Investment Tips for Beginners to Avoid Losing Their Money

The first rule with investing is always, “Don’t lose money” which is often forgotten by first-time investors who have a little money that they’ve saved and wish to invest it. The second rule is usually, to never forget rule number one. Beyond that, it gets more complicated!

Here are a few investment tips for beginners who are worried about losing their investment capital.

Never Invest in Anything You Do Not Understand

Not investing in something you do not understand is more easily said than done, but it’s a very sound philosophy and one that’s shared by the folks at dividendmantra.com too. The idea is that you should stay in cash until you are sufficiently educated yourself to understand the investment well enough to put money into it. When you don’t know what “money market instruments” are, you shouldn’t buy any of them.

While your cash may not return well against the ravages of inflation, it is still safer than putting your hard-earned money into something you don’t understand and losing it all. In fact, that could put you off investing ever again which would be a crying shame.

Avoid Reaching for a Higher Yield

While receiving a pleasing income from your investment every month, quarter, bi-yearly or yearly is nice enough, trying to get a higher income often ends with buying into fallen stars that are about to die off. When a company gets some bad news, and declines in price heavily, its cash dividend payout when compared to its new, lower stock price, looks juicy. But it can spell the beginning of the end. You can see this when looking at the higher yielding investments paying over 10 percent which are either in cyclical industries going through a downturn, companies losing money faster than ever, or ones that have just been hit with a large legal judgement.

Always Do Your Due Diligence

Most investors don’t understand their investments, make no attempt to correct that problem and cry havoc when their investment portfolio tanks. The practice of buying index funds at any price is a case in point. Buying a good investment at too high price doesn’t make sense, whether through an index fund or with a company stock. At a certain point, there’s too little value there and the investor should walk away. Index fund investors fail to consider this at all.

With any type of investment, it’s important to thoroughly investigate it before putting money into it. It doesn’t matter whether it’s a company stock, a preferred stock, a mutual fund from Vanguard or an ETF from Schwab. You have spent considerable time earning the money, saving it and then planning to invest it, isn’t it sensible to check that you’re not throwing it away on a lousy investment?

For new investors, they’re best advised to study investment websites and to read a collection of good books about finance. These should be general investment ones like those by Jack Bogle of Vanguard, and any book by David Swensen of the Yale Endowment Fund. Beyond that, it’s useful to study specific asset classes – different investment types – to clearly understand how they are different. There are pros and cons with every investment class and it’s important to know what these are.

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