In this article, we will take a look at the 10 best investments for beginners according to experts.
Investment environment for beginners is becoming difficult by the day amid a variety of factors including increasing volatility in financial markets, changing geopolitical situation, unending investment options causing distraction and lack of focus, among others. All was good for investors when credit was cheap and tech stocks (including speculative ones) were skyrocketing, without any checks, balances or questions on valuations. But as soon as inflation became out of control and the Federal Reserve decided to start increasing interest rates, investors all of a sudden put brakes on their spending patterns and became wary of speculative stocks. Perhaps financial markets always need strong and stark reminders that certain things in the investing world remain constant. While everyone knows that futuristic technologies like biotech, AI, IoT, gene editing, etc, will grow and many companies working in these domains will enjoy gains in the future, one just cannot blindly invest in every company claiming to be working in these areas.
Third Avenue Management’s Value Fund in its third quarter of 2023 letter to shareholders talked in detail about what it takes to invest in the volatile environment of today. After mentioning how many investors are becoming a victim to false growth stories and speculative plays, the fund frankly admits that it stays away from many “cutting edge” and even “transformative” tech plays and explains the reason behind this strategy:
“For example, the Third Avenue Value Fund has not, in as long as I can recall, made investments in any type of cutting edge or transformative technology. We simply don’t have the specialized technical expertise to win most of the time in that arena. I could say something similar about biotech, where risk of complete failure is high and assessment of that risk requires specific technical knowledge. And furthermore, attempting to identify opportunities in businesses that have been performing fantastically is a fundamentally different mindset than is employed at Third Avenue. It requires identification of situations where investors are already excited about a company’s prospects, but where the business will, in the future, outperform those very high expectations. And outperforming those high expectations, which are embedded in share prices, is what is required to produce share price outperformance and prove those already bullish investors were not quite bullish enough. Again, this is an approach that is foreign to us and one in which we are unlikely to succeed most of the time. That approach would, furthermore, subject our capital to large amounts of a very undesirable set of risks. Most obvious would be the risk of substantially overpaying.”
What are the best investments for beginners? This age-old question has already been asked to almost every successful money manager, billionaire or financial advisor and to our luck a lot of this wisdom is out there on the internet waiting to be discovered. But wisdom is easy to discover and read. What remains difficult is action. Value investors and billionaires for a long time have been reiterating in their letters and books that one should never give in the to short-term market swings and instead stick to tried and tested golden principles of the market. Yet many beginner investors find it hard to develop a long-term investment horizon and approach.
Back in 2000, value investing legend Seth Klarman answered the question of how investors should tackle the market’s volatility in an investor letter:
“How should Mr. Market’s increasingly volatile behavior influence investors? In our view, investors should, more than ever, act on the assumption that any stock or bond can trade, for a time, at any price. Margin debt (which we do not utilize) should be considered extremely dangerous; investors should never enable Mr. Market’s mood swings to result in a margin call which could necessitate forced selling. Investors should prepare themselves for a greater degree of portfolio volatility, because it is impossible to tell how wild Mr. Market’s mood swings may become. It is of paramount importance that investors brace themselves for a stern test of their investment will. Avoiding overpriced speculations and maintaining a strict value discipline are more important than ever because the overpricings are so egregious and the bargains so pronounced. Yet the price swings are so severe and swift, and not always in the desired direction, that investors must be braced for mark to market losses. Those sufficiently disciplined and unwavering will be generously rewarded.”
Methodology
For this article we scoured investment forums, financial media, investor letters penned by hedge fund managers, billionaires’ interviews and articles to find out the most common investment advice and recommendations given to beginners by masters of the money game.
10. Bonds
The rising interest rate environment has put bonds back in the limelight. Investing in bonds is relatively safe and often provides investors with diversification. Collin Martin, fixed income strategist at Charles Schwab, while talking to Bank Rate, said:
“Any decision to increase the bond allocation is up to each individual investor, but investors who have been sitting in cash waiting for higher yields don’t necessarily need to wait anymore. Adding bonds to a portfolio provides diversification benefits, and today they offer some of their highest yields in years.”
Ryan Linenger, a Chicago-based financial advisor with Plante Moran, also believes having some exposure to bonds helps investors hedge against risks.
9. Mutual Funds
Investing in mutual funds is also one of the best ways to diversify your portfolio and decrease risks. Here’s a quote from John C. Bogle, the Founder of Vanguard Group, in the favor of investing in mutual funds:
“For the great majority of investors, mutual funds are the most sensible and cost-effective way to invest in stocks and bonds.”
8. Invest in Small Companies
The Magnificent Seven group, which includes mostly mega-cap tech companies, accounted for most of the gains of the stock market this year. Almost every hedge fund and money manager’s portfolio is highly titled towards these stocks. Amid the uncertainty and market volatility, investors tend to invest in stable, mega-cap stocks. But that is not the best way to get rich, according to the Oracle of Omaha Warren Buffett.
Buffett said at a shareholder meeting that if he were to start again with a small budget in the investing world, he’d pay more attention to small-cap companies.
“I probably would be focusing on smaller companies because I would be working with smaller sums and there’s more chance that something is overlooked in that arena.”
Buffett actually started his investing career by focusing on small companies that went on to become huge in the future.
