How to Invest in the Stock Market: 10 Rules of Investing for Beginners

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Today, I’m happy to host a contribution from my fellow bloggers, John and Gary. Both are former financial professionals on a mission to help new and seasoned investors find the best brokerage accounts for their needs.

Just getting started in the stock market? Here are 10 rules of investing for beginners.
Some people are born rich, others are lucky enough to be given opportunities early in life and start on the right path, and finally, some must overcome life’s challenges to achieve financial security. No matter where you start, once you have some savings, you’ll want to invest and grow it into a nice nest egg for retirement. But before you jump in and become a day trader, here are a few rules for investing you may want to learn.

1. Bulls and Bears Make Money. Sheep Get Slaughtered.

New investors must realize that they are “playing the game” with professional traders, and when it comes to the stock market, it’s every man (or woman) for himself. If you plan on trading, do your research, minimize risk, and know when to take some chips off the table; otherwise, you’re setting yourself up to potentially lose everything.

2. Keep Things Simple.

Do you want to pretend to be a hotshot trader or do you want to make money? Sometimes the most basic investment strategies offer the greatest returns. If you aren’t a finance professional with market insights yet want control over your investments, the best thing you can do is research the best discount brokerage firms, open an account, and invest in index funds.

Consider a fund allocation that favors U.S. stocks with a heavy-weight in large caps. However, be sure to include some exposure to international and emerging markets, as well as small and medium cap companies.

3. It’s OK to Pay Taxes.

Some investors don’t sell stocks for gains because they fear the taxes they will pay. Stop worrying about the tax man, take your gain, and pay your taxes before you end up with losses. In this situation, having to pay taxes is a good thing.

4. Buy Broken Stocks, Not Broken Companies.

Investment professionals believe in “intrinsic value.” The stock market fluctuates in relation to sentiment, macroeconomic trends, money flow, and hundreds of factors. However, all assets have a certain “true” value.

When a company’s share price falls below its true value, buy the company’s stock. The market will eventually revert back and recognize its own mispricing. However, a damaged company with a dying business model will not recover unless there is a significant change.

5. Buy Best-In-Class.

Want to enjoy peace of mind and sleep well at night? Buy best-of-breed companies in each industry. While a turnaround story may yield a 10-fold return once in a blue moon, investing for retirement is more about “slow and steady wins the race.” The best companies in each industry usually have the best management, attract the best talent and maximize opportunities to earn more.

6. Don’t Be Afraid To Hold Cash.

When you think the market is euphoric, valuations are expensive or you simply don’t like any of the opportunities available, don’t be afraid to hold cash. While some investors stress that you should be constantly invested because it is impossible to time the market, sometimes it’s better to wait and get a clearer view of the market than to have buyer’s remorse.

7. Always Have Emergency Funds.

The U.S. economy has been experiencing boom and bust cycles for the last century, and you shouldn’t expect that to change. For this reason, you should always have a sizeable emergency fund to hold you over during the next recession. Otherwise, you may be forced to sell stocks at their lows just to cover living costs, thereby missing out on an incredible buying opportunity.

8. Leave Your Emotions At The Door.

Investing is part art and science, but there should always be strong reasons or evidence for your decisions. Your emotions, including hopes and dreams, should never be factors. Unfortunately, most people are dishonest with themselves. If you have a history of poor or emotionally decision-making, hire a financial advisor or wealth manager who can be objective about your portfolio.

9. Beware of Wall Street and Hyped Securities.

Wall Street analysts and advisors often have a vested interest in propelling the market higher and hyping certain stocks. Whether their firm is trying to earn the company’s underwriting business, increase the value of their own shares, or the analyst simply has a bias, beware of propaganda.

Listen to their opinion and analysis, but don’t invest in a security solely based on someone else’s “expert” opinion. Remember, these were the same “experts” who thought the housing market was going to increase forever.

10. Life Insurance Is Not An Investment.

Unless you are in the top 1% or require significant estate planning, life insurance is not an investment option no matter what your financial advisor suggests. First, whole life insurance is prohibitively expensive and only provides a fraction of the coverage you could buy with a cheap term policy. Also, if the guaranteed interest paid on the cash value seems appealing to you, remember that only a fraction of your premium is directed to the cash value portion of your policy.

In general, any reputable financial planner will recommend term life insurance. For your retirement nest egg, as we discussed earlier, index funds are the way to go. But don’t take my word for it – learn more about the difference between term and whole life insurance before making any financial decisions that may affect you for the rest of your life.

While these are all great rules for investing, this list is by no means comprehensive, and even if it was, each investor has his or her own set of investment strategies and philosophies. Before diving in and choosing a path, research and analyze different approaches. Ultimately, the best investment strategy may just be to hire a professional that will let you do what you do best – earn money in your career; after all, in most cases, that is a person’s biggest asset.

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2 thoughts on “How to Invest in the Stock Market: 10 Rules of Investing for Beginners

  1. Kalie @ Pretend to Be Poor

    Very informative. I agree with investing over the long haul with index funds and avoiding whole life insurance. I also like how the authors point out that “experts” and advisors always have a vested interest, i.e. making a profit. This doesn’t mean they can never be trusted, but it’s important to do your own research instead of blindly following.

    Reply
  2. Harmony

    Thanks for these tips. I’m still working on paying off debt right now, but am really looking forward to a time in the (hopefully) near future when we can start to do more investing. I will definitely heed your advice to do my research when that time comes.

    Reply

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