7 Do’s and Don’ts for Rookie Investors
TAKING THE INITIAL plunge into investing can be a nerve-racking move. What should you buy? Who can you trust? And most harrowing of all: What if you end up losing money?
At its core, the concept of investing is simple. The problem is investors are often tripped up by emotion, speculation and poor advice from others.
Investing your money is the key to reaching long-term savings goals, and it doesn’t have to be a stressful or arduous process. Follow these do’s and don’ts to start your venture into investing off right.
1. Do: A ton of research.
Before locking your hard-earned dollars into a stock, mutual fund, exchange-traded fund or other market investment, be sure it’s worthy of your money. Television shows, radio programs, articles and other sources of investment advice can point you in the right direction, but should serve only as a starting place. Let us remember “Mad Money” host Jim Cramer’s 2008 Bear Stearns statement, if you disagree.
This goes for the person you choose to help manage your investments as well. You don’t have to go at it alone, but the same amount of careful research you put into choosing your first investments should also be applied to choosing a financial advisor if and when you’re ready to hire one.
2. Don’t: Try to time the market.
As the most famous and well-respected investor of all, Warren Buffett, wrote in this year’s letter to Berkshire Hathaway shareholders, “The goal of the nonprofessional should not be to pick winners – neither he nor his ‘helpers’ can do that – but should rather be to own a cross section of businesses that in aggregate are bound to do well.” (He recommends Vanguard’s 500 Index in case you’re wondering.)
3. Do: Diversify your investments.
Too often, novice investors mistakenly equate the concept of “diversification” with “owning many investments.” However, a diversified portfolio should not be varied only in number of investments, but types of investments, too.
For instance, a portfolio of only stocks would be too aggressive even for a 20-year-old. A tech-heavy collection of investments would make your nest egg far too reliant on the performance of one industry.
This goes for investing in company stock, too. Considering that you are already dependent on your employer for your livelihood – salary, benefits, perhaps a 401(k) match – it’s safe to say you’re already overly-invested in it. Allocate a significant portion of your portfolio to that same company, and you become dangerously dependent on that one investment to pan out. One word: Enron.
4. Don’t: Invest according to emotion.
When the market crashed in 2008, I was working for a financial planner who had about 100 high-net worth clients. Those clients watched the value of their portfolios get cut in half within just a few short days, and most did what any normal person would: They panicked. They wanted to pull their money out before any more of it disappeared.
Those who waited out the storm at the advice of their advisor regained all the money they lost, and then some. Those who bailed when the market was at its lowest took huge losses they might never be able to make up.
Positive emotions can be just as destructive to your earnings; don’t fall in love with an investment that isn’t performing with the hopes that it will regain value some day in the future. There’s no place for love or fear in investing, only calculated decisions based on data.
5. Do: Pay very close attention to fees.
On paper, your returns for the year might seem impressive. Unfortunately, once you subtract all the fees paid to purchase and manage those investments, the yield starts to look less exciting. In fact, you could easily end up sacrificing 40 percent of your return to fees, according to Forbes.
Trade commissions, expense ratios, advisor fees – they all add up and take a big bite out of earnings. It pays, literally, to research the costs associated with all possible investments before making a final decision.
6. Don’t: Wait.
Think you can make up for lost time by investing more money down the road? Thanks to compound interest, you would still earn more over the life of your investments by investing less now than a bigger chunk later. Add inflation and increasing life spans to the equation, and you can’t afford to give that money up to procrastination.
7. Do: Maintain cash savings.
Finally, it’s very important to understand the objectives of your savings and how to put it to work based on your goals.
Market investments are for the long-term – money you won’t need for at least 10 years, ideally longer. Retirement is a perfect example. But what about today?
A separate, cash savings account should always be maintained for immediate needs. After all, because of the time, fees and future earnings sacrificed, your least desirable option for covering a new transmission or roof repair would be to sell off shares of an investment.
You never want your emergency savings to be tied up. Keeping a minimum of $10,000 in any combination of savings accounts and short-term certificates of deposit should protect you from surprise expenses that need to be covered immediately.