Believe it or not, there are some ‘myths’ that stopped many from venturing into the investing world.
“Not knowing how…”
“Don’t have money…”
“Fear of losing…”
and beginner investors are too often caught up in the 'Chicken and Egg' dilemma, as in which come first? Chicken or the egg?
"Do we get a $1000 profit by investing?"
"Do we wait to invest until we saved $1000?"
Here’s a little perspective to get you started.
How would you invest if you have 100k in your possession now?
If someone is telling you that he got an investment portfolio, invested 15 years ago, made up of 5 equities with the amount of 20k each, and with the average annual return of -10%, -5%, -15%, 15%, and -20% respectively, based on these data, would you believe if he says he’s still making a profit from the investments?
Here’s the interesting thing, these data might seem deceiving! And the true fact is he did make a profit from it.
‘How it is possible then?’
The answer lies in the power of compounding effect.
Let’s analyze in a table form below, with equity A, B, C, D, and E represents each of the equity invested.
Despite the 4 losing equities, but after 15 years, the amount had still accumulated to 178575.65, and the total annual average return of 3.94%!
Now, what happened if he keeps the investments for another 5 years?
The total annual average return would increase to 6.27%, and the amount? It had become 337937.77!
Knowing that you might be questioning:
“I don’t have the money to invest…and investing in many equities means that I will need more money…”
The best part is – it often does not cost much to own hundreds of equities or companies from all around the world. How? Through drip feed or investing small regular amounts through an investment product called exchange traded funds or ETFs or index funds. It is one way to mitigate the risk in volatile investment, especially in the stock market. This is known as dollar cost averaging. The effect of dollar cost averaging is that you’re buying assets at different prices on a regular basis, and not buying at just one price. Hence, the highs and lows of the market will smooth out.
Here’s for you take away: The 3 important things you could learn here,
Start up small, and reinvest the dividends.
Don't get the misconception that you need to have a lot of money before you can invest, you could invest by the monthly contribution from as little as $100 in a low-cost index fund, and take advantage of the reinvestment, most brokerages now a day are offering a no-fee, no-commission reinvestment program.
Invest for the long term, always.
Don't fear the unknown, age and time are the best assets you have. Because of the compounding effect, when you invest the money in the index fund, your money can grow very nicely over the long periods.
Diversification, don't put all eggs in one basket.
This is especially true for a new investor, don't risk your capitals in a single stock or bond, make sure that you have gone through the analysis and are very sure what you have picked. No one investor is 100% confident in what they invested, Yes, they only invest in things they understand about! But there’s always risk involved.
Remember, don't get caught up in the 'Chicken and Egg' question, you could start-up small if you just started your career, budget how your money flows and building it up when your income increase.