Nathaniel Fried
Investing in the stock market for the first time can seem like a scary and daunting task. But it’s really not as hard as you might imagine. We reached out to stock market and financial experts to get their take on things first-time investors in the stock market should know. Here is what they had to say…
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#1 Stay diversified
Ideally, you would own 5 or more stocks that are not correlated with each other. I.e. don't buy 5 tech stocks. Buy 1 tech, 1 financial, 1 health care, 1 services, and 1 basic materials. This kind of sector diversification will protect you in case 1 sector goes out of favor.
Contributor: Mike Scanlin, CEO of borntosell.com
#2 Stay away from high risk events
These include: earnings releases, FDA announcements, M&A rumors, new product launches, etc. If you're a long-term investor then okay, you can't avoid all of those. But don't buy a stock the day before one of those events and hope for quick 5-10% pop with the intention of selling the next day. That's not investing; it's gambling.
Contributor: Mike Scanlin, CEO of borntosell.com
#3 Never invest money that you might need in the short term (1-3 years)
Never invest money that you might need in the short term (1-3 years) because there is a risk that you will be forced to sell when the market is down. Put that money in more conservative places like CDs or high yield savings accounts.
Contributor: TimStobierski founder and editor of studentdebtwarriors.com
#4 Look for a low cost diversified index fund
Vanguard provides great options based on the S&P 500, the Wilshire total market index, and a total bond market index.
Contributor: Lou Haverty, CFA from financialanalystinsider.com
#5 First start with tax free or tax deferred investment vehicles
First, start with tax-free or tax-deferred investment vehicles like an IRA or a 401K and aim to max out those first before contributing to a taxable account.
Contributor: Lou Haverty, CFA from financialanalystinsider.com
#6 Invest on a set schedule
Invest on a set schedule: weekly, or monthly, but invest consistently so you benefit from investing in the market when prices are low.
Contributor: Lou Haverty, CFA from financialanalystinsider.com
#7 The younger you are, the higher your percentage should be in a stock market index vs a bond market index
The younger you are, the higher your percentage should be in a stock market index vs a bond market index and gradually shift that percentage as you get older to have a higher percentage in bonds.
Contributor: Lou Haverty, CFA from financialanalystinsider.com
#8 Try not to pay attention to periodic changes in the market
In the long run, you’re better off investing when prices are lower, so try to resist the urge to race for the exit during periodic market corrections.
Contributor: Lou Haverty, CFA from financialanalystinsider.com
#9 Never invest your emergency fund
That money is for emergencies! If you want to grow your emergency fund without putting it at risk, check out this useful article.
Contributor: TimStobierski founder and editor of studentdebtwarriors.com
#10 Know your risk tolerance before you get started
Imagine that you are investing $10k and plan to need the money in ten years. If the value of your investment dropped rapidly to $8k, do you think you would panic and sell? Or do you think you'd be able to keep your cool for the long haul?
If you would panic, you'd probably be wiser to be a little more conservative in your investments, but if you think you would keep your cool, you can likely go riskier. There are a lot of calculators out there that can help you figure out your risk tolerance.
Contributor: TimStobierski founder and editor of studentdebtwarriors.com
#11 It’s more important to know what you don’t know when it comes to investing than it is what you know
If investing seems overwhelming, search help from a fee-only Registered Investment Advisory.
Contributor: Matthew Murawski from Goodstein Wealth Management
#12 Low cost doesn't always mean better value
Be prudent in researching the funds you use and their expected returns.
Contributor: Matthew Murawski from Goodstein Wealth Management
#13 Annuities are for inept people
Stay away, stay very far away.
Contributor: Matthew Murawski from Goodstein Wealth Management
#14 Don't fall into chasing winners
Nobody wants to walk into Nordstrom's and pay full price, we want sale items with good quality. Investing is the same.
Contributor: Matthew Murawski from Goodstein Wealth Management
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