Investing 101 Series: 4 Key Guidelines

Whether you're just starting your journey or well on your way to financial freedom, there are key guidelines to investing that most, if not all, investors follow. Those guidelines may change with your level of comfortability, knowledge and risk appetite – that said, below are (4) four overarching principles that any new investor should follow and/or at the very least understand. Make sure you follow us or subscribe to stay up-to-date and informed.

(1) Invest in Well-Established Companies

You work hard for your money and so it should work hard for you, but that’s difficult to achieve when you invest in high-risk or volatile companies and industries. This is why it’s important to start with well-established companies, which are often referred to as blue chip stocks – stocks that are from well-established, well-known, and reliable companies. In most cases, these are companies that have stood the test of time and have been resilient to past economic downturns. A word of caution though, having a blue-chip status does not guarantee continued success nor does it guarantee a “safe investment.” A “safe investment” on the market is actually an oxymoron – there’s always a risk, it simply ranges from low to high.

(2) Diversify Your Portfolio

The power of diversification is real and far from being a new concept. This strategy provides many benefits such as risk management, especially for the average retail investor – the key here is creating a balanced portfolio. At its core, diversification is to spread your investments among various industries, asset classes, and even geographies (think the U.S. equity market vs the European market, or even from emerging markets to developed markets). It can also mean investing in more stable companies (e.g., blue-chip companies) instead of high-risk companies.

Diversification is one of the most critical components of a well-rounded portfolio. It reduces risk and volatility, which is even more essential in uncertain economic times. A well-diversified portfolio should have various groups of assets and/or investments that will fluctuate and resist different economic pressures. In times of high interest rates, certain assets will perform better than others, the same goes for times of high inflation. Other than providing financial protection (i.e., ensuring you are not losing all your financial clout on the market), diversification can help with keeping your cool and emotions under control. Investing is very much an emotional journey, which means that a well-diversified portfolio can help avoid making rash decisions. Think about it, if your entire portfolio is spiraling down fast, your stomach may start to turn (naturally so) – you may want to cut your losses before the heartburn kicks in and take your money out. However, if only a portion of your portfolio is in a downfall, you may be more willing to stay the course, which is often the winning long-term strategy.

You may now be asking – how do I diversify? There are many ways to implement such a strategy, ranging from investing in different industries to simply purchasing exchange-traded funds (ETFs) or mutual funds that track a market index (an index calculates/measures the price performance of a group of securities/companies – it represents a benchmark). A preferred starting point is often to invest in Index ETFs that provide a wide range of exposure such as Vanguard’s S&P 500 ETF (VOO), which aims to track the Standard & Poor’s 500 Index – a widely recognized benchmark of the U.S. stock market performance that is dominated by the stocks of large U.S. companies (often synonyms with blue-chip companies). There are many ETFs available that can provide you with the level of diversification you are seeking within your desired risk appetite.

While some of this may seem obvious to some, it may not be so for others and that’s ok. It’s also useful to know that according to the Global Industry Classification Standard (GICS), there are 11 stock market sectors, which are further broken down into industry groups and sub-groups. There’s truly no need to study this or to know this off the top of your head, but it’s the kind of information that is good to know exists and helps decipher the Wall Street lingo a bit. You can now skip to below unless you're dying to know what those market sectors are, in which case here they are in no particular order: Healthcare, Materials, Real Estate, Consumer Staples, Consumer Discretionary, Utilities, Energy, Industrial, Consumer Services, Financials, and Technology. 

(3) Be Wary of Stocks in the Limelight

Avoid stocks in the limelight as this often increases investor expectations and creates larger downturns if those expectations are not met. In sum, these stocks can be more volatile, which as a new investor you will want to avoid. Think of stocks like Tesla Inc. (Nasdaq: TSLA) or Apple Inc. (Nasdaq: AAPL) which may not necessarily be a desirable investment for your portfolio for various reasons – perhaps you’re already heavily invested in technology, or the stock does not provide the returns you are looking for as part of your investment strategy, such as dividend returns or high growth potential. 

Steering clear of limelight stocks also means steering clear of meme stocks (you know those stocks that have gained sudden viral popularity on social media and websites such as Reddit) as these will rarely benefit your portfolio and are more likely to end in losses. Such stocks have no place in a beginner’s portfolio (or frankly, anyone’s portfolio). One of the main issues is that these stocks’ performance is rarely linked to fundamental analysis (FA), which is a methodology used by seasoned investors to evaluate the true value of a stock that considers the economy, industry, and the company’s specific data such as financial statements.

(4) Don’t Act Like Day Trader

You wouldn’t drive your car like a NASCAR driver, then don’t trade like a day trader. They have different objectives and are often not investing their own hard-earned money. A day trader is thinking of short-term gains with institutional-level financial clout and resources. This could not be farther from the reality of the average retail investor. The reality is very few individuals (or institutions) can beat the market – no wonder even famed billionaire Warren Buffet is a fan of the low-cost S&P 500 index funds such as Vanguard’s VOO ETF.

Now that you are equipped with some key guidelines and tips, you can embark on the next step of your investing journey. You can also follow us on Instagram to stay updated on the latest information and statistics, or subscribe to our mailing list here.