Financial Education  7 Key Investing Principles For New Investors
Guides Investing
7 Key Investing Principles For New Investors
TABLE OF CONTENTS
1) Don’t Try To Time The Market
2) Avoid FOMO
3) Don’t Be Afraid To Buy Stocks On Market Dips
4) Only Invest In What You Understand
5) Diversify, Diversify, Diversify
6) Stocks Are A Long Term Investment
7) Invest, Don’t Gamble
Final Thoughts

7 Key Investing Principles For New Investors

Erik Machuca Erik Machuca
Jan 2, 2024
Before you start investing in the stock market, there are a couple key investing principles you should be aware of. These principles can help you create a sustainable investing plan to both grow your portfolio and avoid costly mistakes.

1) Don’t Try To Time The Market

You may have heard of the term, “timing the market.” When you hear others discussing “timing the market,” it refers to jumping in and out of the market by buying when the stock market is low and selling when the stock market is high.
While it sounds great in theory, it is not so feasible in real life. Even expert stock analysts can’t predict when the stock market will have a drastic up or down fluctuation.
Successful long term investors will tell you that most of the growth of your money doesn’t actually come from timing the market, but rather, from time in the market.
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Those who try to time the market often think that selling their stocks when the stock market is high, and rebuying those stocks when the stock market is low, is the best thing to do. But consider this:
  • If you sell your stocks when the market is at a high, expecting it to drop back down, what happens when the prices of stocks continue to rise higher? You just missed out on potential gains.
As a result, you may experience FOMO (fear of missing out), and end up rebuying your stocks at a higher price point than you originally had.
The longer you are invested in the market, the longer time horizon you have to weather any short term stock market downturns and come ahead on the other side. Not only that, but the longer you are invested in the market, the longer the time frame you have to experience the full power of compound interest.
The best time to start investing was yesterday. The second best time to start investing is now. Always remember, your investing success will come from time in the market, not timing the market.

2) Avoid FOMO

As we previously mentioned, FOMO often causes new investors to rush to buy a hot stock whose price is quickly rising.
For instance, a few years back in 2017, you may remember Bitcoin came on the scene in a big way.
The price of Bitcoin quickly rose from $2,500 to nearly $20,000 within about 6 months. However, by the time it became mainstream, the price of Bitcoin was over $15,000 for just a single coin.
Many new investors flocked into Bitcoin once they saw how quickly the cryptocurrency was shooting up. They did not want to miss out on this “hot investment.”
Unfortunately, I was one of the new investors who had FOMO once the price surpassed $10,000. I began to pour a lot of money into the hot cryptocurrency, thinking it would only keep going up.
I, along with thousands of other investors poured a lot of money into Bitcoin, and bought the cryptocurrency at all time highs.
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Wouldn’t you know, within 2 months the price of Bitcoin plummeted from nearly $20,000 per coin all the way down to $7,500 per coin. And within one year of that December 2017 high, the price of Bitcoin was sitting at just $3,000 per coin.
Yes, this is an extreme example unrelated to stocks, but the lesson here holds true. Never be pressured into investing a large amount of your money into a “hot” investment because you’re afraid of missing out.

3) Don’t Be Afraid To Buy Stocks On Market Dips

At the end of the day, whether you’re investing in stocks, ETFs, or anything else, do not feel pressured to buy at all time highs.
Remember, the stock market fluctuates up and down. There will always be opportunities to buy stocks at a discounted price.
Conversely, when stock prices drop, new investors believe this is the worst time to buy stocks. But consider this:
When you go shop at your local Target or Walmart, would you not stock up on your favorite household items when they
go on sale?
Yet, when the stock prices of Target or Walmart go on sale, we are hesitant to buy it.
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As long as you are investing in quality blue-chip companies, buying stocks when their price dips can be one of the greatest ways to get quality investments at a discount.
One of Warren Buffett’s most famous quotes is,
“The underlying value of a stock does not change in the short term, only the stock’s price does.”
— Warren Buffett
There will be times where the stock’s price may be high simply due to investor’s rushing in due to FOMO. Other times, the stock’s price may be low simply due to investors rushing out. Again, due to fear.

4) Only Invest In What You Understand

  • “Buy, Buy, Buy!”
  • “Sell, Sell, Sell!”
  • “This stock’s going to explode, guaranteed bro!”
These are just some of the things you might hear, from everyday novice traders all the way up to experts on Wall Street.
But this is not an investment strategy. This is just following a hot-stock tip, and hot stock tips are just a quick way to lose your money.
Instead, the best investment strategy is to simply invest in what you understand. Think of quality and innovative companies you know, shop at, or buy services from, and then, do your research on them.
Not only will your money be invested in quality and sustainable companies, but you’ll sleep better at night knowing exactly what your money is invested in.

