By: Hari Wibowo
A novice investor might ask this question: " What is the most appropriate way for beginners to start investing?". While some beginners have higher risk tolerance than others, I think that we can generalize that beginners are just that; beginners. Therefore, it is not appropriate for beginners to jump straight into nano technology or finding companies who have the next cure for avian flu.
For beginners, it is advisable to invest in index fund while learning more about stock investing. Historically, index fund returned on average 10.5% since World War II. In essence, you are getting paid 10.5% of your capital while you are learning how to invest! There are plenty to learn and beginners shall use this period to go deeper into financial statements, valuation techniques and reading annual reports. At this point, investors should focus on the company that they like to research or industries that they are already familiar with.
For example, if your occupation is doctor, you can start by focusing on pharmaceutical industries such as Pfizer, Merck or health care companies such as United Health. If you work as a mechanic, you might start researching on automobile companies such as Ford, General Motor or auto part suppliers such as Magna International, Johnson Controls Inc. Learning the industry that you are familiar with will hasten your learning curve as you do not have to learn all the jargons that are specific to each industries.
While investing in index fund sounds boring, it does sounds better than losing money. The first step of becoming a good investor is to control your loss. You may look cool when you are investing in the next big thing. However you want to be cool instead of looking cool. The way to be cool is to know what you are doing while minimizing your loss.