Investing Summer School: 3 Indispensable Tips from the Pros

×
Investing Tips
Getty Images
Starting to invest can be one of the most intimidating tasks you'll ever take on, but it can also be one of the most lucrative. Liberating yourself from the financial strain of paycheck-to-paycheck living and building yourself an investment portfolio that lets you look forward to an even brighter future is your best defense against the financial struggles that millions of Americans face.

Throughout our Investor Summer School series, we've covered the basics on finding ways to save more to invest, the five most common types of investment you might buy, three popular investing strategies for beginners, and the two main tools you'll need.

In our final installment, we want to leave you with a few tips from some highly experienced professionals to guide you throughout your investing career.

Tip 1: You Don't Have to Pick Stocks to Win at Investing.

One reason why so many investors get hung up in getting started investing is that they don't have the time or inclination to comb through thousands of stocks and other investments seeking out the best ones. Here's some welcome news if that describes your current situation: you don't have to be a stock-picker in order to succeed with your investing.

For decades, researchers have known that the most important decision investors make is not which particular stocks of funds they buy, but how they divide their money across major investment categories.

In short, diversify well and you'll do well.

A landmark study in the 1980s concluded that when you looked at the quarterly returns of nearly 100 corporate pension funds, 93 percent of the variability in those returns came from differences in the way the funds broadly allocated their money across asset classes.

Subsequent studies have produced slightly different figures, but the overall lesson is clear: although spending time seeking out the best investments within a particular category can earn you extra returns, relying on well-diversified investment vehicles like mutual funds and exchange-traded funds will get you most of the way there.

Tip 2: Pay Attention to True Value.

Superstar investor Warren Buffett has said often that you can't rely on the stock market to tell you what a stock is actually worth. Rather, a stock has value as a money-making business, and fundamentals like profitability and growth provide help in figuring out what that true value is.

Of course, the real challenge is trying to figure out exactly what a stock's true value is. Entire books have been written on valuation, but some simple rules to keep in mind include the following:
  • Even great companies can be lousy investments if you buy them at the wrong time. Big tech companies have made billions in profits since 2000, but many of them have share prices that are still below where they traded at the top of the tech boom. The same goes for banking stocks at the height of the housing bubble.
  • Out-of-favor stocks, on the other hand, often offer the best bargains. You have to be careful to avoid weak companies that actually deserve their low share prices, but stocks that are simply in the depressed part of a regular business cycle often make smart buys.
  • Don't try to guess exactly when a stock will hit rock-bottom. If a stock's long-term prospects are sound, then whether you buy at the low or 5 percent above the low won't make much difference in your long-term returns.
Tip 3: Let Time Be Your Best Friend.

Finally, the biggest virtue an investor can have is patience. Over time, the magic of compound interest will make you rich, but only if you give it enough time.

Buffett is a good example of this phenomenon, as he earned 95 percent of the total value of his fortune after his 60th birthday.

The earlier you start investing, the easier it is to save up a nest egg that will provide for your financial needs for the rest of your life. Unfortunately, many investors don't even think about saving until they get closer to retirement, and by then, it's too late to take full advantage of the opportunities that investing offers.

That's why procrastination is your worst enemy, and why there's no better time than the present to get started with your investing today.

So Get Started, and Good Luck!

Thanks for reading our Investor Summer School series. We hope you've learned enough about investing to motivate you to get started with your own investment portfolio. Be sure to stay tuned to DailyFinance for ongoing guidance on how to invest better and take advantage of opportunities when they arise.



You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal-finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.

Increase your money and finance knowledge from home

Portfolio Basics

What are stocks? Learn how to start investing.

View Course »

Professional Vs Do it Yourself Investing

Should you get advice or DYI?

View Course »

Add a Comment

*0 / 3000 Character Maximum

8 Comments

Filter by:
evd10

You can avoid stocks and "protect" your money and get a 1.5% return and after inflation and taxes be guaranteed to lose money.

July 21 2013 at 6:22 PM Report abuse rate up rate down Reply
Big John

Tip 4: Don't get swindled by the stock market and the 1%. Keep your hard earned money.

July 19 2013 at 10:44 PM Report abuse -4 rate up rate down Reply
2 replies to Big John's comment
Nestor

That's probably one of the most ignorant, uninformed, irrational, and worthless opinion I have ever heard. Stocks represent OWNERSHIP in some of the best managed companies in the world. Companies basically exist to create value and survive ONLY by creating profits. Owning a business yourself or a small portion of a profitable company through stocks is the ONLY proven long term way to create wealth from an investor standpoint. Keeping your money, as you say, can only mean you keep it in cash, so considering taxes and inflation that is a guaranteed way to lose your purchasing power year to year. You owe it to yourself, if you ever expect to grow your money, to become a bit more informed. Banks, credit unions, insurance companies, pension funds etc. ALL have a majority or significant portion on there investments in stocks. Unless you currently live only on government "handouts" that come from tax dollars or plan to someday, you will not have any liquid assets that are not dependent, one way or the other, on stocks. Most Americans are involved in stocks whether they are aware of it or not....NOT just the mythical 1% as you seem to claim.

July 19 2013 at 11:43 PM Report abuse +3 rate up rate down Reply
2 replies to Nestor's comment
Lifes a Beach

I think your anger is based in frustration over the amount of energy you have to expend creating arguments that other people aren't as smart as you. You should just accept that you are ignorant too, you wouldn't have to spend so much time belittling others. For example, in your first sentence up there you wrote 'opinion', upon reflection, do you think it needs an 's' or is that something you'll never see? If I was just like you I might charge you w/'That is one of the most ignorant, uninformed, irrational, worthless sentences I've ever read'. Then I could be 'the smart guy' on the internet, eradicating ignorance, just like you.

July 20 2013 at 7:35 AM Report abuse -3 rate up rate down
Lifes a Beach

Oh, & another thing, credit unions don't issue stock, that's just ignorant. *bigsmileyface*
http://www.cuna.org/Thecredituniondifference/
"Not-for-profit. Credit unions are not-for-profit financial cooperatives. We exist to serve our members, not to make a profit. Unlike most other financial institutions, credit unions do not issue stock or pay dividends to outside stockholders."

July 20 2013 at 7:37 AM Report abuse rate up rate down
merstockgto

I have invested in the stock market since 1980 with about $1000. I have done very, very well and am very good shape financially because of it. With an attitude like yours, you will always live in the poor house.

July 20 2013 at 2:55 AM Report abuse +2 rate up rate down Reply
Lifes a Beach

Warren Buffett making 95% of his worth after 60 is kinda funny. I think forbes said he's worth 60 billion & if I did my math right that means he was worth 3 billion to start with!

July 19 2013 at 1:32 PM Report abuse rate up rate down Reply
1 reply to Lifes a Beach's comment
Nestor

You don't have enough of a brain to comment. He had 60 years to accumulate the $3 billion...he didn't START with $3 billion.

July 19 2013 at 11:47 PM Report abuse rate up rate down Reply
1 reply to Nestor's comment
Lifes a Beach

You mad bro? Yeah, from the math 3 bil at 60. & some regular person who was starting (aww hale, there's again that word that gets you mad) at the same time w/some regular person amount, say $300, & investing wisely using just 3 tips from the pros let's say, would today also be one of the mega-rich w/about $6,000. I guess we all gotta start somewhere. (you still mad bro?)

July 20 2013 at 7:19 AM Report abuse -1 rate up rate down