7. Crypto
A number of expert resources we consulted, which include money managers and financial advisers, urge beginners to not completely ignore crypto investments. The future of money is digital and it does not make sense to ignore the potential of cryptocurrencies just because of the huge volatility, scams and scandals in the industry. This advice is linked to the general advice for beginners which advocates not to be risk averse all the time. No one has gotten rich without taking risks. It’s risk management and taking calculated risks that makes the difference. Mark Cuban, who is a big fan of cryptocurrencies, has some advice for young investors in this regard:
“If you’re a true adventurer and you really want to throw the Hail Mary, you might take 10% and put it in bitcoin or Ethereum, but if you do that, you’ve got to pretend you’ve already lost your money. It’s like collecting art, it’s like collecting baseball cards, it’s like collecting shoes — something’s worth what somebody else would pay for it. I’d limit (risky investments) to 10%.”
6. 401(K)
Taking full advantage of employer-sponsored 401(k) plan is one of the most common investment advices given to beginners. According to a report by USA Today, Sabino Vargas, senior financial advisor at Vanguard, says:
“The retirement runway can be long, especially for younger investors, so it’s important to begin saving early and often to take advantage of compounding returns.”
The analyst reportedly recommends putting at least 10% to 12% of your income in the 401(k) or at least enough to meet your employer match.
5. Real Estate
Whenever a list of the richest people in the world is compiled, you will almost always see a lot of individuals on the list who got rich investing in real estate or at least started on their path to success and wealth by buying their first piece of land or apartment. Here are some quotes from experts and people who got rich via real estate that motivate beginners to consider investing in real estate:
“Most millionaires I know made more money from owning real estate than any other investment. Real estate consistently increases in value over time and outperforms other investments. It’s always a good time to buy real estate. In fact, the real wealth is made by buying when everyone else is selling and vice versa. While many are talking about a recession, the market is strong, with increasing prices and transactions.” [Peter Hernandez, president of the Western Region at Douglas Elliman, founder and president of Teles Properties]
“There’s an inherent demand for real estate, whether the land produces a product like coffee or is home to an apartment or retail space; so it will always be a good investment. No matter what kind of business you run, you need land.” [Marcello Arrambide, founder of Day Trading Academy]
4. Invest in Big, Stable Companies
The market crash of 2022 and extreme volatility in stocks highlighted the importance of investing in stable, blue-chip companies. Many investment gurus and hedge funds time and again repeated the importance of staying away from risky, low-quality stocks and investing in big companies. Jim Cramer calls these companies “best of breed” stocks. The famous American investor and author Peter Lynch once said:
“Go for a business that any idiot can run – because sooner or later, any idiot probably is going to run it.”
Bill Ackman of Pershing Square, Joel Greenblatt, Michael Price, and many other legendary investors, often talk about applying strict filters to choose stocks and going with a handful of high-quality companies. Bill Ackman’s portfolio has for years included only a few names but the fund has outperformed the broader market for several years. Ackman once said:
“Occasionally we’ve diverged … There’s a certain discipline that comes with investments and there always seems to be a countervailing quality that caused us to diverge, but in really each case we’ve either compromised on either business quality or complexity we’ve been harmed from an investment standpoint.”
3. Broader Market ETFs
More and more money managers and experts are recommending beginners to avoid investing in individual stocks and instead go for ETFs, index funds and broader market funds. If you put your money in the S&P 500 index, you are almost guaranteed to get a 6% to 7% return annually since that is the average return of the index adjusted for inflation. We could quote many experts and financial gurus who believe investing in broader market funds is one of the best ways to invest for beginners, but we decided to quote Warren Buffett who is also a big fan of this investing approach.
Talking to CNBC, the Oracle of Omaha advised people to consistently buy an S&P 500 low-cost index fund.
“I think it’s the thing that makes the most sense practically all of the time,” Buffett said.
Buffett also said:
“The temptation when you see bad headlines in newspapers is to say, well, maybe I should skip a year or something. Just keep buying. American business is going to do fine over time, so you know the investment universe is going to do very well.”
2. Emerging Markets
Famous money managers are extremely bullish on emerging markets and they urge beginner investors to look beyond just the developed stock markets and take advantage of the growth potential of nations outside of the North American or the European continent. For example, Ray Dalio earlier this year reiterated his bullish stance on India in a tweet.
“I am pleased to be able to help PM Modi as he is a man whose time has come when India’s time has also come. He and India are in an analogous position to Deng Xiaoping and China in the early 1980s–i.e., at the brink of the fastest growth rates and biggest transformations in the world. Additionally, the challenges both between and within China and the US are putting PM Modi in a unique position to influence the complexion of the world order via influencing the non-aligned world ‘s dealings with these two leading world powers. I believe that Modi has what it takes to have the greatest impact on the largest number of people in the world at a time that the risks of harmful impact are greater than at any time in our lifetimes.”
According to a report from Lazard Asset Management, after a decline seen in 2021 and 2022 for earnings growth expectations for emerging markets, estimates for earnings growth for these countries moved higher compared to the US.
1. Skills
Topping our list of the best investments for beginners according to experts is an investment that is often recommended by highly wise financial gurus and money managers. The advice might sound cliché but it is certainly true. Learning skills and knowledge which you can sell to make money is one of the best investments in life. This advice is often given by Warren Buffett. Here’s how he sums it up:
“The best thing you can do is to be exceptionally good at something. [People] are going to give you some of what they produce in exchange for what you deliver. Whatever abilities you have can’t be taken away from you. They can’t be inflated away from you. The best investment by far is anything that develops yourself, and it’s not taxed at all.”
You can also take a peek at 11 Undervalued Mid Cap Stocks To Buy According to Analysts and 12 Most Important Holidays in the US.
Suggested articles:
- 25 Richest Criminals of All Time
- 25 Worst States for Human Trafficking in America
- 20 Most Common Places to Get Kidnapped
Disclosure: None. 10 Best Investments for Beginners According to Experts is originally published on Insider Monkey.
