Your Questions About Investing For Beginners

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Thomas asks…

I want to start investing in stocks. I want to know how do I start and what is some great advise for beginners?

Justin answers:

Standard investment advice is that you should invest in a diversified mix of stocks, bonds, and money market funds. If you are like most people you will invest part of your money aggressively in stocks, and part conservatively in money market funds and bond funds. However, some young people will go all stocks, and some very conservative people will go all money markets. The links below have on-line questionnaires which will give you an idea of how to do “Asset Allocation,” determining how much to put in each type of investment.

You want to buy a diversified portfolio of stocks as individual stocks are too risky. Highly knowledgeable people can buy a properly balanced portfolio, but most folks have a difficult time balancing things on their own. They will misbalance their portfolio by buying all small stocks or all growth stocks, or some other misbalanced assortment of stocks. Back in 2000, Some people bought all Internet stocks; they got burnt when they all crashed together. You have to diversify across industries. Unless you know what you are doing, it is best to buy mutual funds that will diversify for you. Buy no-load, low cost funds. Mutual funds should have expense ratios of less than 0.5%.

I like index funds. Because of their broad diversification, you are less likely to have a dramatic drop in value. They also have the lowest management fees. For stock funds, I like putting ~70% of one’s money in the Vanguard Total Stock Market Index Fund. And ~30% in the Vanguard Total International Stock Index Fund. The Vanguard Total Bond Market Index Fund is good for a bond fund. The Vanguard Target Retirement funds can be a good all-in-one stock and bond funds for an IRA. (If you have less than 3,000 dollars, you can’t invest in most Vanguard funds. For such people I would suggest Schwab funds.) There are many different opinions out there on what the best mutual funds are. Read the links below and form your own opinion.

Once you have stared investing, you need to keep adding money on a regular basis. Many funds allow you to set up automatic investment programs that take a set amount of money out of your bank account each month.

If your company offers a 401K plan at work, try to invest the most you can. The money grows tax free, and some companies will match your contribution. Investing in a mutual fund IRA is also a good idea. If you have children, you may want to consider a 529 plan or other college savings plan that grows tax free.

If you have high-interest debt, like credit cards, it is best to pay this off first before trying most of the investment ideas above. You should also have 3-6 months of salary saved up as an emergency fund in a bank or money market fund before trying more risky investments.

I will warn you that there is a tremendous amount of stock investing books and websites that teach stock investing strategies that don’t work. Particularly bad are people that teach “technical analysis” systems that sound impressive, but don’t work.

Believing advice you get on Yahoo answers can be risky, so read these websites for further information. If you find it too confusing, contact a professional financial advisor. They will charge you significant commissions, however.

Mark asks…

Free Investing Online?

Is there a such thing as “free” online investing for beginners?

Justin answers:

You can build a “mock” portfolio in Yahoo finance to practice trading and track your results. CNBC is getting ready to start their million dollar portfolio challenge. You can sign up on their website (it’s free). You basically get to “mock” trade a $1 million portfolio. I’ve done it before and it’s pretty good practice.

I also subscribe to a live daily online webinar. Most of the customers are intermediate to advance level traders. The owner gives free 1 week trials if you email him at info@potatoheadmick.com.

Hope this helps.

Steven asks…

Beginner investing question?

So i’ve done my research and for a while i was considering and studying about trading options, but after realizing that I probably shouldn’t start with options trading, i was thinking of value investing, maybe buy and hold for a year or so. My question is, and the one that has been causing me some great difficult is, what sector or specific stock should i look to invest in? I have trouble watching the news and interpreting how it will make the market fluctuate and which sectors it’ll effect. And if I am considering value investing, for about a year’s worth of buy and hold, how diverse should my portfolio be? should it contain rather volatile sectors as well as stable ones? and where should i start looking as far as which stock/entity to specialize in? Thanks for your time 🙂

Justin answers:

Ticker symbol: ERSO.
What do you think of it?

George asks…

Best stock market investing books for beginners?

I am 18 and just graduated and will start college in a year from now. I am taking a year off to work and save money for college. I also want to invest in the stock market. My dad is helping me. But I’d like to read a book on beginning trading in the stock market. I would like to buy mutual funds as well as stocks. So what book should I buy to learn about the stock market and investing for beginners like me?

Justin answers:

‘Trading in the Zone’

‘The way to Trade’

‘Come into my Trading Room’

Michael asks…

What book of Robert Kiyosaki is best to start after Rich Dad Poor Dad?

I just completed Rich Dad Poor Dad, of his other books which ones are steps to investing or beginners guides?

