Investment Basics for Beginners

If you’ve ever felt like the world of investing is an exclusive club with its own language, its own rules, and seemingly endless complexity, you’re not alone. For many people, especially those early in their careers or those who’ve been focused on building a business or a medical practice, investing can feel like a foreign concept that’s always been on the to-do list but never quite made it to the top.

The good news? It doesn’t have to be nearly as complicated as it seems. While there are certainly layers of depth and nuance to investing, the foundational concepts are actually pretty straightforward once you understand them. And the sooner you understand those concepts, the sooner you can start putting your money to work for you rather than just sitting in a savings account slowly losing purchasing power to inflation.

In this guide, we’ll walk through the fundamentals of investing in a way that’s practical, easy to follow, and geared toward helping you feel more confident about taking that first step. Whether you’re a physician just finishing residency, a small business owner starting to see some profit, or simply someone who’s ready to learn, thisarticle is for you.

Why Should You Invest in the First Place?

Before diving into the how, it’s worth asking the why. Why invest at all when you could just save your money in a bank account?

The short answer is that saving alone likely won’t be enough to build the kind of wealth you’ll need to fund your goals over the long term. Inflation, which is the gradual increase in the price of goods and services over time, erodes the purchasing power of cash sitting in a savings account. If your money isn’t growing at a rate that at least keeps pace with inflation, you’re actually losing ground in real terms.

Investing gives you the opportunity to grow your wealth over time by putting your money into assets that have the potential to appreciate in value or generate income. When you invest, your money has the chance to compound, meaning the returns you earn can generate their own returns. Over long periods of time, that compounding effect can be incredibly powerful.

Think of it this way. If you save $1,000 per month in a savings account earning 1% annually, after 30 years you’d have roughly $420,000. If you instead invested that same $1,000 per month and earned an average of 7% annually, you’d have approximately $1.2 million.Same monthly commitment, dramatically different outcome. That’s the power of investing.

The Most Common Types of Investments

When most people think about investing, they immediately think of stocks. And while stocks are certainly a major component of most investment portfolios, they’re far from the only option. Let’s break down some of the most common types of investments you’ll encounter.

1. Stocks

When you buy a stock, you’re buying a small piece of ownership in a company. If the company does well and grows in value, the value of your stock generally goes up too. Some stocks also pay dividends, which are regular cash payments made to shareholders from the company’s profits.

Stocks have historically been one of the best performing asset classes over long periods of time, but they also come with more volatility than some other types of investments. That meansthe value of your stock holdings can go up and down significantly in the shortterm. For that reason, stocks are generally better suited for money you don’tneed to access for several years or more.

2. Bonds

If stocks represent ownershipin a company, bonds represent a loan to a company or government entity. Whenyou buy a bond, you’re essentially lending money to the bond issuer in exchangefor regular interest payments and the return of your principal at a specifiedmaturity date.

Bonds are generally considered less risky than stocks, but they also tend to offer lower returns over the long run. They can serve as a stabilizing force in a portfolio, providing steadyincome and reducing overall volatility. The trade off is that you’re giving upsome growth potential in exchange for more predictability.

3. Mutual Funds

A mutual fund is a pooledinvestment vehicle that collects money from many investors and uses it to buy adiversified portfolio of stocks, bonds, or other securities. Mutual funds aremanaged by professional fund managers who make investment decisions on behalfof the fund’s investors.

One of the biggest advantages of mutual funds is diversification. Rather than buying individual stocks or bonds one at a time, you can get exposure to hundreds or even thousands of securities through a single mutual fund. The downside is that mutual funds often come with management fees (known as expense ratios) that can eat into your returns over time, so it’s important to pay attention to those costs.

4. Exchange Traded Funds (ETFs)

ETFs are similar to mutual funds in that they hold a diversified basket of investments. However, unlike mutual funds which are priced and traded once per day at the close of the market, ETFs trade on an exchange throughout the day just like individual stocks.

ETFs have become incredibly popular in recent years due to their generally lower expense ratios, tax efficiency, and ease of trading. Many ETFs are designed to track a specific index, such as the S&P 500, which means they aim to replicate the performance of that index rather than try to beat it. This passive approach to investing has gained significant traction and is a strategy that many long term investors find appealing.

