Introduction
When you are just a beginner in the stock market and want to invest, you should remember these two principles for investing given by Warren Buffett: the first one is never lose your money, and the second one is never forget rule number 1.
This may seem very simple, but it has a profound meaning because, in the short term, the stock market is very volatile—meaning it moves upward and downward very frequently—while, in the long run, it’s like a weighing machine, signifying that stock prices reflect the fundamentals of the company. If you focus on the short term, you’re likely to forget these principles.
People often start their journey inspired by investors’ success stories, initially thinking only about earning profit. However, when the market declines and their investments show red signals, they tend to become traders. They start selling their shares at a loss, forgetting how and why they started investing, and set a new goal: “First, I’m going to cover my loss, and then I’m going to quit the stock market forever.”
Remember, regardless of how much the stock market goes up or down, you will only earn a profit or book a loss when you sell your shares.
Where to invest as a beginner:
I recall that once a person asked me the same question about which stock I would buy in the stock market. Before I could answer, one of my friends said, “in an index like Nifty.” So, I immediately asked, “How to invest in an index,” and he was blank. So, his answer is correct. Beginners should begin their journey by investing in indexes.
Investing for beginners
There are two ways to invest in indexes, and both of them are called index funds, i.e., Mutual funds and Exchange-traded funds (ETFs)
A mutual fund is an investment vehicle that collects money from investors and invests it in stocks, bonds, and other securities based on the risk and return expectations of the investors. These funds are actively managed by fund managers who make investment decisions based on the risk and return objectives of the investors.
An Exchange-Traded Funds (ETFs) are investment funds that are traded on stock exchanges, similar to individual stocks. ETFs pool together assets such as stocks, bonds, or other securities and offer investors a way to buy shares in the entire portfolio. They are designed to track the performance of a specific index, commodity, bond, or a basket of assets.
What is the work of Index funds, and what should be your expectations?
Index funds are those funds that hold all (or a representative sample) of the stocks in a specific index like Sensex or Nifty, with the aim of matching the performance of the index as closely as possible.
Regarding expectations, I advise you to expect returns between 10-15% at the beginning because if we track the compounded annual growth rate of Sensex from 1983 to 2023, it will give us a CAGR of 15%. In simple terms, your investment will give you a 15% compounded return per year.
You might say, “15% is very low; there are almost 250 trading days in a year, and if I am able to earn 5% per month, then I am going to earn almost 60% in a year.” In that case, remember that Warren Buffett was only able to generate a 21% CAGR per year, and if he couldn’t do more, why are you expecting much?
