Top 10 Tips for the New Investor
I nvestments are a great way to generate wealth and ensure future economic security, but starting can be challenging. Understanding stock market terms, strategies, and risk abatement can be intimidating for even the most experienced investor. We have the experience and knowledge you need to jump into the world of investing without losing sleep or all of your savings. Here are our top 10 tips for the new investor.
- Start investing as soon as possible.
- Start small and growing over time.
- Clearly define your investment goals.
- Understand your risk tolerance.
- Educate yourself with books and other reliable sources.
- Put your money in companies you understand.
- Diversify your investment portfolio
- Keep emotion out of decision-making.
- Reinvest your dividends.
- Pay attention to fees.
1. Start as Soon as Possible
No matter what your financial situation, you can begin investing and preparing for your future. The value of your investment portfolio depends on three factors:
- The amount of capital you invest.
- The net earnings on your capital.
- How long you keep your investment.
The longer your money stays invested, the more time it has to grow. Also, when you are investing over a long period, you can start with small amounts of money. Compounding interest (basically, interest earned on interest from your initial investment) and time are your friends. Begin investing as soon as possible to reap the greatest benefit.
2. Start Small and Simple
Before you dive into the stock market on your own, invest in your employer’s 401(k) plan, which puts investing on autopilot. With a 401(k), you can choose how much you want to invest, and it is automatically taken out of every paycheck and invested in your portfolio. Your 401(k) investments are made pre-tax, so participating in such a plan also lowers your tax bill. Most employers offer a company match for your 401(k) contributions. Aim to invest enough to get the full benefit of your company’s 401(k) match.
Many 401(k) plans don’t require you to choose individual stocks, just ‘target date’ mutual funds. With a target-date fund, you choose the fund with the maturation date closest to your retirement. Target-date funds automatically adjust investments (usually moving from higher risk to lower risk) over time to provide you with the most benefit at maturation.
3. Know Your Investment Goals
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Before you start investing, you need to know why you want to invest. Determine if your goals are:
- Short-term: These might include a down payment on a home. Short-term investment goals are best accomplished by investing in a mix of stocks and bonds. However, if you want a return on your investment in less than five years, the stock market may not be your best option.
- Long-term: These goals may include college or retirement savings. Investment goals that are 10 years or more in the future can be accomplished primarily by investing in stocks.
Knowing your goals and time frame can help you figure out how much money to invest and what your investment return needs to be to meet those goals.
4. Know Your Risk Tolerance
Risk tolerance boils down to how much variability you are willing to deal with when it comes to your investments. Everyone’s risk tolerance is different. Your ability to deal with risk can be a result of your:
- Family background: Did your parents invest? Was money an issue in your home?
- Age: Younger investors tend to have a higher risk tolerance than older investors.
- Income: If you have a large income and more money to invest, you can take more risks than someone with less money to lose.
- Education: Your overall understanding of money and investments affects your risk tolerance.
Many people make the mistake of selling off stock when the market drops. By selling off the stock in a low period, you miss the recovery of your investment. Keep in mind that while the market fluctuates over time, it always recovers. Focus on your long-term goals and be patient.
Understanding your level of risk tolerance will help you make more rational decisions rather than emotionally reacting to changes in the market.
5. Educate Yourself
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- Asset: This refers to stocks, bonds, and other investments that have the potential to earn money over time.
- Asset allocation: This is how you divide up the holdings in your portfolio.
- Bear market: Investors use this term to refer to a falling market.
- Bull market: Investors call a rising market a ‘bull market.’
- Bonds: These are a loan you make to a company or the government. In return, you get your money back plus interest after a set period.
- Dividend: This refers to a portion of company earnings paid out to shareholders
- IPO: Initial price offering (IPO) is the initial stock sale when a private company becomes a publicly-traded company.
- Stocks: These provide partial ownership in a company. when the company does well, the value of your stock increases and vice versa
- Mutual funds: These refer to a pool of money from many investors used to buy investments. These have a portfolio manager who chooses which investments are part of the mutual fund. Rather than owning individual stocks, you just own a portion of the mutual fund made up of a variety of stocks and other investments.
- Price-to-earnings ratio: Also known as the ‘P/E ratio,’ this refers to how much you paid for each dollar the company earned. The higher the P/E ratio, the more confidence investors in future earnings.
- Prospectus: This is a document required by the Securities Exchange Commission for any stock, bond, or mutual fund. This single document contains all the information you need to decide on an investment, including information on the company’s history, management, previous performance, and growth potential.
6. If You Don’t Understand It, Don’t Invest
Put your money into companies and industries you understand well. Beware of current fads and hot, new companies that you don’t know much about, as you may end up losing money instead of making it. Before you invest in a company, make sure you understand how the company makes money and what factors affect its profitability.
Feel free to branch out a bit after you have some experience investing, but sticking to what you know in the beginning will decrease risk.
7. Diversify Your Investment Portfolio
The expression ‘Don’t keep your eggs in one basket’ applies to many strategies, including investment. Investing in one industry or company can be catastrophic during a market downturn. An investment portfolio that has a healthy mix of stocks, bonds, and other commodities is better insulated against market volatility and can better remain afloat even when the market is experiencing a downturn. It’s also wise to spread your investments across a variety of industries, ensuring that a drop in one area doesn’t knock out all of your investment money.
As your money grows, make sure that you periodically check your portfolio. Investments that are right for you today might not be in 10 years. When you are more comfortable investing, you can also use a portion of your money to invest in fine art, real estate, and other niche interests.
8. Leave Your Emotions at the Door
When you begin investing in the stock market, understand that you are making a long-term investment. The stock market is volatile in the short-term but usually profitable in the long-term. A successful investor is one that can stay composed and make logical decisions during stressful times. Selling stocks at the first scary downturn can end up costing you money in the long run. You must be logical about your choice of investments. Don’t allow a flashy CEO or visionary idea to underestimate the risk associated with an investment.
On the other hand, sentimentality about an investment (such as stock shares gifted from a family member) should not keep you from selling a poor-performing stock. Long-term investment should be unemotional to be the most profitable.
As a new investor, always reinvest any capital gains or dividends that you receive to help your investment to grow and generate wealth faster. Dividend reinvestments don’t usually require transaction fees, saving you money with every trade. Because it creates regular, steady stock purchases, dividend reinvestment allows you to automatically increase your investment portfolio without much effort on your part.
Furthermore, with dividend reinvestments, you can buy fractional shares that you would not otherwise be able to afford. Over time, the reinvestment of your dividends will allow you to accrue high-value stock bought a fraction at a time.
10. Watch out for fees
F ees can take a large chunk out of your market returns over the long term. For example, investing in a mutual fund with a 3% fee that returns 8% in a year will only earn you a net of 5%. If you stretch fees out over years of compound interest, you will have lost thousands of dollars that could have helped you reach your goals sooner. Always aim to keep investment fees as low as possible, no higher than 1%.
Everyone has the power to better their situation by investing. With our 10 tips, you can start investing today to ensure a wealthier, more secure tomorrow.