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Four Tips For New Investors

A recent conversation with a friend who wanted to start investing brought up some interesting thoughts. Well, basically, it revolved around one important topic. The topic was: “Apprehension of parents”, and it goes something like this:

My parents lost a lot of money in the stock market in the past and so they don’t think it is a good idea for me to invest”.

This is definitely something that is very common. It is not the first time that I have heard someone say it. As the conversation continued, I tried to find out if he (my fried) actually knew what investing really meant. What he said shocked me.

All he told me was: “It’s another way for me to make money”.

I asked if he had read up on how to decide which companies he should invest in? His reply was even more shocking. He said: “There are a lot of stock tips in the paper, I can just follow those”. I was speechless and I understood why his parents might be apprehensive.

So here are four things for young investors to bear in mind:

  • The most important thing is to learn the language of business. In other words, learn some basic accounting. Of course no one will expect you to be an expert at it, but being able to make sense of the three key financial statements, namely, the balance sheet, the cash flow statement and the income statement will be a good first step.
  • Start small. This allows you to make mistakes while you learn and identify your favoured investing is. Is it income, growth or speculative or something else? Although the typical portfolio could comprise of 60% in income; 30% in growth and 10% speculative, the proportions are not set in stone.
  • Think long term. While you might want to tell your parents that you have made a killing on the market in one day, it’s probably not going to last. We need to be patient if we want to reap long-term rewards.
  • And finally, consider an Exchange Traded Fund (ETF) that tracks a specific stock market index. Even Warren Buffett has mentioned the benefits of index trackers. A stock market ETF is basically an index fund that mimics the movements of the index. In Singapore the SPDR STI ETF (SGX: ES3), which tracks the Straits Times Index (SGX: ^STI) has delivered a total return of around 7.2% annually since its inception. It is not a bad return for someone who is just finding his or her feet in the stock market.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool contributor, Esjay, does not own any companies mentioned in this article.