Five things first-time investors need to know
At the beginning of any new year, many people begin to seriously consider investing. This is the year to get their finances in order, especially if rumors of an interest rate increase prove true. But for newcomers to investing, making the decision to move money into a stock can seem intimidating, especially if they’re relying on the advice of friends and family.
By understanding a few tips, new investors can get started with the peace of mind of knowing their investments will grow. Here are five tips designed to get beginners started on their plans to invest.
Speak to an expert: The best first step for any beginning investor is to speak to someone who has spent years studying the market and specializes in it. The right expert is key, since you’ll be entrusting this person with your hard-earned money. Even if the fees are higher for the best financial adviser in town (though typically, annual fees are 1 percent of your total portfolio), it will be well worth it if that adviser has the knowledge to sell before a fund crashes and buy when a stock is on the verge of breaking through. Just be sure that if you do choose to hire a professional, you work with someone who does not earn a commission for unbiased advice.
Diversify: One of the most dangerous things an investor can do is put everything in one place, especially if there is risk involved. Sinking every dollar into your favorite tech company is risky even if you’re sure that stock will continue to dominate for many years. Unexpected occurrences can wipe out years of earnings in a matter of days.
Diversification can not only reduce risk but improve gains when the right mix of investments is grouped together. Many successful stockholders have made their money with a combination of funds.
Buy low, sell high: Experts have noted that in a thriving market, investors tend to boldly choose high-risk stocks, while in a struggling market they flock to low-risk investments. By battling this urge, investors can actually benefit by buying when prices are low and waiting it out as they rise. This isn’t always an easy task, since the market can be unpredictable and even the best experts sometimes get it wrong.
How does an investor know when a stock is at its lowest? When it will increase in value after being at this low? The truth is, there’s no way to know for sure. Best Buy is a great example of the unpredictable nature of stock prices. The once-thriving company seemed to be on the way out when its stock surged 244 percent in 2013. After that brief success, the stock is once again on its way down, with some experts calling it the beginning of the end for the retailer.
Automate: There’s no replacement for a real, human expert, but software can help the aspiring day trader succeed. Tools like Personal Capital and SigFig help investors set up a portfolio and track the results on an ongoing basis. They even provide mobile apps for tracking on the go. These sites will make recommendations and alert users to mistakes they might be making, such as choosing the wrong broker.
One downfall to using these services is that you often must enter information on all of your financial accounts, which can be a problem if there is ever a data breach. These sites promise to implement security to keep fraudsters at bay, but it’s important consumers be proactive in protecting their information with strong passwords and secure computers.
Use the Web: It’s never been easier to become a stockholder, with expert advice from other investors available at the click of a button. Sites like E-Trade offer comprehensive education to investors, and Motley Fool has ongoing articles on the latest stocks to watch (and avoid).
If a new investor wants to put time in, he can easily learn enough about the market to be successful. While this takes time, through a combination of technology, advice from experts and experience, an investor will soon be making decisions based on his own knowledge of the market.
Stephanie Faris writes for GOBankingRates.com, a personal finance news site.