New to Investing? Here’s How to Get Started
Professor Stephen Penman of Columbia Business School offers 10 tips for the beginner investor:
- Understand your investment horizon. When do you want to cash out? Establish your time horizon to determine your risk profile.
- A house is an excellent asset to own, but be wary of buying at “bubble” prices. Owning a home is one of the few ways an individual can issue long-term debt (via a mortgage). Buy when interest rates are low.
- Diversification is important to spread your risk. Don’t put all of your eggs in one basket. If your employment and wages are tied to a particular industry, don’t invest too much money into that industry.
- Information is gold. Invest in assets you know. You’ll feel more comfortable. If you don’t understand technology, don’t buy tech stocks even if they are “hot” at the moment.
- Inflation could be an issue. If you are worried about inflation, look at inflation-protected securities (TIPS) to protect against inflation.
- Don’t get caught in a situation where you need “liquidity” (cash) when markets are down. Reserve a portion of your portfolio for cash or safe interest-bearing deposits or liquid bonds. Safe near-cash assets (bank deposits) are insurance against a rainy day.
- Examine the price of an investment. Price is what you pay, value is what you get. You may not be an expert analyst, but should have a sense of when prices are too high.
- Resist speculation. Treat the fads of the day with skepticism. Don’t fall victim to the rumor mill to make investment decisions.
- Understand your tolerance for risk. Good investing happens when you don’t worry too much. Being comfortable with your investments is part of the happiness of life.
- Don’t put off investing for the “right” time. People will counsel that when it comes to money, you should make sure it’s the “right” time to invest. The trick is that there could never be a “right” time, but, if you do your homework, and keep these tips in mind, the “right” time is now.
Source: Columbia Business School