traded on the stock exchange, are suitable for you. You can start with ETF from Finex , which are on the Moscow Stock Exchange. Of course, the choice is not rich – there are only 15 ETFs in the list. But you can begin to master the tool with them, by opening an account with a Russian broker. There are 2 more ways to enter this product: through the acquisition of shares of a Russian mutual fund investing in an ETF and through a funded insurance program. But both of these options have many restrictions and high costs for the payment of services of the Criminal Code.
For a novice ETF give undeniable advantages:
- Low entry threshold – from 500 rubles here and from $ 100 abroad.
- In the ETF itself has already laid the diversification of assets from different industries and even countries.
- The composition of the fund’s assets is usually tied to the base index (for example, the S & P 500); this insures against the drawdown of individual issuers.
- Asset security by auditors, depositories, insurers, SEC commissions.
- ETFs are denominated in foreign currency, which eliminates the worries of the ruble exchange rate.
- Relatively low commissions, on average 0.5%.
The commissions are small because the funds often follow the index and manage hundreds of billions of dollars. This does not require a large staff of analysts, but it allows you to earn on volumes. The composition and dynamics of ETF quotes are conveniently tracked on aggregators: etf.com, morningstar.com, etc.
As your capital and competencies grow, it is logical to think about going beyond the domestic market through a foreign broker. Russian brokers offer services for the withdrawal of foreign exchanges only to qualified investors . You shouldn’t think that going “over the hill” requires an amount that is very heavy for our investor. For example, in Interactive Brokers there is no minimum threshold at all. In addition to a wide selection of tools, the protection of your investments will be a plus, in particular, deposit insurance up to $ 500 thousand.
Returning to the question that subscribers are asking more often than others, “Where to start?” – start with yourself. Invest in learning and do not stop doing it, even when you feel confident in your professionalism. The market is undergoing constant changes, for which you need to keep up.