Commercial message: New Year's resolutions are traditionally associated with January. In addition to typical diets and sports, many people also focus more on financial literacy at the beginning of the year. This year at XTB, this trend was further multiplied by the campaign Free promotions for a good start. However, as is often the case with resolutions, in many cases they are quickly abandoned. So in this article we will look at three important aspects that a novice investor should think about.
- Passive or active access
How you approach investing is probably the most important decision. Passive investing has the advantage that one does not have to devote a lot of time to it. In most cases, the investor chooses one or more ETFs, or shares of large reliable companies, and then invests in them regularly on a certain time basis (monthly, quarterly, etc.). This method is considered to be less risky, on the other hand, the potential profits also correspond to this assumption, which within the framework of ETFs mostly correspond to the average of the given market.
Active investors, on the other hand, try to beat this average primarily by building a portfolio of individual stocks. Which means higher volatility and the need to focus more on what is happening in the markets, however, the potential profit is of course much higher for individual stocks than for ETFs. So if you decide to go the active route, XTB analysts have released Market outlook for 2023, where all important trends for this year are mentioned.
But it is certainly not necessary to decide only for a passive or only for an active approach. A large number of investors choose a hybrid system, where part consists of ETFs and part of individual stocks. The time horizon also plays a big role in decision-making. If an investor thinks in terms of tens of years, he can usually afford more passivity than a person with a five-year horizon.
- Growth or dividend stocks
If we decide to choose stocks, here too we have two main groups. Dividend stocks are already large companies that pay part of their profits to shareholders in the form of dividends. In general, they are characterized by lower price volatility and their main positive is the passive income derived from them.
Growth stocks in most cases do not pay dividends, or their value is quite negligible. These companies reinvest their profits back into the company and their shares are characterized by large price movements, when in a period of months these companies can easily grow by tens to hundreds of percent under favorable conditions. However, this trend also works in the opposite direction and such companies are now often trading around 80% below their maximy from last year.
- Diversification or specialization
The topic of the afternoon is the question of diversification or specialization. Many newcomers tend to specialize in their favorite stock. A typical example of such favoritism in recent years was Tesla, which brought its investors fabulous wealth during a period of growth, but in recent months has fallen from its maxima fell by more than 70%. It depends on each investor what they decide to do, but it is important to remember that although allocating capital to just one great product or sector can be highly profitable, it can also mean high losses. Of course, Tesla was not the only one to suffer in the current situation, but even in a bear market like the one we are in now, proper diversification can at least help to miniloss mitigation and risk distribution.
Of course, the topic of investments and stock portfolio is much more complex and it is not possible to discuss everything in this short article. But if you are interested in finding out more about this topic, stock expert Tomáš Vranka has prepared the eight-part course Creation of a stock portfolio, which is available for free here.