Justin answers:

Go to the bookstore and ask for the sequel to Robert Kiyosaki’s Rich Dad Poor Dad. I read the sequel. It is as informative as the first and has a lot of new ideas.

Remember Kiyosaki’s ideas will only work if you internalize the concepts and adapt it in your daily life.

Paul asks…

How does P/E ratio of stock affect the investor?

Hello.

I’m trying to learn all I can investing for beginners. Through some reading though i’m at a point where i’m trying to understand the P/E ratio of stock.

I understand it to the point where you basically end up buying over-priced or under-priced stock. But how does this affect me? How will I see higher returns if i buy under-priced stock?

Any information is welcome. Thank you!

Justin answers:

The P/E ratio of a company in isolation doesn’t tell you much of anything. It can be useful in comparing companies within the same industry, as it can indicate companies with potential for improvement (low relative P/E) given the market economics of that industry, or companies priced at a premium (high relative P/E). One thing to note; when you see P/E’s published on the web, the denominator is usually a consensus estimate for current year EPS. Using prior year actual EPS can create some strange P/E ratios (can be negative if there was a loss, or outrageously high if a company had extraordinary losses etc.)

One measure you might want to look into is the market/book (M/B) ratio. That is, the market value (market cap)/book value of equity. M/B in isolation does tell you something about the company. A M/B ratio greater than 1 indicates that the company is expected to have earnings in excess of the cost of equity (required return by investors) over time (i.e. Creating value), anything less than 1 is just the opposite. It can also be compared to companies within industries, just as the P/E can. However, do not interpret a company with a high M/B as a sure fire winner – a high M/B indicates that investor expectations for value creation are already high, and the company will have to deliver on those expectations just to return the cost of equity (between price appreciation and dividend yield) and will have to exceed those expectations to deliver excess returns.

John asks…

How do you begin to invest in stocks? Do you need a special bank acct to get started or something?

Just wondering what it takes to get started investing in Stocks. Is the money being transferred in and out of a bank acct or something. I don’t know anything about stocks so I am just wanting to check it out.

Justin answers:

Before you invest a cent, read up everything you can. Investopedia has a good tutorial on stock investing for beginners at http://www.investopedia.com/university/buildingblocks.asp.
It also has a stock simulator, so you can get a feel for stock trading without committing any real money at http://simulator.investopedia.com/
Once you feel ready to invest for real you will need an account at a brokerage, which you can link to your bank account to transfer funds between the two.

William asks…

Where is a good place to start for beginner investors?

I have some extra money that I wanna invest to make more money. Where should I start? What kind of investing is good for beginners. Thankyou for your answers!

Justin answers:

First of all, Congratulations!!! Investing is a big and responsible step that will help secure your future.

The first thing you want to do is figure out how much risk you are willing to take. Higher risk investments can have hefty gains, but you can also lose it all. Is this a game you are willing to play? Or, would you like to earn a guaranteed income that might not pay so much but will definitely net you a profit in the end?

Savings accounts with interest are the safest of all, but the interest rates are so low these days, its hardly worth it.

I found CD’s and Money Market accounts to be good to start with… Higher interest rates than savings, but fairly certain gains (usually definite with CD’s.)

Then there are riskier propositions like stocks, etc. These can be difficult to get started in because you often have to have a broker or pay a fee to use an online investment company. Also, it truly is gambling.

If you do want to give stocks a go, a solid blue chip might be a good way to start. (A solid company that’s been around for years and has a steady history of turning a profit.) Even if you can only afford say… 2 shares, its a good ground floor to get in on. In my opinion, be sure to re-invest your dividends. Otherwise you’ll get a random check every now and then for a few dollars that you’ll be tempted to forget about and not ever cash. If you re-invest, the money will automatically go to buying you more stock. It will compound your earnings faster.

I would highly recommend signing up for Motley Fool. (motleyfool.com) I was totally intimidated when I first started investing, and the website helped a lot. The website is all about investing. They update constantly and send out monthly newsletters (electronic). Its one place that I found that spoke about money in a way that I understood (slightly dumbed down and it felt like a person was writing the articles, not a calculator.)

Whatever you do, ALWAYS read the fine print. Find out if the investment opportunity is insured. Get all of the information and never feel like you can’t ask questions.

If anyone tries to put you off, or won’t answer your questions. Walk away.

If it seems to good to be true. It is.
Walk away.

Make a list of questions to yourself before you begin so you know what you need, too.

What level of risk am I willing to take?
Is this a long term or a short term investment?
Do I need to have access to this money?
Am I ok with being locked into terms for X amount of time?
Etc.

Good luck to you.

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