Important Advice for New Investors
A generation or two ago, the stock market was often perceived as the province of the wealthy. Average Americans kept a dubious distance.
That distance has closed in recent years. First came the 401k revolution. Millions of workers got their first exposure to the market. Then the spread of new technology allowed trading in the comfort of your own home.
Suddenly, the market was democratized. Barriers to entry had fallen. Now, according to Gallup, about half of Americans are in the market in some capacity.
That number, however, should be much higher. Among Americans earning more than $75,000 annually, nearly 90-percent are in the market. People with college and graduate degrees are also far more likely to be in the market.
Now, some of this is explained by access. Wealthier or more educated people are more likely to have employer-based retirement accounts. They also have more money to invest. A higher level of financial literacy. More tolerance for risk.
Yet there's another reason market activity rises with education -- participating is a smart idea for almost everyone. Historically speaking, equities dramatically outperform savings.
Entering the market however, is often a daunting prospect. Unusual acronyms, like REIT or ETF, abound. The press is full of horror stories about flash traders. Impossibly complex market instruments have been developed.
Yet the average investor doesn't have to worry about that sort of complexity. By sticking to the fundamentals, new investors can harness the immense wealth creating power of the market.
So let's discuss what market neophytes need to know when getting started.
Action Plan: Which Steps Should a New Investor Take?
When it comes to investing, our first instinct isn't always correct. It pays to take a methodical and measured approach when entering the market. Consider the following steps:
- Think about your goals. Are you investing for retirement? Your child's education? The answer will help you develop the right strategy.
- Start slowly. You'll feel more at ease investing over time. Build confidence before getting too aggressive.
- Seek data from a variety of sources. Warren Buffett famously said he won't invest in a business he doesn't understand. This is great advice for new investors. Famed investor John Bogle's "Little Book of Common Sense Investing" is a useful text to read.
- Don't get caught up in short-term results. Some studies have shown that investors do better when they pay less attention to their portfolio. This may sound illogical. Yet it's easy to let a bad day or week get the better of you. It's best to avoid being too active.
- Avoid emotional responses. Invest with your head, not your heart.
- Don't always defer to authority. Most advisors can't beat the market. Nor should they be trying. An advisor's job is to provide investments tailored to your goals and risk tolerance.
- Realize that sometimes the best values are found in a bear market.
- Never try to time the market. This is the Holy Grail of the inept investor. Timing doesn't work. It never will.
- Minimize your costs and fees. One percent may not seem like much. Yet even small fees add up quickly. In a lower return landscape, lowering costs is essential.
- In that vein, consider low fee index funds and other safe, reliable options.
- Avoid the urge to pick stocks. Instead, consider Exchange Traded Funds (ETFs). These funds can track a broad array of stocks.
- If you must own single stocks, buy blue chip firms.
- Start investing early. A longer timeline means more risk tolerance. You can be aggressive with more time to recover.
Investing in the market shouldn't be cause for concern. Technology has made the process easier. The market is also more accessible. ETFs and other products allow even the greenest investor to benefit from the wealth creating effects of the market.
By getting started today, you improve your odds of achieving financial independence in the shortest time possible.