Essential Reading for Investment Beginners: Financial Basics You Need to Know

If you're just starting to learn about investing, the complexity of the market and the variety of financial instruments can often feel overwhelming: stock price fluctuations, mutual fund buys, bond yields... every investment option seems to come with its own “rules” and terminology. However, investing isn't as complicated as it might seem. By mastering some basic knowledge and steps, you'll be able to establish a foothold in this field and begin building wealth.

This article will guide you through the basics of investing, common investment tools, and how to actually get started. By the end, you'll be ready to take the first step in your investment journey.

1.What is Investment?

At its core, investment is about "making your money work for you." Simply put, investing is purchasing a financial instrument (like stocks, bonds, or mutual funds) and expecting it to appreciate over time, generating returns in the process.

You can think of investment as putting your money into a "wealth seed bag," where it will grow over time, eventually bearing more fruit. Typically, returns from investments come in two forms: capital appreciation (the increase in the price of an asset) and income (such as dividends or interest payments).

2.Three Basic Investment Types

There are three main investment tools you’ll encounter most frequently: stocks, bonds, and mutual funds. Let’s break them down and see what makes them tick:

• Stocks: Buying stocks is like becoming a shareholder in a company. When the company does well, you'll share in its profits (dividends), and if the company’s stock price rises, you can sell your shares for a profit. Stocks offer great potential for return, but they also come with higher volatility. Historically, the S&P 500 (a stock market index representing large companies in the U.S.) has provided an average annual return of about 7-10% over the past 20 years.

• Bonds: A bond is essentially a loan you make to a government or corporation. In return, they promise to pay you regular interest and return your principal at the bond’s maturity date. Bonds are generally considered lower risk and provide more stable returns, which makes them suitable for conservative investors. For example, U.S. Treasury bonds have historically yielded between 2% and 4% annually over the past few decades.

• Mutual Funds: Mutual funds pool money from multiple investors and are managed by a professional fund manager. The manager then invests that money in a range of assets like stocks, bonds, or other securities. You don’t have to pick individual stocks or bonds yourself, which helps you spread risk. Mutual funds come in many varieties: stock funds, bond funds, balanced funds, etc. Long-term returns for stock mutual funds tend to average between 6% and 8% per year.

3. Risk and Return in Investment: Balance is Key

Every investment involves some level of risk. The general rule is that higher returns are associated with higher risk, and lower returns with lower risk.

• High Risk, High Return: Investments in stocks, real estate, etc., tend to have larger price fluctuations, making them suitable for investors who can handle higher risk. Historically, the average annual return of the U.S. stock market has been around 9.8% over the last 50 years.

• Low Risk, Steady Return: Investments like bonds or savings accounts are safer, though their returns are typically lower. For example, 10-year U.S. Treasury bonds have historically yielded 2%-3% per year.

For beginners, it's recommended to start with lower-risk investments and gradually increase your exposure to higher-risk assets as you gain experience.

4.Diversification: Don’t Put All Your Eggs in One Basket

The principle of diversification in investing means spreading your investments across different asset types to reduce risk. If one type of asset performs poorly, other assets might perform better, thus balancing out your overall portfolio.

Example: Suppose you have $100,000 to invest, and you decide to split it as follows:

•40% ($40,000) in stocks

•40% ($40,000) in bonds

•20% ($20,000) in mutual funds

If the stock market drops, the bonds and mutual funds could help stabilize your returns, reducing the impact of the stock market's decline.

5.Investment Time Horizon: Long-Term is Key

Investing is not about quick gains but about growing wealth over time. In the short term, markets can be volatile, leading to sudden "buy high, sell low" behavior. However, long-term investments allow you to ride out these fluctuations and generally result in more stable returns.

Example: Say you buy a quality stock for $100 per share. Over the short term, the price might drop to $80, causing you to feel tempted to sell. However, if you hold the stock for the long term, the price could rise to $200 over 10 years, providing substantial profits.

Historically, the S&P 500 has delivered an average annual return of about 9.8% from 1980 to 2020. If you had invested $10,000 in 1980, it would have grown to roughly $72,000 by 2020.

6.How to Get Started with Investing? Practical Steps

Ready to start investing? Here are some concrete steps to help you get started:

1.Learn the Basics: First, get a solid understanding of financial instruments like stocks, bonds, and mutual funds. You can learn through online courses, books, or by consulting professionals.

2.Set Clear Investment Goals: Determine your objectives. Are you investing for short-term income, or are you building wealth for retirement? Knowing your goal will help you choose the right investment tools.

3.Assess Your Risk Tolerance: Understand how much risk you're comfortable with. A simple way to gauge this is to ask yourself, "If my investment lost 20%, could I still handle it?" If so, you might be suited for higher-risk investments; if not, lower-risk assets may be a better fit.

4.Start Small: Begin with a small amount of money to minimize risks while you're learning the ropes. Choose a diversified mix of low-risk assets to start.

5.Diversify: Spread your investments across various types of assets to reduce risk. A common strategy might be: 40% in stocks, 40% in bonds, and 20% in cash or short-term mutual funds.

6.Review Regularly: Investing is a long-term endeavor, so make sure to review your portfolio periodically. Ensure your investments are still aligned with your financial goals and adjust as necessary.

7.Successful Investment Case Studies

Case Study 1: Small Monthly Investment for Big Returns Ms. Li, after graduating from university, decided to invest 10% of her monthly salary (around $2,000) into an index fund. She chose a fund with an average annual return of 8%. After 10 years, her monthly $2,000 investments had grown to about $300,000, helping her save for a future home.

Case Study 2: The Power of Diversification Mr. Zhang, a conservative investor, allocated his $500,000 investment as follows: 40% in bonds, 40% in stable mutual funds, and 20% in blue-chip stocks. Even though the stock market was volatile, his bond and mutual fund investments grew steadily, and after 10 years, his portfolio had reached $800,000.

8.Conclusion

Investing is an effective way to grow wealth, but it requires patience, discipline, and continuous learning. By choosing the right investment tools, setting clear goals, and managing risks carefully, you can steadily build your wealth over time.

Remember, investment isn’t about short-term wins, but about steadily building wealth over the long run. We hope this article has laid a solid foundation for you, helping you take your first successful steps in the world of investing!