5 Tips for First-Time Investors

So, you’ve decided to take the plunge and invest in the stock market. Congratulations! Investing in the stock market is one of the best ways to establish financial security. By investing, your goal is to turn assets into wealth over the long-run and have money for future expenses, such as retirement or your children’s college education.

Since you’re new to investing, how do you know what choices to make that will best benefit your long-term goals? Investment advisor Mark Matson reviews important tips for first-time investors.

1. Know Your Long-Term Goals

Why are you investing in the stock market? Are you saving for your retirement? Are you building an estate to leave to your beneficiaries? Before you invest, establish your reasons for investing in the stock market. This will help you determine when you will need the funds. Then, you can calculate how much you should invest to reach your financial goal.

2. Recognize Your Risk Tolerance

Risk tolerance is an important concept in investing and is a fundamental issue to consider when planning your investment strategy. All investments involve some degree of risk. Risk tolerance refers to how much risk you’re willing to take in order to achieve your goals. Your individual risk tolerance is heavily dependent upon when you will need your funds. If you have a long-term financial goal, you can invest in higher-risk assets. If you have short-term financial goals or are nearing retirement, lower-risk investments are appropriate.

3. Determine How Much You Want to Invest

While there is no correct amount as to how much you should invest, it does depend on how much money you want to save and when you need it. If you’re just starting out, you may have to start small, and that’s OK. You can always increase the amount of money you invest over time. To help you figure out how much to invest, it’s ideal to speak to a financial advisor.

4. Determine What You Want to Invest In

You have options in regards to what to invest in. You can invest in almost anything, including stocks, fixed income, mutual funds, even residential or commercial properties. When choosing what to invest it, it’s a matter of the value of the investments and how they will help your money grow. A financial advisor can help you determine which types of investments are appropriate to invest in.

5. Diversify Your Investments

Investment professionals like Mark Matson heavily encourage diversification. When you diversify your investments, you spread your investments around. If you put all of your cash into one company and the company falls, you will likely lose all of your money. By investing in different companies in different industries, and sometimes different countries, a single bad event should not be catastrophic to your overall portfolio.

Preparing For The Next Crash

Let’s face it, the stock market unpredictable and ever since the market had a downfall during the 2008-2009 recession, some investors backed out and started playing the waiting game. Waiting for the perfect time to get back into the market. But that time will never come, because it’s impossible to predict when it will do well. While the past five years have seen some positive market returns, could other investors be over-confident in the market?

Panic can play a factor when the market is doing well. Some investors fear a pullback when the market is at an all-time high. However, this only applies to short-term investors and short-term investing really doesn’t do much good. Long term investments can give you investing peace-of-mind no matter what the market does because you aren’t looking for the next investment that might give you a 20% return— you are looking at potential investment returns for the next 5, 10, 15 or 20 years down the road.

Take for instance a $100,000 investment in a well-diversified portfolio of large cap stocks initially made in 1984. If you examine historical stock market data as captured by the S&P 500, an index that measures the market performance of large cap stocks, from then to now, a well-diversified large-cap stock portfolio held from 1984 to now could potentially be worth $2.5 million. It’s similar to a roller coaster with ups and downs, but long term investing provides the greatest likelihood of safety.

Waiting for certainty in the market won’t get you anywhere. Another market crash could happen in the future, which is why you should prepare yourself with long term, diversified investments that offer the potential to survive rough times. The problem isn’t the crash, the problem is the behavior of investors when the crash actually happens. Historically speaking, investors’ first instinct is to sell, which is a panic reaction that doesn’t offer the chance for good results. The general rule of thumb is to buy equities in a down market because they may bounce back with your long term goals. The result can be a massive transfer of wealth from people who panic to people who don’t panic.

Want to learn more about what Mark Matson has to say about the next crash? Watch this video!

*Past performance is not indicative of future results.