Where should a beginner investor put their money?

The most important aspect for beginners to consider in investing is a process and a journey.

Experience and achieving a greater appreciation of one’s risk tolerance, patience and emotional traits will assist you over the longer term in making more informed decisions.

No matter what stage of investing you are at, the first thing to assess is how much time and effort you want to commit, bearing in mind that markets are ever changing and evolving.

For a beginner, I always suggest a good starting point is investing indirectly through a one-size-fitsall financial product, such as an exchange traded fund (ETF).

An ETF offers exposure to a basket or group of companies (shares) that reflect an index, such as the S&P/ ASX 200 (the top 200 shares listed in Australia) or a theme such as quality shares, decarbonisation or cybersecurity.

An ETF is one listed share (entity) that you can buy and sell on the sharemarket that represents an underlying group of shares. The product removes the need for beginners to make the more challenging decisions of direct stock picking and different price levels.

But a new investor does not have to rely solely on ETF products; they can evolve as their experience grows with their savings and over time develop the confidence to select and invest directly in individual shares.

The key difference between an ETF and buying a share directly is you are concentrating your investment risk into one company when you invest directly in individual shares.

Where are we now in the cycle?

In the later part of 2022, selling across global equity markets, including Australia and the US, means investors are being offered much more attractive price entry levels.

The first lesson for beginners is that timing the markets is, for most people, very challenging.

Therefore, investors should look two to three years out with the risks of earnings recessions continuing to potentially weigh on share prices over the short term and bear market volatility (falling and rising share prices like a roller-coaster) causing a lot of fear.

Beginners should not try to focus on trading the markets – as many newcomers have discovered, it is not as easy as it may seem in bull markets, such as 2020-21.

Investing one’s savings for the medium to longer term will allow the companies to grow earnings and dividends, which – all things being equal – will generate not only capital appreciation in the share price, but also growth in dividend income.

My preferred stocks to buy are normally in the quality category, with a proven track record, strong cashflows, dividend growth and a robust balance sheet as well as a solid competitive advantage.

Quality companies exist across all sectors, from consumer discretionary (consumer products) to cyclicals (banks, resources, housing) and defensives (healthcare).