Index funds also provide a simple and effective way to diversify your portfolio. “They offer broad market exposure, reducing the risks associated with individual stock selection,” said Scott McBrien, founder and chief investment officer at The Laser, a stock market technology company based in Scottsdale, Arizona. “Index funds are also cost-effective, with lower expense ratios than actively managed funds, and provide an easy entry point for beginners to gain broad market exposure.”
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# 4 key investment strategies for beginners

By

Brian O'Connell

CNN Underscored Money

Published 6:00 AM EDT, Tue August 13, 2024

Featured Image

visualspace/iStock

The historical performance of the Standard & Poor’s (S&P) 500 index is something to behold.

Consider this: A single investment of $100 in 1928 (with dividends included) would have grown to $873,305 by the end of 2023. That represents an annualized return of 9.9%. Investing in stocks is a legitimate moneymaker, which should encourage any beginner considering stock market investing in 2024.

“Getting started on one’s stock market investing journey is a great step in helping establish a financial plan and providing financial longevity,” said Julio Bedolla, a wealth manager at LourdMurray in Los Angeles, California. “One of the most instrumental concepts is the power of compounding. When you invest early, your money has more time to grow, allowing for a longer runway for your initial investment. The longer your investment period, the more profound its impact on growth.”

If you’re beginning that journey yourself, get to know the stock market strategies that have proven successful over time, and understand the primary market risks and rewards before you buy a single share of stock.

Launch that process with these stock market investment strategies, and keep using them as your wealth accumulation journey expands.

## Understanding basic investment terminologies

A little education goes a long way when money’s on the line. Review some key terms you’ll run into regularly as an investor.

- Stocks: Stocks are shares of ownership in a publicly traded company. They’re bought and sold each weekday on stock market exchanges.
- Bonds: Bonds are like loans made to corporations or governments that pay the investor back with interest. Bonds are generally considered lower risk than stocks.
- Dividends: Dividends are a corporation’s payments to its shareholders, usually from profits.
- Mutual funds: Mutual funds are offered by investment companies that pool money from numerous investors to purchase a diversified portfolio of stocks, bonds or other securities. Mutual funds trade once a day, after the market closes.
- Exchange-traded funds (ETFs): ETFs are similar to mutual funds, except they trade like stocks on the exchange when the market is open. They’re typically cheaper to hold than mutual funds and more tax-efficient.
- Stock exchanges: Investors buy and sell stocks and other securities on stock exchanges. They’re the primary marketplaces for investment activity.
- Earnings reports: Quarterly profit-and-loss statements show how much money the company is making or losing over the past three months.
- Buy and hold: This strategy consists of buying stocks and holding them for a long period of time.
- Going long: Going “long” means buying a security with the expectation that its price will rise.
- Short-selling: In a short sale, the investor borrows a security from their brokerage firm, sells it on the open market with the expectation that its price will decline and then buys it back later at a lower price. The investor then returns the borrowed security and pockets the difference.
- Registered investment advisor (RIA): An RIA is a person or company that advises investment clients on key money management issues.
- Fiduciary: A fiduciary financial advisor is one who has a legal obligation to prioritize an investor when recommending securities.
- Discount broker: A discount broker is a brokerage firm that charges low or no commissions for buy and sell orders.
- Sector: A stock sector is an industry grouping of many stocks.
- Market correction: A market correction is a downward move of between 10% and 20% in a market index.
- Bear market: A bear market is a downward move of 20% or more in a market index.

## The key types of investment strategies

You’ll need a solid plan as a new investor, and that’s where a well-planned investment strategy comes into play. These portfolio strategies are the most common and usually the most effective.

### 1. Active and passive investing

As a beginner, you’ll need to understand two key investment terms: “active” and “passive.”

“Active and passive are names for portfolio investment strategies most commonly used in mutual funds and ETFs,” said Anthony Denier, chief executive officer at Webull, a global investing platform based in New York City.

Passive investments track a market index by holding all the securities in that index. “It’s a buy-and-hold strategy that tries to match the moves of the index,” Denier noted. “Funds that follow the passive fund philosophy are called index funds.”

Active investments are the opposite strategy. Most active funds seek a higher return than the index, but few succeed.

“Here, the fund managers can buy and sell securities as they wish and hold them for as little or as long as they wish,” Denier said. “Some can be bought and sold on the same day.”

Funds that follow this investment strategy charge a higher management fee than similar index funds because they must do more than just buy what’s in an index. “These managers must do a lot of research to find the stocks they like and may pay more commissions depending on how much they trade,” he added.

### 2. Buy and hold

Young investors just starting out are often encouraged to invest almost entirely in stocks for the long term and disregard short-term fluctuations. That’s for good reason.

“We have about 100 years of history of stock market performance that shows that stocks average a return of about 10% a year,” said Peter Tanous, chairman emeritus at Lynx Investment Advisory in Washington, DC. “Unfortunately, it isn’t in a straight line — There can be long periods of drought, but there are no 20-year periods in stock market history where you lost money.”

By investing regularly, investors can take advantage of dollar-cost averaging, whereby you buy stocks or other assets in consistent intervals and amounts regardless of whether the market is rising or falling.

“A disciplined investment approach like this can assure that a young, new investor can accumulate a retirement portfolio of several million dollars even with relatively modest monthly investments,” Tanous said. “The key is not to lose faith and stick to it.”

### 3. Dollar-cost averaging

As noted, dollar-cost averaging is the process of purchasing stocks or funds regularly with a consistent amount of money.

