8 Investment Strategies For Beginners

An investor today has several avenues to choose from. This sheer number of options may make it challenging to identify a suitable one. For a new investor, it may be natural to feel uncertain about where to begin. This is where investment frameworks come into the picture. They act as a roadmap for investors to align their investment with their goals and risk appetite.

In this article, we will focus on eight factors that new investors may consider when embarking on their investment journey.

Table of contents

• Understand your financial goals
• Assess your risk tolerance
• Invest only in what you understand
• Harness the power of compounding
• Diversification
• Seek professional advice
• Stay consistent and avoid emotional decisions
• Keep learning and reviewing your investments

Understand your financial goals

This is considered one of the most important parts of creating an investment strategy. Understanding why you are investing in the first place may keep you focused on that which is important and avoid that which isn’t. While financial goals vary from person to person, a precise goal gives directions to your investment decisions.

A goal helps you estimate how much money you may need and by when. Without a goal, an investment may feel directionless, and you might not know whether your money is growing in the direction you expect.

Based on time horizon, there are three types of goals:

• Short-term goals: Buying a gadget, planning a trip or building a small emergency fund. These goals need less time (few months).
• Medium-term goals: Purchasing a vehicle, making a down payment for a home or planning further studies (few years).
• Long-term goals: Retirement planning, building long-term savings, or providing for a child's future education. These goals usually require more time, consistent effort and patience (5+ years).

Read Also: Investment Strategies and Tips for Different Life Stages

Assess your risk tolerance

Knowing your risk tolerance is deemed as important as understanding your goals. Every investment carries some level of uncertainty and risk tolerance is simply your comfort level to deal with that uncertainty. Some factors that affect risk tolerance:

• Age: Younger people often have more time to manage market volatility and fluctuations in investment value, while someone nearing retirement may prefer investments that prioritise relative stability of capital.
• Financial responsibilities: A person with dependents or major monthly commitments may prefer relative stability.
• Income level: Higher regular income may help you tolerate more volatility or take on more risk.
• Investment experience: Someone who has never invested before may initially prefer relatively stable options.

Invest only in what you understand

It is always advisable to invest in something that one clearly understands. Many new investors tend to get influenced by trends, social media chatter or friends’ suggestions. However, investing without clarity may lead to confusion or unexpected, unfavourable outcomes. While you do not need deep technical knowledge, a simple understanding may be enough to begin with. If something feels confusing or unclear, it may be better to avoid it until you gain more clarity or seek help from a financial adviser.

Harness the power of compounding

Compounding is the phenomenon that may potentially help build substantial long-term wealth. Even small savings, when invested regularly, may potentially grow over time because realised returns start generating their own returns. This repeated cycle may potentially transform the corpus over a long horizon.

Moreover, a new investor may not require large amounts to potentially benefit from compounding. One is advised to start early and stay patient. Even if you begin with small contributions, consistency over several years may create meaningful growth potential.

Read Also: Long-Term Wealth Building: Smart Investment Strategies

Diversification

While starting your investment journey, you might have come across this phrase: “Don’t put all your eggs in one basket”. Diversification means spreading your investments across different types of assets so that your overall portfolio performance does not depend too much on one single source. This approach may help reduce the impact of volatility; even if one investment underperforms, another investment may outperform and help balance the overall impact.

However, diversification does not entirely eliminate risk; it helps mitigate it. It is considered to be one of the most essential investment strategies for new investors because it encourages a balanced approach rather than depending heavily on any one asset or asset class.

Seek professional advice

Managing money may sometimes feel confusing, especially when you are just starting out. Professionals are equipped with knowledge, experience and skills that may help you. There are many financial products, each with different features, risks and uses. If you feel uncertain, seeking advice from a certified financial professional may be helpful.

Benefits of seeking professional guidance

• You may understand financial terms more clearly.
• A professional can help you create a personalised investment plan.
• You could avoid common beginner mistakes.
• You receive guidance based on your goals and risk tolerance.
• You receive support in reviewing your portfolio regularly.

However, it is always advisable to reach out only to certified and registered financial experts. Also, stay actively involved in your decisions even if they are backed by professionals.

Stay consistent and avoid emotional decisions

Investing is not a one-time activity. It is a long-term habit. Many beginners worry a lot about short-term changes and may stop investing when prices fall or invest more when prices rise quickly. These emotional decisions may lead to confusion and sub-optimal long-term outcomes. The solution is regular investing, which builds discipline. It helps you avoid reacting to short-term fluctuations and keeps you focused on your long-term goals. Even if it’s a small amount, keep investing regularly.

Some investors may also have this habit of checking their investments very frequently. They are recommended to avoid doing so and focus on long-term progress potential rather than short-term changes. Panic selling when the market is low and overconfidence during rapid market growth are common emotional traps to avoid.

Read Also: Active Management in Investment: Meaning & Strategies

Keep learning and reviewing your investments

The world of finance keeps evolving. New technologies, changing economic conditions and new investment products appear regularly. To stay clear in your decisions, you may have to keep learning. You could understand basic economic concepts, read basic financial articles and blogs, watch educational videos, and attend webinars. Furthermore, your goals, lifestyle, and responsibilities may change over time. Therefore, reviewing your investments may help ensure they still match your needs.

FAQs

How does risk tolerance affect an investment strategy?

Risk tolerance determines how comfortable you feel with fluctuations in the value of your investments. If you prefer relatively stable options, you might choose investments that prioritise relative stability of capital. If you are comfortable with some level of volatility, you may choose growth-oriented avenues.

What is an investment strategy for achieving high returns?

No investment can guarantee high returns. Any investment that aims for higher potential returns usually carries high volatility and risk.

What is the least risky thing to invest in?

Every investment carries an element risk, but some may be more stable compared to others. For example, savings accounts, bank fixed deposits and government bonds typically carry very low risk.

Can an investment strategy change over time?

Yes, an investment strategy may change over time. As you grow older, your financial responsibilities, income, and long-term goals may evolve. Your risk tolerance may also change. Regularly reviewing your investments may allow you to adjust your strategy when needed.