With SogoTrade, the best way for beginning investors to start is to go over our Education Section, which will give you a good idea of what the market is, and how you can take advantage of a long term, conservative, low cost strategy. Beyond that, here are a few simple things to remember:
Start Early
The key to building wealth is starting early and investing regularly. With the power of compounding, the earlier you start, the more you can generate in the ending years. Regular investments, no matter how small, can grow into a very sizable amount over the long term.
Let's consider an average example. John decides to start investing for retirement when he turns 45. He is financially stable at that point, and can afford to contribute sizeable amounts on a regular period. Lets say he can afford $10,000* per year. At an average annual return of 10%, his retirement plan grows to over $600,000 by the time he reaches 65, or retirement age.
But what if he had started earlier? As soon as John graduated college, when he was 22 years old, he decided to put away $3,000 every year until he reached 65. That's just below $60 a week. The total amount he put in over 43 years would be about $130,000. How much would he have at retirement? Well, at a 10%* return, over 43 years, John would have almost two million dollars!
Diversify
There are many opinions as to how you should invest your money, and almost all of them agree on one thing: diversification. The concept of diversification can be summed up in one sentence; do not put all your eggs in one basket!
This means spreading your investment out across different sectors and funds. That way, if one sector or fund performs poorly, your entire portfolio will not be affected as dramatically. The risk exposure to a particular investment is reduced, and the total overall risk of your portfolio decreases.
To illustrate, let's assume that your portfolio is not diversified. You invest $10,000, and allocate 80% into a "hot" stock, with only 20% into an index-tracking ETF. If the hot stock turns real cold, you could lose up to $8,000.
However, if you diversify, for example 25% into the hot stock, and the remaining 75% into multiple index-tracking ETFs, you only risk $2,500 compared to the $8,000.
Dollar Cost Average
The biggest worry investors have is that as soon as they get into the market, it will fall, and as soon as they get out, it will skyrocket. This is a very real risk, especially if you are trying to catch moves, or time the markets. Even professional traders and fund managers have a very hard time trying to predict random market moves. Chances are that you are a long-term investor, and don't want to play this type of guessing game with your hard earned money. You want a strategy that's conservative, and gives you a good rate of return. A very effective way to invest is through Dollar Cost Averaging.
So what is Dollar Cost Averaging? Well, it works on the premise that buying the same dollar amounts of stocks or bonds on a regular basis evens out the fluctuations of an investment made over time. Basically, you buy more when the market is low, and buy less when the market is high, since you are always investing the same dollar amount.
This takes the worry out of buying high and selling low, because the timing risk disappears. All that you have to do is consistently invest the same dollar amounts every day, week, or month. Your investment will grow with the market.
Since you are able to buy fractional shares with an Scheduled Investment Plan, you can invest absolutely any dollar amount, no matter how small. This is the ultimate dollar cost averaging solution.
*As based on annualized total return of the S&P 500 from 1926 through 2004.