To many beginners, dipping a toe into the investment world can seem overwhelming. Between all of the unfamiliar terms and conflicting information from various financial pundits, it can be hard to know how to take the first steps.
The good news is that investing is now more accessible to beginners than ever before. Numerous well-regarded financial institutions now offer $0 commissions for most stock trades, along with a host of free or low-cost financial education and assistance. However, before you get started, there are some basic fundamental principles that you should incorporate into your financial strategy.
Last updated: March 23, 2021
Leave Your Emotions at the Door
One very important thing to note before you even open an account is that investing can be an emotional experience. While you might feel euphoric during strong market rallies, bear markets can be emotionally devastating. Even corrections, defined as drops of 10% in the market averages, can test your nerve. But to succeed, you’ve got to check your emotions at the door. One of the main reasons investors underperform the market is that they tend to sell at market lows when they are most nervous and buy at market highs when they are feeling most confident. Of course, this is the opposite of what you should be doing as an investor. The best way to avoid this common pitfall is to work hard at keeping your emotions out of your investing.
Build an Emegency Fund First
Before you start tucking away money for long-term goals, consider building an emergency fund first. If you have no emergency savings at all, you may be forced to dip into your investments to fund unexpected expenses. This can trigger additional fees or penalties, in addition to damaging your long-term investment plan. With an emergency fund, however, even when the unexpected happens, you can continue adding to your investments. Common wisdom in this area is to set aside three to six months of living expenses, but if you can start with just $1,000, you can cover most non-catastrophic emergency expenses, like a blown radiator or a busted kitchen pipe.
Define Your Investment Goals
Once you’re ready to begin investing, you’ll need to build a road map so that you’re sure you’re going in the right direction. Financial advisors refer to this road map as your investment objectives, which are used to determine what you want to get out of your money. For example, some investors want maximum growth, while others want a monthly check. Defining what exactly you want from your investments is the first step toward choosing options that are suitable for you. It’s also very useful to have objectives written down so that you don’t stray from them during times of market turmoil.
Determine Your Risk Tolerance
Risk tolerance goes hand in hand with investment objectives when setting up a portfolio. Your risk tolerance is an assessment of how well you can handle the ups and downs of your portfolio. For some conservative investors, even the slightest drops in price are anxiety-inducing; for others, even sell-offs of 20% are no big deal and are viewed instead as opportunities to invest more. There is no right or wrong when it comes to risk tolerance. It’s merely an objective assessment of your own personal tolerance for risk that can help guide you to investments that are appropriate for you.
Practice With an Investment Simulator
In addition to $0 commission trading and so many other perks, many online brokers now allow you to practice investing with virtual money before you take the plunge with your own money. You can use these simulators to try out investment strategies or just see what it feels like to watch your investments go up and down every day. This type of experience can be invaluable for a beginning investor. Just remember that even with simulated investing, you’ll have to remove your emotions from the equation. If you manage to do well in your simulated investing, don’t be upset that you weren’t using real money — instead, take it as a good sign that you are learning how to be a successful investor.
Contribute To Your Retirement Plan
One of your first investment moves should be to contribute to your retirement plan. If your company offers a 401(k) plan, not only will you benefit from tax-deductible contributions, but your earnings will also grow tax-deferred until you withdraw them in retirement. Additionally, most employers also make their own contributions to employee accounts via matching programs. If you don’t have access to a 401(k) plan, you can still take advantage of most of these benefits — with the exception of the employer match — via an Individual Retirement Account.
Find a Low-Cost Broker
There are so many options for $0 commission brokers these days that in many cases there’s no need to look anywhere else. Big-name firms like Fidelity, Schwab and TD Ameritrade are just some of the reputable firms offering this type of pricing structure, so it’s not as if you need to invest with a fly-by-night firm to find $0 commissions. As your needs expand, you may want to consider working with a full-service financial professional, but if you’re just starting out, keep things simple — and free.
When is the best time to start investing? If you’ve got a long-term perspective, the answer is always now. The sooner you can start investing, the sooner you’ll be on the path to meeting your financial goals. If markets go down after you begin — which it feels like they always do — it doesn’t matter if you’re a long-term investor. Just keep adding to your portfolio on a regular basis, and you’ll be buying additional shares when the market is low. An old Wall Street adage says that it’s “time in the market, not timing the market,” which translates to a successful investment strategy.
Automate Your Contributions
Consistency is one of the keys to successful investing, and there’s no better way to remain consistent than to automate your investment contributions. By investing regularly, you can help smooth out the ups and downs of the markets, as you’ll be automatically investing when markets go down. Automating your investment contributions also takes human nature out of the equation, which is a good thing. Human nature often scares us from investing when the market is going down, and it also opens up the opportunity to forget to make regular contributions. By putting your contributions on auto-pilot, both of these scenarios are avoided, which is a long-term plus for your portfolio.
Don't Chase Hot Stocks
If you ever watch the financial news, you can’t avoid hearing about investors that double their money overnight, or stocks that jump 200% in a week. In early 2021, GameStop was the “flavor of the month,” with the stock skyrocketing by triple-digit percentages, including 400% in a single week. As of March 18, 2021, the stock sat at $201.75 per share. That’s a remarkable gain over the stock’s 52-week low of $2.57, but it’s also more than 50% below its 52-week high of $483. If you chase a hot stock like GameStop, you could lose a huge percentage of your investment in a hurry. While you can speculate with a small portion of your portfolio, keep the rest of your portfolio on track by constantly referring back to your investment objectives and risk tolerance.
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