Investor Tips For Beginners: What To Do To Prevent Money From Losing Value

According to the press release, the number of transactions in both global and local equity markets has grown significantly over the past year, with millions of retail investors entering the market. This influx is due to the growing interest in stock trading as more and more different platforms offer one-click start trading and investing small amounts with no commissions or other fees. Popular social media platforms Twitter, Facebook, TikTok are filled with heady success stories about quick profits from corporate stock speculation and the encouragement to join others. The impression is that all you have to do is take the first step and then you just have to watch the money flow into the account.

The world of investors has really changed. Convenient new digital solutions have emerged that have removed entry barriers for retail investors, and robotic passive investing solutions are being actively used. Fundamental analysis of a company’s financial data or portfolio balance and risk allocation may no longer be relevant today. However, history shows that major changes have occurred more than once, and each time it has become clear that the “laws of physics” in financial markets are stronger.

So what are the rules of today’s financial market and where to start for those considering investing? Zigurds Vaikulis, Member of the Board of CBL Asset Management, Citadele Group Investment Management Company, shares personal knowledge and experience.

Invest only what you can afford to lose

Beginners are advised to invest only their own funds – income, which remains after covering the necessary expenses and set aside part of it for intact financial reserves. Money from a contingency financial pillow (your three to six month income) cannot be used for investment. You can invest the so-called free money that is generated; funds must be used so that they do not lose value. However, invest only the amount you lose if you miss a significant change in your lifestyle and limit your needs.

When to start investing?

There are always a number of reasons why now is not the time to invest: stocks have risen for too long, fear of an economic crisis, a recession has started, etc. However, we must remember that investing is a long-term activity. The time you spend in the market will be much more important to the bottom line than chasing the most appropriate moment.

Start with an easier investment

It is said that the best teacher is practice, and you need to learn all the time. This is also true when it comes to investing. It is better to start with relatively simple and not too risky products: you will understand how the financial market works and you will know their reactions to what is happening. Then we can start, for example, by investing in sustainable investment funds.

This fund covers investments with different levels of risk, from stocks to bonds, and investments in them start from several tens of euros. You can choose from a wide variety of funds, from inexpensive index funds that are most popular with inexperienced investors to actively managed equity and bond funds. As investor knowledge and wealth increases, the choice of the right funds becomes almost limitless.

Manage risk, balance portfolio

Whether you enter the stock market with caution or have decades of investing experience, diversifying risk is always important. Even if you are investing in a seemingly perpetual company, it is not worth tying all your financial well-being to a single business model. After all, even the Roman Empire collapsed once, so Facebook or Apple are unlikely to be more powerful than them.

How many different company stocks do you need to buy to call for a diversified portfolio? There is no single answer, but I think there should be at least 10-15. Also, the portfolio should be made up of companies from different economic sectors and geographic regions. The fewer companies in your portfolio, the more you need to know about their business and financial performance and market valuations.

However, portfolio diversification alone is not enough, it must be balanced. Equity risk should be “diluted,” preferably with stocks whose price moves in the opposite direction to the share price at different points in the business cycle. A balanced portfolio will better withstand the storms of the financial markets and will cause you less stress.

Examine all taxes

This is especially important when a small amount is invested. For example, if you buy shares worth € 100 and the minimum commission for that trade is € 20, it is not logical to invest in this unless you do not expect to make a profit and just want to learn. So when looking at fees, you need to decide how much you want to invest and make sure the fees are not out of proportion to your expected return. If a reference figure is to be given, I would say that the commission should not exceed 1%. transaction values.

Decide where to buy and store

Read, analyze and compare! Many international investment platforms promise miracles for free. However, a reading of the rules shows that refunds are typically limited to very small amounts and a very limited number of transactions. Plus, commissions are just one side of the coin. It is worth wondering how, where and who will protect your money and securities. Will they be kept in a bank subject to strict EU rules governing the custody of securities and deposit guarantees? Are they transferred and stored by intermediaries unknown to you?

Do I borrow to invest?

Never. The plan to “borrow today, buy shares in a well-known company tomorrow, sell them tomorrow and make a profit” is a direct path to bankruptcy. Even if such a plan works for some time, it can fail at any moment. Reckless speculation can generate a pair of profits three times, but the next time the result may be completely different. We very rarely manage to stop in time; unfortunately, I have seen it with our own eyes.

personal experience

I started investing about 13 years ago, when I started having some free money to cover my daily expenses and loan payments. And even though I’ve been working as a professional investor for a while, when I started investing, I started to ignore all the prudent investment rules that I talked about earlier. My trades were very speculative and risky. After all, the less money you can invest, the more profit you want. It is true that at the same time I allocated funds for other long-term investment solutions: private pension funds, CBL Asset Management funds (many of which I now manage), foreign investment funds.

However, even today I keep a small amount of money for short-term speculation so as not to lose shape. However, being able to compare the two investment strategies, I can confidently say that the long-term prudent investment principle wins financially.