By: Maria Williams
For first-time investors, trying to figure out how to enter the stock market can be intimidating. Unfortunately, it can also be all too easy to make poor investment decisions when you don’t understand the market or have a well-defined investment strategy.
As Ramsey Brock, president of Brock Asset Management explains, while there is no method that can absolutely guarantee positive returns from your investments, there are some simple tried and true practices that generally provide a solid foundation for first-time investors to build upon.
Set Investment Goals
As with business or your personal life, setting goals is essential for starting your investment portfolio. Ideally, these goals should be determined before investing begins.
As Brock explains, “Having well-defined goals for your investment portfolio is a crucial first step for developing a strategy that works for your specific needs. For example, you could set a goal to have $2 million invested for retirement by the year 2050. This is much more beneficial than simply saying you want to invest toward retirement, because those benchmarks then give you clear guidelines for what you’ll need to do to reach that goal.”
A first-time investor’s goals will have a direct influence on the amount they need to invest, when they need to add to their investment portfolio and even the types of stocks they invest in. By starting with the end in mind, first-time investors can build a roadmap that is aligned with their goals.
Determine Your Risk Tolerance
One important element that is often linked with an investor’s goals is determining their risk tolerance — or the amount of risk they are comfortable with for their financial investments.
Some companies represent a riskier investment with a higher likelihood of financial loss, but also greater potential for higher returns. Other positions have more moderate levels of risk. While extremely high returns are less likely, there is also less risk of losing the value of one’s investment.
Risk tolerance is usually determined based on the investor’s personal preferences (including how much they feel they can afford to lose), as well as how much time they have until their time-based investment goal. Hence, managed target date funds typically have a higher risk tolerance when they are first opened, and gradually adopt more conservative portfolio positions as the target date draws nearer.
Avoid Timing the Market
“Trying to time the market is never a good plan, especially for first-time investors,” Brock says.
“It’s hard to time the market even from an objective standpoint, and all too often, investors tend to make emotionally charged decisions when trying to find the ‘perfect’ time to buy or sell. This usually results in lower returns than if they simply held onto a position for an extended period of time, and can further hurt them financially by incurring extra transaction fees.”
Rather than trying to time the market, Brock recommends that first-time investors focus on simply getting into the market as early as possible so they can give their investments more time to grow.
Rather than trying to time the market, Brock advises that first-time investors set up automatic transactions for their investment portfolio. Making consistent monthly investments without worrying about market timing can simplify the process and set investors up for steady portfolio growth.
Invest for the Long Term
As part of avoiding the temptation to time the market, Brock recommends that first-time investors look at their portfolio as a long-term investment, rather than try to maximize short-term gains.
“Long-term investments harness the power of compound interest, in which you generate interest on your returns as you spend more time in the market,” he explains. “The earlier you invest, the more time you give your money to grow with compound interest. This can be especially valuable when saving for retirement. Starting early so you can spend 30 or even 40 years in the market will result in portfolio growth that exponentially outpaces what you would achieve if you only spent 10 years in the market.”
Diversify to Reduce Risk
Finally, to keep investment goals on track, Brock recommends that first-time investors look for simple ways to diversify their portfolios. “Picking and choosing from a variety of stocks can be time-consuming and overwhelming, especially if you don’t fully understand the market principles underlying the companies you’re considering investing in,” he says.
“However, one easy way to diversify is to invest in mutual funds and index funds. For example, you could invest in an index fund that tracks the S&P 500. By tracking the index as a whole, fluctuations that impact a single company or market sector won’t have an outsized impact on your portfolio’s value.”
Such investments also have a history of generating reliable returns. According to Investopedia, the S&P 500 has delivered an average annualized return of 10.26% since 1957.
Invest for Success
As these principles reveal, beginning an investment portfolio doesn’t have to be an overly complicated process. By following these best practices, you can start investing with a strategy that is tailored to your needs and experience level.
By seeking professional guidance as your portfolio grows and as your investing becomes more complex, you can keep your finances on track and position yourself for steady investment growth.
Disclaimer: This content is for informational purposes only and is not intended as financial advice, nor does it replace professional financial advice, investment advice, or any other type of advice. You should seek the advice of a qualified financial advisor or other professional before making any financial decisions.
Published by: Nelly Chavez