For those of you who may be new to investing, here are some investment tips to get you started thinking the right way about building your portfolio.  These simple pointers are general advice that all investors should know before starting out.  If you are just starting out, check out Stock Market 101 for additional information to help you get going.

Diversification

This is a key concept in stock market investing.  In fact, it’s probably one of the most important ideas of any kind of investment strategy.  It’s basically the idea of not putting all of your eggs in one basket.

You see finances and investing is all about probabilities and statistics.  Historical data has shown that the market overall has risen over time.  That means if you generally follow the market, your portfolio will go up in value.  In order to make sure this happens, you need to make sure you diversify your portfolio across a variety of assets.  Essentially, cast your net wide and you are bound to get some hits as well as some misses.

You will hear a term called asset allocation as you go along in your investing life.  This is the idea of picking different types of assets for your portfolio.  There are many different kinds of asset classes.  The most obvious one of course are stocks, also known as equities.  There are also bonds, Treasury Bills, commodities, futures, and the list goes on.  Each of these asset classes has it’s own set of risks and potential rewards.

The idea of diversification is that if you lose on some, other assets will gain enough to make up for it.  This is probably going to be one of the most important investing tips that you will ever get.  No matter what your investment strategy ends up being, diversification must be a key ingredient.  It doesn’t matter how much of a sure thing you think a certain stock or bond is, it is never guaranteed.  I can name countless of examples.  So diversify, make sure you spread your eggs around.

Understand the Business

This is also another important investment tip, to understand the business of the asset you are investing in.  Make sure you know how an asset works before you invest.

It’s like investing in any business.  If someone approached you to invest in their small business venture.  You would ask them questions, do your own research and generally make sure that you understand their business model before you invest your hard earned money into their company.

It should be no different in investing in stocks or any other asset.  You should understand how it works and be clear about it’s underlying business model.  Invest in what you know.  If you don’t know anything about the semiconductor industry, don’t invest in any companies that do that.  If you don’t know anything about the coffee business, don’t invest in Starbucks.  Should be simple enough but many people don’t do this.

Warren Buffett, the most famous investor in the world, always says that he only invests in businesses he understands.  It’s a simple concept that has made him very wealthy over the years.  And it’s something we should all heed as investors.

The same goes for other types of assets.  If you are investing in bonds, understand how credit ratings work or what junk bonds are and how they behave.  If you are investing in commodities, understand what factors drive the market.  If you invest in T-bills, understand how the interest rate set by the Federal Reserve affect it’s price.

Listen, you are putting your hard earned money into this, make sure you know what you are getting yourself into.  Make sure you go into each investment with your eyes open.  If you do this, even your bad investments will become great learning opportunities.  If you don’t go in understanding all the factors, you will not learn anything on the other side of a loss and it will be even greater loss.

For more money investment tips, continue to check the Finance World Website for general investment advice that most investors can draw from.  Remember, we don’t offer specific personalized advice to any particular person, groups of people or situations.  All investing decisions should be made with due diligence, research and the advice from a professional financial adviser.