In this article, we will take a look at the 10 best investments for beginners according to experts. To see more such investment advice from experts, go directly to 5 Best Investments for Beginners According to Experts.
Investment environment for beginners is becoming difficult by the day amid a variety of factors including increasing volatility in financial markets, changing geopolitical situation, unending investment options causing distraction and lack of focus, among others. All was good for investors when credit was cheap and tech stocks (including speculative ones) were skyrocketing, without any checks, balances or questions on valuations. But as soon as inflation became out of control and the Federal Reserve decided to start increasing interest rates, investors all of a sudden put brakes on their spending patterns and became wary of speculative stocks. Perhaps financial markets always need strong and stark reminders that certain things in the investing world remain constant. While everyone knows that futuristic technologies like biotech, AI, IoT, gene editing, etc, will grow and many companies working in these domains will enjoy gains in the future, one just cannot blindly invest in every company claiming to be working in these areas.
Third Avenue Management’s Value Fund in its third quarter of 2023 letter to shareholders talked in detail about what it takes to invest in the volatile environment of today. After mentioning how many investors are becoming a victim to false growth stories and speculative plays, the fund frankly admits that it stays away from many “cutting edge” and even “transformative” tech plays and explains the reason behind this strategy:
“For example, the Third Avenue Value Fund has not, in as long as I can recall, made investments in any type of cutting edge or transformative technology. We simply don’t have the specialized technical expertise to win most of the time in that arena. I could say something similar about biotech, where risk of complete failure is high and assessment of that risk requires specific technical knowledge. And furthermore, attempting to identify opportunities in businesses that have been performing fantastically is a fundamentally different mindset than is employed at Third Avenue. It requires identification of situations where investors are already excited about a company’s prospects, but where the business will, in the future, outperform those very high expectations. And outperforming those high expectations, which are embedded in share prices, is what is required to produce share price outperformance and prove those already bullish investors were not quite bullish enough. Again, this is an approach that is foreign to us and one in which we are unlikely to succeed most of the time. That approach would, furthermore, subject our capital to large amounts of a very undesirable set of risks. Most obvious would be the risk of substantially overpaying.”
What are the best investments for beginners? This age-old question has already been asked to almost every successful money manager, billionaire or financial advisor and to our luck a lot of this wisdom is out there on the internet waiting to be discovered. But wisdom is easy to discover and read. What remains difficult is action. Value investors and billionaires for a long time have been reiterating in their letters and books that one should never give in the to short-term market swings and instead stick to tried and tested golden principles of the market. Yet many beginner investors find it hard to develop a long-term investment horizon and approach.
Back in 2000, value investing legend Seth Klarman answered the question of how investors should tackle the market’s volatility in an investor letter:
“How should Mr. Market’s increasingly volatile behavior influence investors? In our view, investors should, more than ever, act on the assumption that any stock or bond can trade, for a time, at any price. Margin debt (which we do not utilize) should be considered extremely dangerous; investors should never enable Mr. Market’s mood swings to result in a margin call which could necessitate forced selling. Investors should prepare themselves for a greater degree of portfolio volatility, because it is impossible to tell how wild Mr. Market’s mood swings may become. It is of paramount importance that investors brace themselves for a stern test of their investment will. Avoiding overpriced speculations and maintaining a strict value discipline are more important than ever because the overpricings are so egregious and the bargains so pronounced. Yet the price swings are so severe and swift, and not always in the desired direction, that investors must be braced for mark to market losses. Those sufficiently disciplined and unwavering will be generously rewarded.”
Methodology
For this article we scoured investment forums, financial media, investor letters penned by hedge fund managers, billionaires’ interviews and articles to find out the most common investment advice and recommendations given to beginners by masters of the money game.
10. Bonds
The rising interest rate environment has put bonds back in the limelight. Investing in bonds is relatively safe and often provides investors with diversification. Collin Martin, fixed income strategist at Charles Schwab, while talking to Bank Rate, said:
“Any decision to increase the bond allocation is up to each individual investor, but investors who have been sitting in cash waiting for higher yields don’t necessarily need to wait anymore. Adding bonds to a portfolio provides diversification benefits, and today they offer some of their highest yields in years.”
Ryan Linenger, a Chicago-based financial advisor with Plante Moran, also believes having some exposure to bonds helps investors hedge against risks.
9. Mutual Funds
Investing in mutual funds is also one of the best ways to diversify your portfolio and decrease risks. Here’s a quote from John C. Bogle, the Founder of Vanguard Group, in the favor of investing in mutual funds:
“For the great majority of investors, mutual funds are the most sensible and cost-effective way to invest in stocks and bonds.”
8. Invest in Small Companies
The Magnificent Seven group, which includes mostly mega-cap tech companies, accounted for most of the gains of the stock market this year. Almost every hedge fund and money manager’s portfolio is highly titled towards these stocks. Amid the uncertainty and market volatility, investors tend to invest in stable, mega-cap stocks. But that is not the best way to get rich, according to the Oracle of Omaha Warren Buffett.
Buffett said at a shareholder meeting that if he were to start again with a small budget in the investing world, he’d pay more attention to small-cap companies.
“I probably would be focusing on smaller companies because I would be working with smaller sums and there’s more chance that something is overlooked in that arena.”
Buffett actually started his investing career by focusing on small companies that went on to become huge in the future.
7. Crypto
A number of expert resources we consulted, which include money managers and financial advisers, urge beginners to not completely ignore crypto investments. The future of money is digital and it does not make sense to ignore the potential of cryptocurrencies just because of the huge volatility, scams and scandals in the industry. This advice is linked to the general advice for beginners which advocates not to be risk averse all the time. No one has gotten rich without taking risks. It’s risk management and taking calculated risks that makes the difference. Mark Cuban, who is a big fan of cryptocurrencies, has some advice for young investors in this regard:
“If you’re a true adventurer and you really want to throw the Hail Mary, you might take 10% and put it in bitcoin or Ethereum, but if you do that, you’ve got to pretend you’ve already lost your money. It’s like collecting art, it’s like collecting baseball cards, it’s like collecting shoes — something’s worth what somebody else would pay for it. I’d limit (risky investments) to 10%.”
6. 401(K)
Taking full advantage of employer-sponsored 401(k) plan is one of the most common investment advices given to beginners. According to a report by USA Today, Sabino Vargas, senior financial advisor at Vanguard, says:
“The retirement runway can be long, especially for younger investors, so it’s important to begin saving early and often to take advantage of compounding returns.”
The analyst reportedly recommends putting at least 10% to 12% of your income in the 401(k) or at least enough to meet your employer match.
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Disclosure: None. 10 Best Investments for Beginners According to Experts is originally published on Insider Monkey.
