Anyone venturing into the world of investments in the current climate needs to very careful. It is a difficult environment for professional investors let alone for beginners. The most important consideration is to be cautious and preserve capital. Caution is particularly important for the novice investor who is likely to have limited capital and a great deal of inexperience. Some experienced investors say never get involved in an investment that you do not fully understand.
A beginner needs to distinguish between investment, trading and speculation. Investment involves putting money aside on an informed basis for the long term., typically five or more years. Trading is a much riskier venture in which the investment horizon lasts from minutes to months. Speculation is a form of high risk investment in which the underlying knowledge of the asset is uncertain. A novice investor with limited capital and expertise should concentrate solely upon long term investments. Long term investments using regular saving schemes and dividend reinvestment benefit from the unique properties of compound interest. There are strong mathematical arguments that the account will increase in value regardless of the underlying performance chosen asset class.
Having decided that the best investment for a beginner is to make regular savings over the long term into an investment that allows dividend reinvestment there are a bewildering number of ways in which it can be done. The choice depends upon the investor’s appetite for risk, or bluntly, the amount of money that the investor is prepared to lose. A high interest rate, or prospect of capital growth usually indicates that the investment carries risk and some prospect that the investment could fail. Risk tolerances vary widely between individuals and there is no unique best investment for a novice investor. An investor with a very low risk threshold would be best advised to invest in cash deposits, or building society accounts. An investor with a higher though still prudent attitude to risk might consider a well researched stock market investment. General questions about risk and investment are best left to professional advisors who are well versed in assessing an individuals risk appetite and suggesting suitable investments.
Having decided that the best investment for a beginner seeking capital growth would be with an equity investment the beginner has several, equally prudent options. When capital is limited an investment into a mutual fund or investment trust could be considered. These professionally managed funds can diversify the investment risk across many stockholdings and provide professional investment experience for a modest annual fee. Alternatively, the investor could chose to invest in one or two stocks of their own choice. In either case, in the current climate the emphasis should be on value investing.
Warren Buffet makes the point that he built his fortune from modest beginnings througth value investing. Value investing involves investing in companies that have a proven market and generate a steady stream of profits with which to sustain a dividend. Coca Cola is a famous example as are the electricity, water and gas utilities. These companies have a proven ability to sustain their share price and achieve growth through compound interest rate growth. Some value investors look for stocks and investment trusts whose assets are worth more than the stock market valuation of the company. This gives them an additional sense of security. In the event of a liquidation and sale of the assets these shareholders would still make a profit. Conversely, as a word of warning, in the current, cautious market, novice investors should avoid business classes where the asset value is less than the share price. These companies typically operate in advertising, recruitment and marketing sectors where brand name and intellectual capital is important. They are vulnerable to sudden sharp falls in valuation. A good stockbroker or professional adviser would be able to advise on current value investing opportunities.
The best investments for a beginning investor are those that offer secure long term growth. These will not necessarily be the best investments that appear with hindsight in investment performance. A professional adviser will be well placed to seek out the secure opportunities.