Investing for Beginners

Beginning investors have little to fear. Apparently just gaining experience, or investing as a full-time occupation, or watching Jim Cramer on CNBC, is no guarantee of investment success. There are notable exceptions, like the famous Warren Buffet, but the investment record of nearly 10,000 mutual funds is nothing to crow about. Most do not meet minimum investor expectations nonetheless outperform long term investment averages. The reality is that successful investing takes time and understanding, combined with luck and most important, an intuitive knack for doing the right thing at the right time.

In the absence of a formula for intuition, what should a novice do. My advice derives from experience as a hired portfolio manager, a professor of finance, and a retired, individual investor. Many volumes have been written about investment vehicles and approaches to investing, and there is always something to be gained from them. However, for a short article like this, my conscience dictates that I warn you off of the many temptations, the many side paths that typically lead to early ruin, then follow that with some constructive features of a reasonable approach to investing.

Here are some DON’T’S:

(1) Don’t mess with commodity futures;

(2) Don’t buy gold for investment;

(3) Don’t buy into a hedge fund;

(4) Don’t subscribe to investment letters;

(5) Don’t buy and sell options (put and calls and other derivatives)

(6) Don’t purchase securities with borrowed money (go on margin);

(7) Do not sell short (sell borrowed stock);

(8) Be wary of brokers (commissioned sales people);

(9) Be wary of financial advisors that also sell securities and insurance;

(10) Beware of investment gurus.

The reality of investing is that it entails risk in order to achieve investment returns. Over the very long term, 10,20,30+ years, a steady program of investing has shown average returns of 10-11% per year. But such returns are not achieved without risk. There is the risk of losing an entire investment. Even the most notable and successful companies have their dark days (AT&T, U.S. Steel, General Motors, Ford, Hewlett Packard, etc.) There is the risk related to the volatility in the value of an investment. Will you have to liquidate an investment just when the market has marked it down? And there is the risk of investing in an industry that then declines (textiles, steel, clothing) or over-invests (telecom, airlines, computers, PC’s, cell phones, etc.). Oh there is plenty of risk to go around, and a crucial element of investing is constructing a program of reducing the risk to a level that can be tolerated by the investor. How does one do that?

Well, here are some "DO’s:

(1) Pay off credit card balances as much as possible;

(2) Buy a house and keep it for a long time;

(3) Take advantage of an employer’s 401K plan (employer’s contribution and averaging of diversified purchases almost
guarantees success over the long term);

(4) Establish a money market fund for cash that accumulates;

(5) Buy CD’s (Certificate of Deposits) for storing cash;

(6) Research and purchase appropriate mutual funds;

The idea behind the above actions is to minimize risk by not betting your last dime, so to speak, by investing only after a comfort level has been reached so that one may make investment decisions which are shielded from day to day needs, so decisions are prudent for the long term (years).

Another risk management device is Diversification--a concept which simply dictates the obvious: Don’t put all your eggs in one basket. Own a portfolio of investments in a mix that meets your investment objectives and aversion to risk. The portfolio can be a mix of investment vehicles, like bonds, stocks, mutual funds, CD’s. The holdings may be in a mix of industries and purchased over a period of time. There has been some research on approximately how many stocks, for example, provide enough diversification to minimize risk, yet not too much diversification so that investment returns are difficult to achieve. The result, 8-10 stocks that behave in a dissimilar way so that performance is leveled to the extent possible seems to be ideal. No wonder mutual funds, with their hundreds of securities, have problems exceeding investment averages…the portfolios mimic the market with so many securities.

After some consideration of the above, you can exhaustively watch markets, listen, take courses, and read,; however, eventually, until you put some of your own money at risk, even a small amount, you will not really understand if you and investing are compatible. For an investment beginner, there seems to be no substitute for "hands-on" experience.

—Dr. Roger B. Orensteen


		Investing for Beginners Beginning investors have little to fear. Apparently just gaining experience, or investing as a full-time occupation, or watching Jim Cramer on CNBC, is no guarantee of investment success. There are notable exceptions, like the famous Warren Buffet, but the investment record of nearly 10,000 mutual funds is nothing to crow about. Most do not meet minimum investor expectations nonetheless outperform long term investment averages. The reality is that successful investing takes time and understanding, combined with luck and most important, an intuitive knack for doing the right thing at the right time. In the absence of a formula for intuition, what should a novice do. My advice derives from experience as a hired portfolio manager, a professor of finance, and a retired, individual investor. Many volumes have been written about investment vehicles and approaches to investing, and there is always something to be gained from them. However, for a short article like this, my conscience dictates that I warn you off of the many temptations, the many side paths that typically lead to early ruin, then follow that with some constructive features of a reasonable approach to investing. Here are some DON’T’S: (1) Don’t mess with commodity futures; (2) Don’t buy gold for investment; (3) Don’t buy into a hedge fund; (4) Don’t subscribe to investment letters; (5) Don’t buy and sell options (put and calls and other derivatives) (6) Don’t purchase securities with borrowed money (go on margin); (7) Do not sell short (sell borrowed stock); (8) Be wary of brokers (commissioned sales people); (9) Be wary of financial advisors that also sell securities and insurance; (10) Beware of investment gurus. The reality of investing is that it entails risk in order to achieve investment returns. Over the very long term, 10,20,30+ years, a steady program of investing has shown average returns of 10-11% per year. But such returns are not achieved without risk. There is the risk of losing an entire investment. Even the most notable and successful companies have their dark days (AT&T, U.S. Steel, General Motors, Ford, Hewlett Packard, etc.) There is the risk related to the volatility in the value of an investment. Will you have to liquidate an investment just when the market has marked it down? And there is the risk of investing in an industry that then declines (textiles, steel, clothing) or over-invests (telecom, airlines, computers, PC’s, cell phones, etc.). Oh there is plenty of risk to go around, and a crucial element of investing is constructing a program of reducing the risk to a level that can be tolerated by the investor. How does one do that? Well, here are some "DO’s: (1) Pay off credit card balances as much as possible; (2) Buy a house and keep it for a long time; (3) Take advantage of an employer’s 401K plan (employer’s contribution and averaging of diversified purchases almost guarantees success over the long term); (4) Establish a money market fund for cash that accumulates; (5) Buy CD’s (Certificate of Deposits) for storing cash; (6) Research and purchase appropriate mutual funds; The idea behind the above actions is to minimize risk by not betting your last dime, so to speak, by investing only after a comfort level has been reached so that one may make investment decisions which are shielded from day to day needs, so decisions are prudent for the long term (years). Another risk management device is Diversification--a concept which simply dictates the obvious: Don’t put all your eggs in one basket. Own a portfolio of investments in a mix that meets your investment objectives and aversion to risk. The portfolio can be a mix of investment vehicles, like bonds, stocks, mutual funds, CD’s. The holdings may be in a mix of industries and purchased over a period of time. There has been some research on approximately how many stocks, for example, provide enough diversification to minimize risk, yet not too much diversification so that investment returns are difficult to achieve. The result, 8-10 stocks that behave in a dissimilar way so that performance is leveled to the extent possible seems to be ideal. No wonder mutual funds, with their hundreds of securities, have problems exceeding investment averages…the portfolios mimic the market with so many securities. After some consideration of the above, you can exhaustively watch markets, listen, take courses, and read,; however, eventually, until you put some of your own money at risk, even a small amount, you will not really understand if you and investing are compatible. For an investment beginner, there seems to be no substitute for "hands-on" experience. —Dr. Roger B. Orensteen