Investing for Beginners: First Steps and Common Mistakes

How not to rush into investing headlong and lose everything - a detailed guide to the first steps on the stock exchange.
Investing has become very affordable. Now, it is enough to download an application, conclude an agreement with a broker in two clicks and start buying assets. We figure out how much money you need to start, what assets to invest in and how to change consumer thinking to investment.

What is investing
Investing is the investment of own or borrowed funds with the aim of making a profit. You can invest both in financial instruments, such as securities, and in real estate, industry, and so on. Investment income can be generated in different ways, depending on the chosen strategy.

You can start investing only when income begins to exceed expenses. It is not necessary to have any significant savings or wait for them to appear. You can start investing with small amounts. It is also a good idea to acquire a “financial safety cushion” before the start of investments, albeit not material, but in the form of insurance against loss of property, disability or work.
First, you need to analyze the current financial situation in order to find reserves for investment: "Usually, optimization of current expenses allows you to allocate about 10% of income."
Investments are usually divided into two parts, one is protective, the other is profitable. The protective part is intended to cover unforeseen expenses, such as the loss of a job, a car accident or other unforeseen events, this part of the savings is invested only in liquid assets.
The purpose of investing is to achieve your financial goals, for example:
form a financial "airbag", it can be put on a deposit with the possibility of partial withdrawal;
earn the necessary amount for serious purchases;
protect your capital from inflation;
insure your permanent source of income with additional income from investments;
increase finances for your children;
create your own personal pension fund, which in many years will bring passive income.

How to invest
You can invest in different ways. Conventionally, they can be divided into two areas: through intermediaries who will manage your capital, and independently. Which option is better to choose depends on the initial investment, investment goals, and the time you are willing to spend on the process itself. Let's consider both directions in more detail.

Option 1 is when your assets are managed by specialists. This includes:
bank deposits as the easiest and most reliable investment option. You transfer your capital to the bank, it uses it and pays a certain percentage for it. Returns are likely to be close to or less than the rate of inflation;
mutual investment funds (MIF). They can be selected according to the level of expected profitability and the assets that their managers will buy. You cannot find a guaranteed income here, but a lot depends on the selected assets and on the competencies of the management company, and there are also commissions that the manager withholds;
trustees. This is one of the easiest ways to invest. You entrust the care of your capital to a professional who forms a strategy in accordance with your tasks. They will buy securities and other assets in your name. There can be no guaranteed income here either, in addition, it is worth considering the commissions of managers.
Banks, brokers and management companies must also obtain a license from the regulator.

Option 2, when you will independently make decisions and perform trading operations. This approach requires both knowledge and time. It will be necessary to independently develop a strategy, select assets, form portfolios and conclude transactions. The easiest way is to invest on the exchange through brokers who act as intermediaries. The site itself, through the listing procedure, selects those issuers and securities that meet certain requirements. The exchange can add securities to quotation lists - the first and second levels, as well as to the non-quotation list - the third level. The higher it is, the more reliable papers are considered. Risks are also present there, but they are less than on OTC sites.

What is a diversified portfolio?
The investor must understand that investing is always risky. Regardless of which asset you choose, you risk losing at least part of your capital. To reduce the likelihood of such losses, it is recommended to spread the money among different assets so that in case of problems with one of them, the others are safe and they protect your savings. This is called risk diversification.
Let's take an example. The investor put some part of the funds into a bank deposit. If the bank is included in the deposit insurance system, then the amount up to $250,000 will be protected by the state. The investor invested another part in the least risky securities, for example, in government bonds (OFZ), another part in gold, and invested a certain percentage of the capital in shares. The distribution can be different depending on your goals and risk appetite.
The classic approach is the so-called perpetual portfolio. It was developed by economist Harry Brown in the early 1980s. According to his idea, the capital should be divided in equal shares, that is, 25% each, into four types of assets - long and short-term government bonds, growth stocks and precious metals. He offered to rebalance the portfolio only once a year. This means that you need to look at how the distribution of capital in existing assets has changed over the year and either sell what has risen in price a lot, or buy in addition what has fallen so that the balance is even again.
Another option for portfolio diversification was proposed by billionaire and founder of hedge fund Bridgewater Associates Ray Dalio. He called this portfolio "all-weather" because, in his opinion, it works under any economic conditions, namely:
inflationary period when prices rise;
a deflationary period when prices fall;
"bull market" when the stock market and the economy are growing;
"bear market", when the stock market and the economy are falling.
According to Dalio, the portfolio should be distributed as follows:
40% - long-term US Treasury bonds;
30% - shares;
15% - mid-term bonds;
7.5% - gold;
7.5% - commodities.
In addition to diversification by type of asset, there is also diversification by country and industry.

