When you’re just starting out as an investor, the sheer volume of information can seem complex and overwhelming. Thankfully, learning a few fundamentals, such as the financial investment basics covered in the “Money Essentials” series from CNN Money, will provide you with a good foundation for wealth management. The following tips will help beginning investors understand the way financial investments work.
Financial Investments Require a Long-Term Perspective
In the course of a single day, month, quarter, or even year, financial investments in the stock market can bring your inner wealth management voice to tears. Consider this
- December 12, 1914 was the worst single-day loss in history for the stock market, which dropped 24.4%.
- October 19, 1987 narrowly missed setting a new record when the stock market plunged 22.6%.
- Investors flush with Nasdaq market success in March 2000 lost nearly 75% of their money over the next three years.
- In 2009, stocks overall dropped 37%.
Before you panic, remember: each of these seemingly catastrophic events was followed by substantial growth. In fact, historically, stocks have outperformed all other types of financial investments, growing by close to 10% over the long run. Your next best option for growth, US Treasury bonds, have a historic growth rate of 5%. Your odds of financial success increase simply by being able to wait out periods of decline and uncertainty.
Beginning Investors Should Pay Attention to Earnings and Inflation
Stock prices vary day to day and sometimes hour to hour, based on everything from company news to weather to geopolitical conflict to the whims of investors. From a long-term perspective, however, financial success is based on earnings. Simply put, a company that makes money also makes its investors happy.
Inflation, on the other hand, takes spending power away from investors. The stock market fluctuates, but historically, long-term economic growth allows investors to regain money they have lost. Compare that to inflation, which averages 3.2% per year. If you bought A Hard Day’s Night when it was released 50 years ago, you would have paid just under $6. Buying a Beatles album today will cost between $15 and $20. That is why, when considering the long-term financial situation, beginning investors wisely include inflation in their overall wealth management picture.
Successful Financial Investments Depend on Risk Management
Generally speaking, the greater the risk, the greater the reward – as long as the risky investment doesn’t fail. In the world of financial investments, the “sure thing” tends to offer slow growth, which is why stocks typically outperform bonds. Beginning investors can increase the chances of financial success by choosing a diversified portfolio. Instead of focusing all of your investments in one company or sector, pick a mix of high- and low-risk investments across a range of businesses and industries. As one area of investment falters, another may hold steady or even grow, which means that while you may not have as many big payoffs as a high-risk investor, you will hopefully avoid taking a big hit during periods of short-term loss.
Bonds Offer an Alternative for Risk-Adverse Investors
If you’re looking for a sure thing, US Treasury bonds are the way to go. Conventional wisdom tells beginning investors that the US government will not default on its obligations, as the US economy has historically been strong and the government always has the option of printing more money to pay off its bonds. A few things you should remember
Smart Investors Learn From Financial Experts
You don’t need to learn everything at once in order to achieve financial success. Instead, rely on the wisdom of financial experts like an index fund manager. Instead of actively choosing each investment, managers mirror a market index, such as Standard & Poor’s 500-stock index, and typically outperform actively managed funds, which have higher expenses. You can also ask questions of the Financial Doctor, Chuck Price, who offers a wealth of information for beginning investors on his website, radio program, and in his new guide to wealth management, Investing Simplified.