5. Real Estate

Real estate investing can take many forms, from buying rental properties to investing in Real EstateInvestment Trusts (REITs) which are companies that own and operate income producing real estate. Real estate can provide both appreciation and ongoing income through rent or distributions, and it also tends to serve as a hedge against inflation since property values and rents tend to rise over time.

That said, real estate can also be less liquid than stocks or bonds, meaning it may take longer to sell and convert to cash. Direct real estate ownership also comes with responsibilities like property management, maintenance, and dealing with tenants that you won’t encounter with other types of investments.

Key Concepts Every Beginning Investor Should Understand

Now that we’ve covered the most common types of investments, let’s talk about some fundamental concepts that will help guide your decision making as you start building an investment portfolio.

1. Risk and Return

One of the most important principles in investing is the relationship between risk and return. In general, investments that have the potential for higher returns also come with higher risk. Conversely, lower risk investments tend to offer lower returns. Understanding and accepting this trade off is essential to building a portfolio that aligns with both your financial goals and your comfort level with volatility.

For example, stocks have historically delivered higher average annual returns than bonds, but they’ve also experienced much larger short term price swings. If you’re investing for a goal that’s 20 or 30 years away, you can generally afford to take on more risk because you have time to ride out the inevitable ups and downs. If you’re investing for a goal that’s only a few years away, a more conservative approach might make more sense.

2. Diversification

You’ve probably heard the expression “don’t put all your eggs in one basket.” That’s essentially what diversification is all about. By spreading your investments across different asset classes, industries, and geographies, you reduce the impact that any single investment’s poor performance can have on your overall portfolio.

Diversification doesn’t eliminate risk entirely, but it does help manage it. A well diversified portfolio is less likely to experience the kind of catastrophic losses that can come from being overly concentrated in a single stock, sector, or asset class.For most beginning investors, this is one of the most valuable strategies you can implement from day one.

3. Asset Allocation

Asset allocation refers to how you divide your investment portfolio among different asset classes like stocks, bonds, and cash. Your ideal asset allocation depends on factors like your age, risk tolerance, financial goals, and time horizon.

A common rule of thumb that many financial professionals reference is to subtract your age from 110 or 120to determine the percentage of your portfolio that should be allocated to stocks, with the remainder in bonds and cash. While this is a very simplified approach and shouldn’t be the sole basis for your investment decisions, it does illustrate the general principle that younger investors can typically afford to be more aggressive, while those closer to retirement may want to be more conservative.

4. Dollar Cost Averaging

Dollar cost averaging is a strategy where you invest a fixed amount of money at regular intervals, regardless of what the market is doing. For example, investing $500 every month into an index fund. When prices are high, your $500 buys fewer shares. When prices are low, your $500 buys more shares. Over time, this approach tends to smooth out the impact of market volatility and removes the temptation to try to time the market.

If you’re contributing to a 401(k) or similar retirement plan through your employer, you’re already practicing dollar cost averaging whether you realized it or not. Each paycheck, a set amount goes into your account and gets invested according to your selections.It’s one of the simplest and most effective strategies for long term wealth building.

5. Time Horizon

Your time horizon is simply how long you plan to keep your money invested before you need to use it. This is one of the single most important factors in determining how you should invest because it directly impacts how much risk you can reasonably take on.

Someone who is 30 years old and investing for retirement at age 65 has a 35 year time horizon. That’s a long runway, which means short term market fluctuations are much less of a concern.On the other hand, someone saving for a house down payment they plan to make in two years has a very short time horizon and should be much more cautious with how that money is invested.

Common Mistakes New Investors Make (and How to Avoid Them)

Starting to invest is a great step, but it’s also important to be aware of some common pitfalls that trip up new investors. Here are a few to watch out for.

1. Trying to Time the Market

It’s tempting to try to buy low and sell high by predicting when the market is going to go up or down. The reality is that even professional investors and fund managers struggle to do this consistently. Research has shown time and time again that time in the market tends to beat timing the market. Rather than trying to pick the perfect moment to invest, focus on investing consistently over time and staying the course through market ups and downs.

