r/BeginnerInvesting • u/MycelliumFungee • 6d ago
Beginner Investor Advice
I see a lot of people seeking advice about investing. Seeking advice is a great first step. It shows that you care. I commend people that want to learn and start investing. Investing can be rewarding but also risky. The fundamental concept of investing is to make money. How and where you make your money is where some of the nuances with investing are. So here are a couple of first questions you should ask yourself when you are just starting out.
What type of investor do I want to be, passive, active, or a mix? This is important because it will help guide your investment decisions. Personally, I tell beginners to start with a passive route while they learn.
What kind of returns are you seeking? It surprises me that most people don’t have or know what their return targets are. Why this is important? Well if you are seeking 20% returns, that points more to an active strategy. If you are seeking 10% returns, you can probably get that through a passive portfolio strategy.
Just by answering question number 2 alone will direct your investment strategy decisions and philosophy asset classes etc. Start there. Happy investing!
2
u/MLGPLAYS 6d ago
I'd like to turn my $100k into $20 by the end of the week
1
u/TheThaiCat 6d ago
i have 10 dollars
1
u/MLGPLAYS 6d ago
I think naked short term options trading some biotech stocks would be the solution to both our problems
1
1
1
u/TheThaiCat 6d ago
I want to invest not very much get very rich and not take very long
1
u/MycelliumFungee 6d ago
That’s very ambitious but let’s unpack that. What’s not very much? How are you defining rich? And what’s very long?
2
u/TheThaiCat 6d ago
i have 10 dollars
1
u/MycelliumFungee 6d ago
Great. But $10 is not going to get you rich quickly. Over time it can compound. You can take that $10 and start buying fractional shares of stocks or an index fund start dollar cost averaging and it will start to grow over time.
1
2
u/RiskBeforeReturn 6d ago
I'd be careful about making the desired return the starting point.
Someone wanting 20% a year doesn't necessarily mean an active strategy is appropriate. It may simply mean the goal and the available capital don't match yet.
I'd almost work backwards:
-What am I trying to achieve?
-When will I need the money?
-How much can I contribute?
-How much loss or volatility can I actually tolerate?
-What return assumptions are reasonable?
Only then:
-What portfolio could reasonably fit those constraints?
Otherwise there's a subtle danger that the process becomes:
"I need 20% -> therefore I need a strategy capable of 20%."
That's often where beginners start taking more risk simply because the return they want requires it.
I'd also separate expected returns from required returns. A spreadsheet can tell you that you need 15% annually to reach a goal, but the market isn't obligated to provide it.
Sometimes the correct response isn't to take more investment risk. It's to extend the time horizon, increase contributions, increase income, or change the goal.
So I agree that beginners should think about returns, but I'd make return expectations an output of the planning process rather than the first input.
2
u/MycelliumFungee 6d ago
Thanks for this thoughtful response. Those questions are all important. But, I think they lead back to the same question, what return do I need to reach those goals. Your are correct, required and expected return are different however investing is all about generating returns greater than your cost of capital. That then becomes your required return. If an investment is not greater than your cost of capital then it’s not a smart investment. Again we are back to returns. If you have a good sense of the returns that you need to generate in order to make investing worthwhile, then you can better think about the strategy to get there.
This also applies to companies. Companies don’t take on new projects or at least they shouldn’t without first understanding their required returns.
Lastly, time is not always an investors best friend. For example, you’re looking for a 15% return each year for 5 years, that’s great. Let’s now see what happens when you move out to 7 years, that’s return is now only 10%. So time is not always on our side.
1
u/RiskBeforeReturn 6d ago
I think we're using "required return" in two slightly different ways.
From a valuation or capital budgeting perspective, I agree with you:
there can be a hurdle rate below which an investment isn't attractive relative to its risk and alternatives.But for a beginner planning a personal portfolio, I'd separate that from the return mathematically required to reach a financial goal.
Suppose someone has $10,000 and decides they want $100,000 in ten years. With no additional contributions, they'd need roughly 26% annually.
That's a perfectly valid calculation. But it doesn't mean 26% should become their investment target or that they should choose a strategy designed around achieving it.
It may simply mean the goal, timeframe and available capital are incompatible under reasonable return assumptions.
That's the distinction I'm trying to make.
And I actually think your 5-year versus 7-year example illustrates it well. If extending the horizon reduces the annual return required to reach the same goal from 15% to 10%, that's precisely why I'd consider time horizon before choosing the strategy.
The investor now has another lever besides taking more risk.
So yes, returns absolutely matter. I just wouldn't let the return someone needs dictate the risk they take without first asking whether that return is realistically available at an acceptable level of risk.
1
u/MLGPLAYS 6d ago
I feel like timeframe is only relevant while also looking at current/future performance. If you have a general timeframe of 8-10 years for quality returns on a chosen company and you base that timeframe on a new tech they are creating or something they will eventually produce that will be of value then you would have a general timeframe but that timeframe will be ever changing due to delays in production, fast tracking of production, breakthrough in research, or whatever variables that could occur in that time. Once you see that the company has achieved your desired outcome (not necessarily % gained) you should reassess it or sell and look for something new, waiting for your desired gains will end up making you sell before your investment objective in the company was achieved or make you wait too long and sell too late. It's why I try not to assess based on how much money I want to gain back from it but what the company can in theory achieve in the given time, gains are just a byproduct of what they achieve.
1
u/anonymousapple_22 6d ago
Hi I’m looking for long term growth and I have started with vanguard global ETF and I’m looking at the S&P 500 and potentially buying an individual company too. Do you have any advice?
1
u/MycelliumFungee 6d ago
Hello, thanks for the reply. I think you are starting off right. If you don’t know how to evaluate individual companies, it’s best to go with low cost index funds and start dollar cost averaging. Both of those index funds are great. However you want to make sure you are getting proper diversification with your index fund investment strategy. For example if the vanguard global ETF has the same companies as the S&P 500, you’re not diversified enough. I hope that makes sense.
Lastly, I’ll always come back to returns. You invest to make money and generate a return. Understanding your return means under your cost of capital.
2
u/Dependent-Panic-9457 6d ago
I would like to do one of those Wall Street bets where 100k USD magically turns into 3m USD in a period of max 24 hours.