Getting out of debt is a significant achievement and not something you can accomplish without developing some good financial habits. But anyone who has reached this milestone will also realise that moving forward, it’s often not enough to just continue doing what got them to this level. Additional sources of income help you to not only break even but build wealth, as well.
The stock market is one great way for beginners to keep improving their financial management skills, but it can be unpredictable. Common advice such as “buy low, sell high” can be easily applied where developments are visible, such as buying master-planned real estate properties in places like the western suburbs of Melbourne. As the community grows and new railway lines are built, you know that the value of the properties appreciates. But stocks don’t usually have such reliable indicators of value and trends. Instead of trying to get your timing right, use these long-term strategies to build sound investments for the future.
One of the simplest strategies to grasp, dividend investment is a great option for newcomers to the stock market. You’re essentially buying shares with the intent to keep them over time and benefit from the company’s payouts to its shareholders. Information regarding the dividends paid by publicly listed companies is available through various channels. You can then proceed to analyse which stocks pay out a high yield in relation to the price point, or which ones have the most consistent historical record. There is no need to worry about buying or selling at the right time. Bank on the so-called ‘blue-chip’ companies, and you’ll be set for a slow yet steady growth even through economic downturns.
Another effective way to simplify the decision-making process for first-time investors is through cost averaging. This strategy takes timing out of the equation by acknowledging that fluctuations in the market will always be present; in response, you create a regular investment schedule and stick to it.
For example, you buy stocks four times a year, sometimes buying high, at other times low. Thus, volatility — in terms of both individual stock prices and the economy as a whole — will average out over time, making it an excellent fit with a long-term investment approach. It also helps remove the emotional factor, which can adversely impact anyone’s investment decisions. You get to commit to regular savings or investments adequately.
Diversifying a portfolio
When financial advisors talk about diversification, they usually refer to making different types of investments; not just buying stocks but also bonds and mutual funds, for instance. Each investment type comes with its unique risk exposure and rates of return. This way, your overall position will be protected to a greater extent in case of any sudden disruption.
This concept can be applied as a stock investment strategy. Learn a little more about each company and try to invest in different sectors, or even buy foreign stocks to balance the risk of adverse events in the domestic economy. While the bulk of your portfolio can be low-risk, a small portion could still be invested in a few high-growth picks for potential gains.
When you’re new to investing in stocks, choosing one or more of these strategies will help you grasp the basics while avoiding the emotional highs and lows associated with trying to find the perfect timing in a fundamentally unpredictable market.