2. Letting Emotions Drive Decisions

When the market drops, it’s natural to feel anxious and want to sell everything to avoid further losses.When the market is soaring, it’s natural to feel confident and want to pile more money in. Unfortunately, this emotional cycle of fear and greed often leads investors to buy high and sell low, which is the exact opposite of what you want to do. Having a well thought out investment plan and sticking to it can help take the emotion out of your decision making.

3. Ignoring Fees and Expenses

Investment fees might seem small on paper, but they can have a significant impact on your returns overtime. The difference between paying 0.10% and 1.00% in annual fees might not sound like much, but over a 30 year period on a large portfolio, it can amount to tens of thousands or even hundreds of thousands of dollars in lost returns.Always understand what you’re paying in fees and ask yourself whether the value you’re receiving justifies the cost.

4. Not Starting Soon Enough

Perhaps the most common mistake of all is simply waiting too long to start. Many people feel like they need to have everything figured out before they begin investing, or they think they need a large sum of money to get started. The truth is that you can start investing with very little money today, and the sooner you start, the more time your investments have to compound and grow. Even small contributions made early can have a tremendous impact down the road.

How to Get Started

If you’re feeling motivated to start investing but aren’t sure exactly where to begin, here are a few practical steps to get the ball rolling.

Take stock of your financial situation. Before investing, make sure you have a handle on your monthly cash flow, an emergency fund with three to six months of expenses set aside, and a plan for managing any high interest debt. Investing is most effective when it’s built on a solid financial foundation.

Take advantage of employer sponsored retirement plans. If your employer offers a 401(k), 403(b), or similar retirement plan, especially one with an employer match, that’s often the best place to start. The employer match is essentially free money, and the tax advantages of these accounts make them incredibly powerful tools for building long term wealth.

Open an IRA if you don’t have one. An Individual Retirement Account, or IRA, is another tax advantaged way to save and invest for retirement. You can choose between aTraditional IRA, which offers tax deductible contributions, and a Roth IRA, which offers tax free withdrawals in retirement. Which one is best for you will depend on your specific financial situation, income level, and tax bracket.

Start simple with index funds or ETFs. You don’t need to pick individual stocks to be a successful investor. In fact, for most people, a diversified portfolio of low cost index funds or ETFs is going to be the most effective and straightforward approach. A simple portfolio consisting of a total stock market index fund and a total bond market index fund can provide broad diversification at a very low cost.

Automate your contributions.One of the best things you can do as a new investor is set up automatic contributions so that investing happens consistently without requiring you to think about it every month. Automation helps you stay disciplined and takes the guesswork and procrastination out of the equation.

When Does It Make Sense to Work with a Financial Advisor?

For some people, the basics covered in this guide will be enough to get started with confidence. For others, especially those in more complex financial situations, working with a financial advisor can be incredibly valuable.

If you’re a physician managing multiple retirement accounts, dealing with medical school debt, and trying to figure out whether to buy into a partnership, there are a lot of moving pieces that can benefit from professional guidance. Similarly, if you’re a business owner navigating questions about tax strategy, business valuation, or succession planning, an advisor who understands those complexities can help you make more informed decisions.

The key is finding an advisor who is a fiduciary at all times, meaning they are legally obligated to act in your best interest at all times, and who charges transparent fees rather than earning commissions from product sales. That way, you know the advice you’re receiving is truly designed to help you, not to benefit the advisor.

Ready to Take the Next Step?

Understanding the basics of investing is an important first step, but putting that knowledge into action is where the real impact happens. If you’re ready to move forward but want some guidance on how to build an investment strategy that fits your specific goals and situation, we’d love to help.

At Oread Wealth Partners, we work with physicians, business owners, and high income professionals to build comprehensive financial plans that go well beyond just picking investments. We focus on tax planning, risk management, and most importantly, making sure your finances are aligned with what’s truly important in your life. Consider scheduling a free 30 minute, no-obligation assessment to discuss how we can help you take the next step with confidence.

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