Ten
Tips For First-Time Investors
OK,
so you’re savvy enough to know that you can’t build your wealth simply by
socking all your money into a savings account and watching the entries on your
statement grow. But you’re still wary about dealing with the ups and downs of
stock market swings you may be able to minimize risks — and control your stock
market jitters — by adhering to a consistent, comprehensive investment plan.
Here are 10 tips to help you get started.
Increase your investment IQ.
Without understanding how an investment works, you
could be in for an unpleasant surprise. Take the time to understand your
investment options and the pros and cons of each. Read books, take a course, see
a financial planner, or even consult with friends to increase your investment
IQ.
Define your risk comfort level.
Typically, the more volatile an investment is, the
more profit you can make — but also the more loss you may incur. Safer
investments generally promise a specific — but more limited — return and
don’t always keep pace with inflation. Deciding how much risk you are
comfortable with will help you set and adhere to a smart investment course of
action — one ruled by sound strategy, not emotional response.
Match
your investments to your goals.
Define your short- and
long-term investment goals and identify how much money you’ll need to meet
those goals. Then let those goals drive your strategy. For example, money
you’ll need within five years may be invested in money-market funds, bank CDs,
Treasury bills or mutual funds that buy top-rated bonds maturing in one to three
years. Money you won’t need for five years or more can be invested in the
growth market. In fact, the longer you have to invest, the safer and smarter the
stock market becomes as an investment.
Don't
be guided by investment "gurus."
When considering where to put
your money, look for funds that can withstand the test of time, and avoid
managers who are “gurus” of the moment. Do your own homework. Review annual
and quarterly shareholder reports, along with the most recent Form 10-K or Form
10Q disclosure documents filed with the Securities and Exchange Commission. You
can obtain these documents by calling or writing to the corporate secretary or
investor relations department at the companies that interest you.
Diversify.
Regardless of your personal risk profile, include a variety of assets that react
differently to market conditions. Opt for a mix of stocks, bonds, and cash
investments, so that when one sector of the market declines, gains in your other
holdings can cushion the blow. In other words, don’t put all your eggs in one
basket.
Put your investing program on automatic pilot.
Because there really is
no such thing as “extra money,” you have to treat investing as part of your
basic monthly expenses. The surest way to do this is if you don’t see the
money at all before it goes from your wallet to your account. You can arrange
for your employer or a mutual-fund company to transfer a fixed sum every month
from your salary or checking account into an investment account.
Stick to your investment plan.
If you want to achieve your financial goals, stick
to your plan. Don’t let market swings or the desire to make a sudden big
purchase cause you to make impulsive decisions and alter your plan. In fact,
switching in and out of investments drives up transaction and tax costs.
Also, you’re usually selling a falling investment and buying a rising one, so
you’re selling low and buying high — a sure way to lose money.
Reinvest your dividends whenever possible.
Rather than cashing dividend
checks, reinvest the proceeds. Many companies allow you to automatically invest
your payouts in additional company stock. You’ll continue to build your
portfolio and you’ll save brokers’ fees and investment fees at the same
time.
Track your investments.
Make it a practice to review your goals and
investments once a year. In the event your circumstances change, you also might
want to revise your strategy.
Check with your financial consultants.
Make sure you periodically
meet with your advisers to review your portfolio and allocations in light of
changing goals, tax laws, investment performance, and various opportunities that
might arise. They also can advise you on how to time withdrawals and plan
reallocations so you can make the most of your investment dollars.