Investing can be intimidating for young investors who are starting out. The wealth of information available online is a two-edged sword. You can learn just about anything you want, but with so much information available how do you tell the difference between good information and bad?
And understanding investing can be complex enough. On top of that, there are many different investment styles and products to choose from.
This post will explore some of the basics that young investors need to understand in order to invest successfully.
Save Capital & Avoid Debt
Think long and hard about whether going into debt is a good idea. Some may champion the idea of taking out loans to pay for education, but be careful. Excessive student debt will seriously hamper your ability to save capital and take the steps needed to build wealth.
Once you have your debt under control, your next step is raising capital. Pay yourself every week by automatically funding your savings and retirement accounts – the rule of thumb is to put 10% away.
If you have a RRSP or equivalent plan, make sure you are funding it with every paycheque (note that with the TFSA and your saving ability, there may be other beneficial tax strategies). Take advantage of any company matching contributions if it’s present.
Save as much money as you can in your 20s and going into your 30s. That way you can build a substantial capital position and start to make larger investments as time goes on.
Educate yourself on investment topics and learn as much as you can. Read books and expand your knowledge. Here is a list of investment and personal finance books that I have found useful.
- The Millionaire Teacher – Andrew Hallam
- The Lazy Investor – Derek Foster
- The Intelligent Investor – Benjamin Graham
- One Up On Wall Street – Peter Lynch
- How To Make Money In Stocks – William J. O’Neil
Virtual stock trading accounts and games can be a good way to test the waters and get your feet wet before committing any actual capital. However, be very conscious that once it’s your money, the psychology is different but it’s a good way to make mistakes early.
Once you have your finances in order and you are ready to make your money work for you, open a discount broker account and setup all the accounts necessary.
Don’t forget that saving money is going to be your best portfolio grower. See my dividend income reports for the past 4 years as an indication that my investing income is mostly fueled by my savings and some dividend increase.
- Cash Account
Once you have your account opened and funded, you will need to decide on an investing strategy or combine more than one. There are many different styles to choose from or combine together.
There are many investing strategies that you can study first and read on.
- Dividend Investing (that’s my strategy)
- Index Investing
- Value Investing
- Momentum Trading
- Options Trading
There are also multiple type of investments such as
You want to understand the tax advantages of your different accounts available along with the tax advantages on the investment types.
Keep Learning And Experimenting
Investing is a lifelong process. Keep learning as much as you can and experiment with different styles. Just be sure to never commit more than you can afford to lose.
Keep risky investments to a minimum, at least until you fully understand how they work. Start with small positions and gradually work your way up as you gain knowledge.
About the Author: Eric @ The Passive Income Earner is a DIY investor and software engineer by trade. He has a passion for building a retirement portfolio to retire from the income it generates. Subscribe to my newsletter for more unique content on investing.