Investing for beginners: 5 tips before you start

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Investing will make me a millionaire in my 40s and help me retire early. If you are thinking of investing, congratulations! Because it will help you achieve your life’s biggest goals and dreams. However, before starting, there are some things that you should know, and we’ll discuss them in this post.

Investing for beginners: 5 tips before you start

Lee en Español Invertir para principiantes: 5 cosas que saber

Nowadays, there is a lot of noise out there about investing. There are thousands of articles about choosing the best stock, finding the best time to buy and sell, having the best day trading strategies, and more. However, there are a few things to know before you get started.

To clarify, I don’t do any of those things. I don’t pick stocks, invest at “the best time,” or do day trading. The good news? You don’t need to do any of these either to be successful!

Here are 5 things you should consider before starting to invest.

1. Have a “long-term” mentality

Thinking long-term allows you to focus on the big picture and avoid being distracted by short-term market fluctuations. This mentality is the opposite of day trading, which seeks to profit from short-term price fluctuations.

Successful investing is about buying and holding investments for the long term, and it requires patience and discipline. Having this perspective prevents you from making impulsive decisions based on fear, which can lead to costly mistakes.

Additionally, investing for the long term allows for compounding returns, which means that gains made over time can generate even greater returns! Let’s talk about these points in detail.

The Big Picture

When we talk about the stock market, it’s easy to focus on what’s happening today and what the news announces. The stock market is known for its volatility, and it is normal for stock prices to fluctuate over time. 

If the market is not performing well today, it doesn’t mean your portfolio has lost money (because you don’t lose money unless you SELL your position). However, people get carried away by fear and do what many call “panic selling,” which can indeed result in significant losses and missed opportunities for gains when the market eventually recovers. Read that again!

Let’s explain these three charts showing the performance of the S&P 500 at different times to illustrate a big picture long-term mentality.

Graph of the S&P500 returns from March 16, 2020 to March 25, 2020

What do you think when you see this graph? Maybe “this investment doesn’t perform well and isn’t worth investing in,” right?

This is an actual screenshot of the performance of the S&P 500 from March 3 to 23, 2020. After achieving an all-time high in February, the S&P 500 fell 34% by March 23, hitting the lowest point of the COVID pandemic (one of the steepest declines in history).

But what happens if we zoom out and analyze the performance during the entire year, including the following months?

Graph of the S&P500 returns from Jan 1, 2020 to September 30, 2020

After its drop, it took 6 months for the S&P 500 to recover, and at the beginning of September 2020, it reached an all-time high.

Graph of the S&P500 returns from 2002 to 2023

As we see on this final graph, although there may be temporary disruptions or fluctuations caused by various factors such as economic cycles, political events, or natural disasters, the market tends to balance out and recover over time. Investors who remain patient during these periods of volatility often see their investments regain value and surpass previous levels.

Compound interest, your money-making money

Having a long-term mindset allows compound interest to do its job. Compound interest is the process of earning interest not only on the initial investment but also on any accumulated interest. Over time, the interest earned can snowball, resulting in significant growth in the value of the investment.

The key word here is “over time” because TIME is compounded interest’s best friend! The sooner you start investing, the more time you allow your money to generate interest. The more you do that, the more it grows.

As a first example, if you’re 25 years old and decide to invest $400/month for 40 years (that’s a total of $192,000 out of pocket), you’ll have $1.2M by the time you’re 65 (considering an 8% return).

As a second example, let’s say you decide to start investing at 35 years old. In order to have the same $1.2M by 65, you’ll have to invest close to $900/month (that’s $324,000 out of pocket).

Powerful, isn’t it?

2. Select your investments based on your goals

Investing for retirement is not the same as investing to pay for a bachelor’s degree or to pay for the trip of your dreams to another country. These goals, while incredible, don’t have the same time horizon or purpose. Therefore, the investment strategy to use will be different.

Investment accounts

There are different investment accounts, each with a specific purpose, rules, penalties, limits, and tax implications. Make sure to choose the one that’s aligned with your goals and needs.

Here are SOME examples.

Retirement accounts

  • Roth or traditional 401(k).
  • Solo 401(k).
  • 403(b).
  • 457(b).
  • Roth or traditional IRA.

Health accounts

  • HSA.

Educational accounts

  • 529.
  • Coverdell ESA.

