Advice for those investing in the stock market for the first time
Investing on your own can be a daunting and exciting prospect. Every individual has the ability to control their finances and invest on his or her own. As you begin your investment journey, you’ll find that the more you learn, the more questions you will have. This is normal and it’s a process that every first time investor goes through. The good news is that investing successfully doesn’t take years. This expert advice will help you get your investing started on the right foot, and can make all the difference when you’re looking to invest for yourself.
- your homework
- take baby steps
- understand your broker’s platform
- have an overall plan and time frame
- go all in
- listen to one source
- have unreasonable expectations
- let your emotions rule you
Do your homework
The number one mistake first-time investors make is jumping into the market without understanding the basics of how it works. Gone are the times when all that investors had to worry about was a company’s earnings and financial performance. In todays’ market, prices are more and more a reflection of people’s beliefs and opinions rather than the actual value or performance of a company. Subscribing to a newsletter or watching a webinar on a Sunday afternoon isn’t a recipe for success. You are going to have to be willing to roll up your sleeves and do some work to be successful.
Do take baby steps
Slow and steady wins the race. When you’re just starting out investing, the best formula for success always includes patience. The prospect of making money often lures people into investing too much and/or too soon before they have all the necessary information to make a good decision. Taking it slow will ensure that you have all the information you need to make good investment decisions when you’re first starting out.
Do understand your broker’s platform
There are literally hundreds of brokerage firms out there and each has its own unique investing and trading platforms. Before you ever put a single penny into the market, it is imperative that you understand how your broker’s platform works—especially how to buy and sell. You don’t need a platform with lots of “extras” to be successful. You just need to know how to use what you’ve got. I can’t count how many times I’ve spoken with people who have lost money, simply because they accidentally bought stocks when they meant to sell them.
Paper trading is the best way for a first time investor to get started. When it comes to learning how to invest, you want to make as many mistakes as possible before you put your hard earned money on the line. You will make mistakes. We all do it and it’s just a part of the learning process. No matter how much we double- and triple-check our research and investment decision, we are bound to miss something. Paper trading is doing a dry run of your investment process. Paper trading allows you to go through the entire process of making an investment, from start to finish, without risking any of your own money in the process.
Do have an overall plan and time frame
“I want to maximize my return” or “I want to make lots of money” isn’t a goal—it’s just a dream. An initial investment goal for when you’re just starting out should look something like this: “I want to attain an average return of 7% over the next five years while minimizing risk through proper position sizing.” This would be an excellent investment goal for someone just starting out. In that one sentence we have determined our goal—a seven percent return over five years—and how we are going to approach both risk and position sizing (more on that in a bit).
Having a reasonable goal and expectation allows you to properly assess your performance and progress. If you have no measurable goals, there is no way to know if your investment endeavors are successful or not. Keep in mind that, when it comes to investing, “more” is not “better.” Better is about setting goals, balancing risk, and managing a carefully selected list (your portfolio) of stocks. This avoids making rash decisions based upon hype or greed, rather than rational thought.
Do not go all in
Position sizing is one of the most important factors when it comes to investing. This answers the question: How much money do you stake on the investment you are making? It’s not only about not putting all your eggs in one basket, but deciding how many eggs to put in each basket. When starting out, you want to avoid putting a large part of your funds in any single investment. Instead you want to initially spread your investment over 8 to 12 stocks. And it may take you several months to identify and purchase those 8 to 12 stocks.
Do not listen to one source
Part of successfully investing is being open to new ideas, particularly those that challenge what you believe or have been taught. Whether, it’s your broker or financial planner, you need a second opinion. As you double check, you’ll find that some sources are better than others. Then you can decide to follow an individual’s advice, do so only after you’ve done some homework to ensure you aren’t being misled.
Do not have unreasonable expectations
Be reasonable when it comes to your expectations as to how much money you’ll make investing. Those marketing messages that say you’’ll make 200% return in two months aren’t telling you the whole story. Double-digit returns are possible, but only when you’ve got some experience under your belt or you’ve got a professional helping you. As a first time investor, shooting for 7 to 10% over your first 5 years is a reasonable expectation.
Do not let your emotions rule you
The number one enemy to your investment success is your emotions. Emotions can cloud our judgment and cause us to sell in a panic or buy in a frenzy. While it’s hard to remove your emotions when it comes to making and losing money, remaining aware of the destructive role emotions can play can save us from making some less-than-sound investment decisions.
Do not trade
Investing and trading are far from being the same thing. While they may share some characteristics and common principles, trading and investing are not the same. Investing is about making a long term stake in a company because you believe the company will produce more cash in the future than it does now. Trading is all about looking at short term price movements. As an investor, you shouldn’t be making more than 10-15 trades per year. Personally I enjoy double-digit returns making less than 10 trades each year. Investing is about the long haul—not making a quick buck.
Investing on your own isn’t always an easy task, especially when you first start out. However, I encourage you to stick with it and learn how to properly invest your own money. It’s rewarding to see your hard earned money grow as a result of your investing efforts. So take those baby steps towards controlling your investments. At the end of the day you are the best manager of your own money, because you care the most about your own money.