5) Diversify, Diversify, Diversify

You may have heard of the expression, “don’t put all your eggs in one basket.”
As you begin to build your portfolio, it is important to consider diversifying your investments.
Remember, when you only invest in one stock, or a few stocks, you open yourself up to more risk. Your overall investment portfolio is dependent on the performance of a single company, or a few single companies.
  • This is why index funds and ETFs are such an efficient way to create instant diversification. A single ETF can hold 50, 80, or even hundreds of individual stocks.
Even more aggressive investors recommend to never invest more than 20% of your money into any single investment. And more conservative investors would likely tell you that 20% of your money in any one stock is still far too risky.
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Again, this all depends on your risk tolerance, investing time frame, and personal investment goals. The key takeaway here is that no matter how great a particular company may seem, you don’t want to place all your money on that single stock.
Yes, it can be tempting to invest all your money in that one hot up-and-coming stock that’s price has increased over 200% in the past year. But at some point, it will decrease. And if you went all in at a market high, it could be a very painful lesson when it drops.

6) Stocks Are A Long Term Investment

Remember, in the short term, the market can fluctuate both up and down. But over the long term, the stock market has a history of increasing in value.
Most successful investors recommend that you should have a minimum time horizon of 3–5 years when investing in a stock. When you are investing in a shorter time horizon, you are not making an investment, but rather, a speculation.
Statistics have shown, that simple long term investing has been the most reliable strategy for millions and millions of successful investors to become millionaires. It is proven, sustainable, and easily manageable over time.
I am a long term investor. This is my investment approach. I do not have any educational courses on day trading or short term trading. That is not my area of expertise. But what I can tell you, is this: When I first began investing in the stock market, I was lured in by the “flashiness” and promise of day trading.
I made some quick profits at first. But as the weeks went on, I began to lose all of it. I soon realized that day trading was not going to be a sustainable strategy for me.
Investing is sustainable growth over the long term. Trading offers potential profits in the short term. But they are completely different strategies.
It takes a dedicated type of person to be a consistently profitable trader. Active stock trading requires daily research, analysis of charts, and most of all, a very high risk-tolerance.
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While it is not impossible to be a successful trader consistently, just know that it will take a lot of dedication and practice. However, if you are willing to put in the work to be a successful trader, then there is no better platform to practice on than Webull.
Millions of investors have become millionaires simply from long term investing in quality stocks and indexes over decades. Only a handful have become millionaires from day trading.
Remember, as we learned earlier, statistics show that 90% of day traders can’t outperform a simple S&P 500 index over the course of a few years. Imagine trying to outperform it over the course of decades and decades.

7) Invest, Don’t Gamble

Whether you are investing in individual stocks or index funds, you want to build the foundation of your portfolio around quality companies.
One of the best books on investing in the stock market is a book called The Intelligent Investor, by Benjamin Graham.
Graham, is widely known as the “father of value investing,” and the mentor to Warren Buffet. In his book, Graham goes into great detail about understanding the difference between an investment and a speculation. The following quote summarizes his distinction.
“An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”
— Benjamin Graham
According to Graham, if you feel the need to speculate with your money, you should not invest more than 5% of your overall portfolio into speculative investments.
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Graham suggests that when you invest in any company that is not turning a profit, you are not making an investment. Instead, you are making a bet, a speculation. You are betting on that company achieving profitability before they go bust.
When you make a speculative investment in a hot penny stock, or company that is not making a profit, you are taking a gamble. But if you must, do so with no more than 5% of your overall portfolio.

Final Thoughts

Always remember, investing is a long term process. In the short term, the stock market can fluctuate both up and down. It is over the long term where the stock market has a history of increasing in value.
No matter how much or how little you have to get started with, anyone can grow real wealth with time, consistency, and compound interest. Below are some core ideas to keep in mind:
  • Most new investors should simply start by investing in an index fund.
  • One of the most efficient ways to invest in index funds is through ETFs.
  • If you want to invest in individual stocks, consider investing in reliable and time-tested blue chip companies.
  • You can make money in the stock market from both asset appreciation and dividends.
  • Look for investing platforms with easy-to-use investing automation features, like these.
Erik Machuca
Erik Machuca
Erik Machuca is the founder of EverydayInvesting.com. He is passionate about helping everyday investors simplify investing with technology.

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