3 Moves Every New Investor Needs to Get Right
Getting started investing isn't easy. But if you make a few smart decisions early, you can greatly increase your chance of long-term success.
Brokers added a record 10 million accounts in 2020, according to estimates by JMP Securities. During the GameStop frenzy in the first quarter of this year, Fidelity, Schwab and Robinhood added some 13 million new customers, according to estimates.
Millions of new investors who raced into the stock market did so at a particularly good time: The S&P 500 has surged as much as 89% since its March 2020 low. Inevitably, the good times won’t last and some investors will get burned and never return.
To find long-term success, new investors must become comfortable with creating a habit that lasts. “Too often, new investors want to make a big hit with a hot idea to accelerate the wealth accumulation process,” says Linda Erickson of Erickson Advisors. “The best investors are patient investors.”
Decisions you make early in your investing journey can impact where you end up. So we asked several certified financial planners: What are the moves that new investors must get right:
1. Set a concrete investing goal
Most people don’t stumble into investing. Rather, they set out with a goal to grow their wealth by generating returns that beat stashing money in a savings account.
However, it’s important to get into the specifics of your goals first. “Determine what you are investing for,” recommends Spokane, Washington financial advisor Sarah Carlson. If it’s for retirement, your strategy will be different than if you’re trying to build up a nest egg to buy a new home, she adds. “Your time horizon can help guide how much risk is reasonable.”
As you think about your risk tolerance, determine whether you want to be a speculator or an investor, says Charles Sachs, a financial advisor in Miami. Your choice will take you on one of two very different paths. You can start investing by buying a low-cost index fund that tracks the broader stock market’s performance. By contrast, as a speculator, you will try to outperform the market by making bets on individual stocks or sectors, he adds.
2. Match investments to your goal
There’s no one-size-fits-all answer to building a portfolio because your goals, risk tolerance, and age vary over time. For example, a pre-retiree, future homebuyer, and trader will probably have different needs and require different tools (or investments), says Sean Pearson with Ameriprise Financial.
“Investments help you achieve certain financial goals,” he says. “They are not an end in and of themselves.”
Whether you’re investing in stocks or betting on cryptocurrencies, understand what you’re buying — and why, adds Troy, Michigan-financial advisor Leon LaBrecque. He recommends completing this fill-in-the-blank sentence before investing: “I am buying ____ because it makes/sells ____, which will make me money by ____.”
Buying stock means becoming a part owner and banking on the continued success of that company, says Judson Meinhart of Parsec Financial. But you could also lose some or all of your money if the company falters or goes bankrupt, he adds.
Another option will get you off the hook for some research (and potential risk): An exchange-traded fund (ETF) that invests in a broad swath of the market. “If you don't have the stomach for the volatility of individual stocks, purchasing an ETF is a great way to instantly diversify your holdings, while decreasing the overall risk in your portfolio,” Meinhart says.
3. Don't overpay
After jumping into a hot market in 2020, some investors got a splash of cold water when taxes were due. As many people learned: Trading isn’t actually free, there’s an eventual cost in terms of tax obligations for capital gains.
“If you are into trading and you're successful, you will pay money in taxes; plan for it,” Carlson says. And having some basics covered — like an emergency fund or being mindful of debt obligations — will also ensure you don’t have to sell investments because you need money quickly and have no other choice, she adds.
Finally, watch out for expense ratios (common for mutual funds and ETFs) or advisor fees because they can add up over the course of decades, notes Randy Bruns with Model Wealth. And your cost basis for investments also dictates your eventual returns, which is why you can earn a higher average annual return by adding money to your portfolio regularly, a strategy known as dollar-cost averaging, he adds.
When in doubt, keep your strategy simple. “More complex investments lead to higher fees and higher taxes,” Bruns says. “Both are enemies to growing wealth over extended periods of time.”
More from Money:
Getting Rich Off Cryptocurrency Isn’t As Easy as Internet Millionaires Make It Look
How to Use Bitcoin: A Complete Guide to What You Can (and Cannot) Buy With the Cryptocurrency