“One example is buying $100 worth of fund shares every month on the first of the month and doing so for the long term,” Denier said. “Dollar-cost averaging keeps you buying and building your portfolio in a consistent schedule. It forces you to buy when the market is up and down.”

Dollar-cost averaging prevents an investor from putting all their money into the market at a high price or an all-time high. It also forces the investor to buy when the market falls, even if it feels counterintuitive.

“Many people are afraid to buy when the market falls, but dollar-cost averaging takes the thought and emotion out of it and forces you to buy when prices are low, which is what every investor wants,” Denier added. “By buying when prices are high and low, the average cost of your purchases lands in the middle, so whatever you purchase at high prices is less detrimental to the portfolio.”

### 4. Invest in index funds

Index funds take a lot of the work out of building a portfolio.

“Index funds are portfolios that track a market benchmark, such as the S&P 500,” Denier said. “These portfolios remain pretty constant throughout their lifetime.”

With index funds, beginners don’t have to research stocks and determine the best point to enter the market. “You just pick an index you like and buy a fund that tracks that index. Index funds cost less than building a portfolio by yourself; much fewer commissions,” he added. “They’re also tax-efficient and a classic buy-and-hold purchase.”

Index funds also provide a simple and effective way to diversify your portfolio. “They offer broad market exposure, reducing the risks associated with individual stock selection,” said Scott McBrien, founder and chief investment officer at The Laser, a stock market technology company based in Scottsdale, Arizona. “Index funds are also cost-effective, with lower expense ratios than actively managed funds, and provide an easy entry point for beginners to gain broad market exposure.”

## Getting started as a new investor

Make these moves when you’re ready to start trading.

### 1. Choose a trading firm

“Selecting the right brokerage is crucial,” said McBrien. “Look for platforms with low fees, user-friendly interfaces and strong educational resources. Popular choices include Robinhood for its commission-free trades, Fidelity for its comprehensive research tools and E*TRADE for its robust trading platforms.”

### 2. Determine how much to invest

Once you’ve signed on with a stock trading firm, determine how much cash you can steer into “day one” of your investment experience.

“It’s important to start with an amount you’re comfortable losing,” McBrien noted. “A budget of $500 to $1,000 is a good starting point. Start small, and get used to the investing platform, when to buy, when to sell and how to protect yourself by using sell-stop orders (e.g., automatic stock sales orders at a pre-determined ‘bottom’ price) to limit risk.”

### 3. Balance stock investment with your finances

It’s also important to merge your investment budget into your household budget.

“Your investment cash should come after you have a cash cushion for emergencies,” said Gloria Garcia Cisneros, a wealth manager at LourdMurray. “Your investment accounts should not be treated like a bank debit card.”

The best way to balance investing with your other personal financial needs is to create a budget.

“Whether it’s on an Excel sheet or an app like You Need a Budget (YNAB), Monarch Money or EveryDollar, the goal is to understand your expenses,” Cisneros said. “This will give you the amount you should set aside as an emergency fund. Once you’ve laid out your finances, you can set aside a monthly amount to save and invest responsibly.”

### 4. Use a robo-advisor

Automating your investment decisions with a robo-advisor, especially your first year in the market, can remove the decision-making pressures that lead to impulsive stock selection decisions.

“These are digital financial platforms that use automation and machine-learning algorithms to offer financial planning advice,” Cisneros said. “They do the work for you, particularly with stock trading, rebalancing and investment allocation, which removes the worry of tracking your investments.”

Robo-advisory trading platforms typically charge low fees and invest in diversified low-cost index funds. “The automated trading process is cheaper and has a lower barrier to entry than hiring a financial advisor,” Cisneros noted. Some options include Ally, Wealthfront, Betterment and Vanguard, but you can look up robo-advisors online and research them.”

While fees vary widely, expect to pay between 0.05% and 0.25% for a solid robo-trading service, which translates to $5 to $25 per year for $10,000 in portfolio investments.

## Frequently asked questions (FAQs)

What are some benefits of the “buy and hold” investment strategy?

By choosing great stocks and funds and allowing them to grow over time, you’re leveraging the power of compound interest. That allows your investment returns to accumulate. The longer you hold on to stocks and funds that are increasing in value and returning cash to shareholders in the form of dividends or capital gains distributions, the higher your portfolio balance will be.

Does investing in index funds offer any advantages to beginners?

Historically, index funds have a robust growth record. Plus, they generally charge investors low fees and provide solid fund management.

How does dollar-cost averaging reduce investment risks?

Regularly investing in the stock market through dollar-cost-averaging means your money is put to work on your behalf as the market is both rising and falling. As long as you buy stocks regularly over the long haul, you’re taking emotion out of investment decisions and keeping yourself in the stock market, which are two cornerstones of successful investing.

Editorial Disclaimer: Opinions expressed here are the author's alone, not those of any bank, credit card issuer, airlines, hotel chain, or other commercial entity and have not been reviewed, approved or otherwise endorsed by any of such entities.

This content is for educational purposes only and is not intended and should not be understood to constitute financial, investment, insurance or legal advice. All individuals are encouraged to seek advice from a qualified financial professional before making any financial, insurance or investment decisions.

Note: While the offers mentioned above are accurate at the time of publication, they're subject to change at any time and may have changed or may no longer be available.

What is in this guide?

- Understanding basic investment terminologies

- The key types of investment strategies

- Getting started as a new investor

- Frequently asked questions (FAQs)

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