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Key Investment Concepts That Beginners Often Get Wrong

From movies and pop culture to news shows and blogs, every platform is pushing the idea of achieving your financial goals as early as possible. As a result, more people are showing an interest in savings and investments.

 

Compared to Baby Boomers and Gen X’ers, Millennials are more likely to set aside money in a retirement account. Additionally, the average age of beginner investors is getting younger. If in the past topics like Forex and the stock market were popular among executives and people in their 40s working in the finance field. Nowadays people in their 30s or even younger are making their way into the trading world.

 

According to The Modern Trader report, Millennials represent 58% of all online traders, and the profile of the modern trader is changing. The reason? Many investment opportunities are beginner-friendly, have low barriers to entry, and there are many educational resources out there so that anyone can learn the basics.

 

But that doesn’t mean investment can’t be a bumpy road for beginners. Although it’s possible to make some great investments in your 20s or 30s without having studied finance, it’s also possible to make rookie mistakes based on incomplete or inaccurate information.

 

Understanding the key investment concepts is essential if you want to build a sustainable long-term strategy, so before delving head first into the latest “next great thing” on the market, you need to invest time into your education and eliminate the guesswork.

 

Risk vs. reward

One of the biggest disclaimers that come with trading, and investing in general, is that this activity is inherently risky. No matter how much you do your research and how many books you read, the market has its whims and you have to accept the fact that one point your investment may not be successful.

 

But while risk may be inherent in investing, that doesn’t mean you can’t control it. Many beginners believe that you can’t win without risking and that a successful investor always has to take chances, but in reality, expert investors take the risk vs. reward ratio very seriously.

 

Before taking any action on the stock exchange, Forex market or any other investment area, you have to create a personal investment strategy and determine the following:

  • How much disposable income you have
  • How much money you’re willing to invest
  • How much money you can lose for an investment opportunity without endangering your financial stability

 

If you absolutely need money in your pocket, you shouldn’t attempt high-risk strategies just we glamorize because the portrait of the daredevil trader in movies and TV. Instead, learn to manage risk with investment alternatives that may not provide fantastic returns, but will instead offer you security.

 

Diversification

Diversification is a popular investing concept and one that many beginners get wrong. On the one hand, the consensus is that you “shouldn’t put all your eggs into the same basket” and that you should strive to build a diverse portfolio, so that if one industry goes wrong, you have a safety net.

 

On the other hand, Warren Buffet and other famous investors have spoken against diversification because the more assets you own, the slower you will be to react to market changes. Besides, you need to put a lot of time and energy into analyzing every investment option.

 

The truth is somewhere in between. Diversification can be a great idea, but only when done strategically, under your trading plan. FxList explains that by combing stocks with Forex trading and corporate bonds, you can slowly secure your portfolio against market changes, but you should never diversify just for the sake of it.

 

Sometimes, diversification can provide movement away from industries that are declining due to economic factors. However, you need to be sure that the direction you’re shifting to is a good one and doesn’t involve more risks than rewards. Many beginners take on multiple investment types at once because they’ve heard that this is a good idea, but fail to analyze every option and end up spreading too thin.

 

Tech is a very good example. In a time when ICOs and disruptive startups are everywhere, they tempt beginners to invest because they want to get a hold of a huge opportunity, and they give in to the buzz without doing their research. While some tech startups manage to rise above average and become profitable, most fail to gain funding and go out of business within five years.

 

It is therefore very important for beginners to understand that the advantages of diversification only apply when you do your research and invest wisely.

 

Liquidity

Liquidity is another popular, yet often misunderstood concept by newcomers to the market. As a result, beginners lose the ability to make money from their investments, especially retirement funds.

 

According to a Bankrate study, over 30 million Americans resort to their retirement accounts to cover emergency expenses, such as their car breaking down, medical treatments, or house repairs, when in reality, we should hold retirement accounts onto for decades.

 

And this is where liquidity comes in. In simple terms, liquidity represents the money that travels from your account every month, whether that’s for planned or unplanned expenses.

 

Long-term investments aren’t meant to cover the need for quick cash, no matter how serious that need might be. This is what emergency funds are for, and it’s important to make the difference between the two. Many beginners go into investing hoping it will solve all their financial problems, but investments aren’t meant to be a quick fix or a substitute for good money management.

 

Before starting to invest, newcomers should first make sure that they have an emergency fund and that they don’t dip into their investments for quick cash problems. Otherwise, these investments will not generate maximum returns and could even lead to financial ruin.