Where to invest for beginners
There are different types of investment instruments. They can be conditionally divided into three types: high-risk, medium-risk and relatively risk-free.
Any investments are associated with risks, this is their essence. Risk is the only parameter that can be clearly controlled in investments. For example, government bonds are considered the least risky instrument. Shares, that is, participation in the capital of the company, are a high risk.
Instruments must be chosen in such a way that they correspond to the objectives and risk profile. Risk profiling allows you to determine what maximum losses a novice investor is ready for. It is better to include in the portfolio different levels of risk and return. That is, the portfolio should contain not only stock market instruments, but also real estate, gold (physical or exchange-traded fund for it).
Deposits in banks included in the deposit insurance system. Thus, they are insured by the state. Even if you want to invest more than $250,000, you can spread the capital across several banks. As a rule, banks offer deposits at an interest rate around the refinancing rate of the Federal Reserve System or slightly higher than it;
Federal loan bonds are considered the safest type of bonds. In fact, you lend to the state for a certain period of time.
Bonds of commercial companies are no longer so safe, because the company may go bankrupt and refuse to pay, so it is worth checking the reliability and debt load of issuers;
ETFs are exchange-traded funds for various indexes. They provide an opportunity to buy a small piece of a set of assets. If these assets are collected after some index (for example, a stock exchange), then by owning a share of this fund, you will actually follow this index. Country, infrastructure and market risks should be taken into account.
Mutual funds are also a way to invest in a set of assets. A share of a Mutual Investment Fund is a security certifying the ownership of a part of the fund's property;
Precious metals such as gold. It can be bought in various ways - bullion in a bank, with the help of exchange-traded funds, depersonalized metal accounts, and so on.
Stable currencies. Currency is a suitable type of asset to create an airbag for a rainy day. Non-cash currency can be bought on the stock exchange through a broker that provides customers with such access. It is necessary to find an option when a monthly commission is not charged for holding the currency on the account. You can consider opening a deposit in banks in Chinese yuan, some banks offer this service. Part of the savings can be invested in cash: dollars, euros, yuan, as well as other options that can be found at a price that is not very high compared to forex prices.
Stock. One of the most volatile assets, especially in a volatile market situation. However, there are companies that are considered reliable in terms of investment and bring dividends.

How much can you start investing?
Theoretically, there is no limit on the minimum investment amount. There are exchange-traded funds whose shares are worth about $1. It is necessary to allocate start-up capital taking into account potential brokerage costs: Also, the cost of the securities themselves imposes restrictions on the starting amount, so on average it is better to start investing with an amount of $3,000 or more.
You can start investing even with small amounts, thus gaining experience and changing your way of thinking. The change of psychology from consumer to investment will take time. The sooner you start, the faster the shifts in habits and behavior will occur.
It all depends on your goals. And also the risk profile, investor income and simple mathematics. Investing at $10 a month, it is strange to expect millions in profits in a year. But by investing even small amounts, you can develop the habit of investing and learning in practice how certain exchange instruments work.
However, you should follow certain rules:
Allocate an amount that will not harm your daily life;
You must be prepared to lose this money painlessly;
Consider possible commissions to the broker;
Do not forget about the need to pay taxes on income from investments.

Investments for beginners: instructions
1. If you decide to embark on the path of an investor, follow a useful checklist:
Formulate for yourself the purpose for which you invest. It could be a long-term investment as a retirement plan, an attempt to save up for a specific purchase, or a desire to beat inflation. Goals should be specific and expressed in numbers: “For example, the goal “I want income to paycheck” is not, but the goal is “in 2 years to save $ 100,000 for a new car” - yes”;
2. Determine your risk profile. Risk profiling is a practice when an investor determines their future tactics of behavior in the market, decides what risks they are ready for. In investments, the higher the return, the higher the risks. Risk profile testing can be done on the websites of many brokers and investment companies;
3. Consider learning for yourself. Some brokers provide free courses for new investors;
4. Calculate how much income you will need to achieve your goal. If you're saving for retirement, figure out how much passive income you want to earn every month and how much you need to earn for that. Don't forget to take into account annual inflation and the need to pay taxes;
5. Choose a strategy. Already knowing how much you want to earn per year, you can come to a specialist, for example, a financial consultant, who will tell you how to proceed. But if you want to work on your own, you can use ready-made portfolio schemes;
6. Allocate start-up capital;
7. Select a broker and open a brokerage account.

Beginning investor mistakes
Avoid typical mistakes that many novice investors make:
1. Don't neglect learning. Even from free master classes and courses, you can learn a lot of useful things about the markets and your opportunities;
2. Don't invest the money you need to live. For passive income, capital is suitable, which you will not need for several years. Before investing money in investments, make sure that you have a financial reserve - "airbag" at the rate of your average income multiplied by 3-6 months;
3. Do not use financial instruments if you do not understand how they work and what their price is made up of or because of what profitability changes;
4. Don't put everything in one basket. Diversification is needed to reduce risks;
5. Do not cling to those papers that fall. Set a milestone for yourself when you will definitely sell the asset that did not live up to your expectations. This is called the potential loss. For example, you can set it to 15%.
6. Don't be fooled by big promises. Be wary of those companies that guarantee returns well above the market.
7. Feel free to check your partners, intermediaries and companies in which you are going to invest.
8. Don't let your emotions take over. If you feel emotions coming up, don't do anything. Take it easy. Remember your goals and your plan.
Novice investors often make decisions to buy assets based not on objective indicators, but impulsively. They tend to open positions without sufficient reason, on the recommendation of friends or under the influence of an article read on the Internet or heard on TV. Recommendations are recommendations, and before risking your own earned money, you need to weigh all the pros and cons, assess the risks and potential profitability, prescribe a trading plan, and only then act.
The importance of a financial plan for getting started: Investors most often choose trading strategies that are not suitable for their level of risk. Many do not know at all that the level of risk is the main criterion for choosing a strategy. And in order to calculate it, you need to seriously work out a financial plan. And, by the way, a lot of people don't either. This leads to the fact that, in addition to a misunderstanding of the risk acceptable to them, novice investors cannot clearly articulate their financial goals, the potential timing of their achievement, determine the start-up capital and additional investments. Without knowing these parameters, it is impossible to trade profitably.