5 Tips First-Time Investors Need to Know
If you’ve been hesitant to dip your toe in the water when it comes to investing, now is the time to get over your fear and jump in. The longer you wait to invest, the less time your cash will have to grow.
“One of the best reasons for investing — and beginning early — is the power of compounding interest. This is wonderfully illustrated in the question and answer: would you rather be given $1 million now, or one penny today and the value of that penny doubles every day for a month? Most are surprised at the result,” Certified Financial Planner and founder of Get Financially Fit, Jason Reiman told The Cheat Sheet.
Here are five tips if you’re investing for the first time.
1. Learn before you leap
One of the best ways to overcome your fear of investing is to educate yourself. Reiman suggests taking advantage of the publications offered by the Securities and Exchange Commission. A good place to start is the SEC’s manual, Saving and Investing: A Roadmap to Your Financial Security Through Saving and Investing, which covers the basics of stocks and bonds, mutual funds, and opening a brokerage account. The SEC website also provides an extensive list of other sources for beginning investors.
It’s also important to make learning fun. Take time to play some of the investing games that are available online and through mobile apps. Keeping the process enjoyable can help you relax and make it a little easier to remember certain financial concepts. One option is The Stock Market Game, which gives players the opportunity to create a top-performing investment portfolio.
2. Focus on saving and paying down debt first
While investing your money is important, it’s also wise to make sure you have a healthy emergency savings fund. Most financial planners recommend having roughly 6 to 12 months of living expenses. It is best to get your savings established before you start investing. Without savings in place, you could be one emergency away from financial disaster. Furthermore, if you have any large debts that must be repaid soon, you should make sure you have allocated enough money to pay them off the in a timely manner. Take care of the basics first.
“The biggest mistake is to begin investing when you should be saving. Typically, if the funds will be needed (or expected to be used) in less than five years, one should not commit such funds to investment goals. That is, you shouldn’t seek to earn much of a return, if any, on money you will need in a rather short time frame,” said Reiman.
3. Assess your risk tolerance
Now is a good time to figure out what kind of investor you are. Decide whether you’re a conservative, moderate, or high-risk investor. You can determine your investment risk tolerance by taking an online questionnaire, such as the ones featured on the Vanguard and Ameriprise Financial websites. Some advisers say it’s best to avoid being overly conservative.
“Don’t invest too conservatively when it comes to retirement. [If you are a younger investor] time is on your side. As long as you are educating yourself about how the market works and that it will go up and down, make good use of the compounding factor and invest in more aggressive investments,” Certified Financial Planner and founder of Panoramic Financial Advice, Andrew McFadden, told The Cheat Sheet.
McFadden says that in order to make money on an investment it will be necessary to take on some degree of risk. This is because higher risk generally yields a higher return. “What most novice investors fail to acknowledge is with a high expected return, there also is the increased chance of a high amount of loss as well,” continued McFadden.
4. Consider joining an investment club
Becoming a member of an investment club will make it easier to research companies. It will also make the experience of learning about the world of investing a lot less overwhelming. In addition, you will have more leverage in the stock market, since investing with a group allows you to invest a larger sum of money. For example, instead of investing $100 a month as an individual investor, you could invest a total of $800 a month as a group. Get more information about starting or joining an investment club when you visit the Better Investing website.
5. Hire a professional
Depending on your goals, you may want to seek the advice of a certified financial planner or investment adviser. The National Association of Personal Financial Advisors or the Certified Financial Planner Board of Standards can steer you in the right direction. Before deciding on an adviser, make sure he or she is licensed and check to see if there have been any disciplinary actions. You can use BrokerCheck, a databased compiled by the Financial Industry Regulatory Authority, to research a potential financial adviser.