Any other goals

  • Brokerage accounts (taxable).

Let’s say that Mariana, who is 30 years old, wants to go on a cruise next month with her friends. Since it’s a last-minute trip, she doesn’t have enough money saved for it, nor does she have an investment account specifically for this purpose, so she decides to withdraw the money from her 401(k)-retirement account because what could go wrong, right?

Well, since a cruise isn’t considered a “hardship withdrawal” (unfortunately), the money withdrawn from the account will be taxed as ordinary income, and Mariana will receive a 10% early withdrawal penalty because she is under 59½ years old.

Not to mention that this will affect her future earnings. Remember compound interest? If Mariana had $45,000 in her 401(k) and withdrew $10,000 for her trip, without considering the taxes plus penalty she’ll pay and assuming she won’t invest one more dollar in the account, this move will make Mariana lose around $150,000 by the time she’s 65 years old. Do you see the impact?

Remember, choose the right account for the right purpose!

Asset classes

Asset classes refer to different categories of financial instruments or investments that share similar characteristics and behave similarly in the market. Each asset class has its unique risk and return profile, and investors typically diversify their portfolios across multiple asset classes to manage risk and maximize returns.

There are typically four main asset classes: equities (stocks), fixed income (bonds), cash and cash equivalents, and alternative investments (such as commodities, real estate, and hedge funds).

Each asset class has different potential growth, liquidity, and volatility. So is important you choose asset classes aligned with your goals and time horizon.

For example, if you are in your mid-20s and you plan to invest for retirement, you should invest most of your portfolio in stocks because you need a type of investment with high growth potential. However, if you’re planning to put the down payment on a house in the next three years, stocks don’t sound like such a good option due to their high volatility.

3. Diversify your portfolio

Have you heard the term “Don’t put all your eggs in one basket?” The same applies when talking about investments.

Diversification is a crucial element of successful investing because it helps to reduce the risk of losses. By spreading your investments across different assets, you can protect your portfolio against the ups and downs of any one specific investment. Even if one of your investments performs poorly, the impact on your overall portfolio will be minimized.

Additionally, diversification allows you to take advantage of multiple market opportunities and potentially achieve higher returns while keeping your risk level in check.

4. Be careful about trying to beat the market

“Beating the market” refers to an investor’s attempts to achieve higher returns than the overall market’s performance, as measured by a market index such as the S&P 500. Investors’ goal is to outperform the market by buying and selling stocks or other securities at the right time and making better investment decisions than others. 

This strategy is used by active traders and fund managers who believe they can identify undervalued securities or anticipate market trends better than others. However, beating the market consistently over time is difficult, and even professional investors may not achieve this goal.

What does this mean for you, and what should you be careful about?

Filter all the noise around day trading and actively managed funds. Get educated and do your research about them before making any decision.

What are actively managed funds?

Actively managed funds are mutual funds or exchange-traded funds (ETFs) where the fund manager picks and chooses the underlying investments to outperform a benchmark index. The manager uses research and analysis to identify undervalued stocks or other securities to buy and sells them based on their market outlook. 

However, actively managed funds typically charge higher fees than passive funds. Studies have shown that actively managed funds, on average, do not outperform passive funds over the long term, and the higher fees can significantly reduce investors’ net returns. Therefore, some investors may find that actively managed funds are not worth the additional cost.

Remember, do your research!

5. Minimize fees

Minimizing fees while investing is important because it directly affects your investment returns. Transaction fees, broker fees, expense ratios, and management fees can eat into your investment profits and reduce your overall gains. 

Careful, these may seem small to you today, but over time these “small” differences in fees will have a significant impact on your investment portfolio.

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Fernanda, "Relentless Latina" founder, wearing a white shirt with the word "Relentless"

Fernanda is an immigrant from Mexico and a Latina Money and Career educator.

After being rejected from her first engineering job for being a woman and spending the first years of her career overworked, underpaid, and broke; she decided to educate herself about money and career growth.

In 6 years, not only she became an engineer, but also moved to the US, pivoted careers, got promoted to manager, raised her salary to six figures, and became an investor on track to be a millionaire.

Now as the founder of Relentless Latina, a platform for women to find tools, resources, actionable strategies, and motivation to grow their careers and money, she’s on a mission to help Latinas build fulfilling high-paying careers, advocate for their worth, increase their income, and build wealth.