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Alright, let me make a disclaimer first. This is article is merely my opinion based on all the personal finance and investing books that I’ve read. I’m no financial planner and I’m not an investment professional so take the advice here with a grain of salt. I’m likely just like you, except I studied a few good investing books here and there. Now, if you’ve ALSO read and researched some good books, then good. That means you probably won’t need this info. If you haven’t then just read this article for some basic information. You WILL still need to do your own research to find the investing style that works for you.
What’s the Best Investment for Beginners?
By beginner’s investment, I mean something that DOESN’T require a lot of research, and it should be something that just about anyone can invest in.
Before we begin let’s list the usual investments: Stocks, bonds, mutual funds, real estate, gold and other precious metals, commodities, antiques, and more. Now I can’t talk about gold and precious metals, commodities, antiques or others in that line as I didn’t want to study them for now. I wanted to fully concentrate on the first four that I mentioned:
- Stocks. These are also known as equities and they symbolize partial ownership of companies. This is usually one of the best investments… IF you know what you’re doing. If you’re just starting and you’ve never studied how to choose good companies and you also can’t stay calm when there’s high volatility (wild price changes), then investing in individual companies might not be the best for you.
- Bonds are loans you give to governments/companies. You lend them money and after a while they pay it back with interest. This is usually considered as a “safe” investment because it’s not as volatile as stocks, but several investors/authors like Lowell Miller of “The Single Best Investment: Creating Wealth with Dividend Growth” and Kenneth L. Fisher and Lara Hoffmans of “The Ten Roads to Riches: The Ways the Wealthy Got There (And How You Can Too!)” point out that the returns you get from bonds are far too low to be worth it.
- Mutual funds are a type of investment where many people pool their money together and have a professional investment manager invest the money for them. While you get the benefits of diversification and professional management from mutual funds, their main drawback is that their returns are often inconsistent. Money managers are humans too and they make mistakes and wrong decisions. Another drawback is that whether you profit from investing with them or you suffer horrible losses, the managers/mutual fund companies STILL get paid. Those “professional fees” take a bigger and bigger bite off your investment returns over time.
- Real estate is simply land ownership. This is an excellent investment if you know how to find good properties and “flip” (buy and sell) them, or build rental properties that you can use to earn passive income (similar to what Robert Kiyosaki first did). The reason why I think this might not be good for beginners is because it almost always require a LOT of money to start. While there are ways to trade in properties without money down (there are books about that), very often the huge amount of money needed to invest in real estate will become a barrier for most people.
So what IS the best investment for beginners?
Answer: A mutual fund… but not just ANY mutual fund. It’s a specific type of fund called an “index fund.”
What is that? It’s a mutual fund where your money is invested in a portfolio intended to track or follow a market index (Read more on Investopedia’s page about index funds here). The downside of index funds is that they usually won’t post mega-high returns like “winning” mutual funds or individual stocks. The upside, however, is that they won’t post mega-high LOSSES either, and markets (tracked by index funds) usually post good positive returns over time. Aside from that, index funds are usually low cost (they only need a computer-based algorithm, no need for constant management from a “professional”) so less of your cash is lost to the manager’s fees. Thanks to that, your investment is allowed to grow more. If you want to learn more about why index funds are great investments, you can check out “The Boglehead’s Guide to Investing”.
That is just my recommendation though. You really NEED to do your own research and find an investment vehicle or investment method that you like. Just make sure to study it well and to watch out for possible scams.
If you want to learn more about investing by the way, then just read our previous articles here:
- The Biggest Mistake you can make Before Investing
- What are Stocks and Why should you Invest in them?
- 10 Reasons to start Investing in Dividend Stocks
- Choosing the Best Stocks: 10 Investing Terms you HAVE to Learn
- How to Invest in Stocks: 10 Things Beginners NEED to Know
- Stock Investing Basics: Benjamin Graham’s 4 Rules on Investing in Common Stock