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Investing in the stock market is a great way to grow your money over time. And if you’re aiming to build a large nest egg for retirement, investing in stocks is a wise choice, since you’ll need a portfolio that can grow faster than the rate of inflation.
If you’re new to the stock market, you may not know how to go about building your portfolio and what to expect. Here are some beginner investor tips to help you get started.
1. Diversification is key
Because stocks have a tendency to gain and lose value quickly, it’s important to invest across a range of companies and industries. Diversifying your portfolio can help limit (though not eliminate) your risk and potentially lead to higher returns over time.
Think about it this way. Say you were to build a portfolio of tech stocks only. If the tech industry were to then experience a shakeup, you could see your portfolio value drop substantially. But if tech stocks only comprise 20 percent of your portfolio, the damage won’t be as severe.
If you’re not sure how to choose your first stocks, Ari Teplitz, a certified financial planner and chartered financial consultant with more than 10 years of experience, has some advice.
“Start with stocks whose products you buy because when you’re just starting out in the stock market, the most important thing is to learn how to track your behavior,” says Teplitz, who is a partner with Teplitz Financial Group in New Jersey.
2. It’s OK to keep things simple
When you’re new to investing, the idea of choosing individual stocks can be daunting. If you’re not comfortable with that strategy, it’s OK to load your portfolio with broad market exchange-traded funds (ETFs).
The benefit of ETFs is that you get to own a collection of stocks with a single investment, giving your portfolio instant diversification at a low cost. Some great ETFs for beginner investors include the Vanguard S&P 500 ETF (VOO), which gives you access to the 500 largest publicly traded companies, and the Vanguard Total Stock Market Index Fund ETF (VTI), which gives you access to virtually every publicly traded company there is.
3. Patience is important
Investing in stocks is a great way to make money over time. But if you limit your investment window to a few years or less, you risk losing money.
It’s crucial to be patient when you’re investing in stocks and to not expect great results right away. Rather, a better strategy is to load your portfolio with a wide range of stocks or ETFs and hold them for decades so they’re able to gradually gain value.
4. Downturns are normal
Stock market downturns might seem like a scary thing when you’re first starting out, but you should know that they’re fairly common. Between 2002 and 2021, the stock market underwent a decline of at least 10 percent in 10 out of 20 years, according to an analysis by Charles Schwab. Despite those setbacks or market corrections, the market rose in most years during that time and rewarded investors with an average annual gain of about 7 percent.
That’s why it’s important to know what to do — and what not to do — when your portfolio loses value. What you should do is take a deep breath and remind yourself that you’re in this for the long haul. What you shouldn’t do is rush to sell off investments the moment they lose value, because then you’re guaranteed to lock in losses.
Another thing you shouldn’t do, says Teplitz, is check your portfolio balance every day.
“If you look every day, all you’re going to do is increase the emotion that you feel without increasing your knowledge,” Teplitz says.
5. It’s smart to get help
Investing in stocks can be an intimidating process, so you shouldn’t hesitate to get some help. Working with a financial advisor might help you feel more comfortable putting your money into the stock market. And an advisor can help you rebalance your portfolio as needed to ensure that it’s well diversified at all times.
A great way to find a financial advisor is to ask friends, colleagues or neighbors for recommendations. Chances are, if they’ve had a positive experience, so will you. You can also use Bankrate’s financial advisor matching tool to find a finance professional in your area.
Bottom line
Investing in the stock market is simpler than you may think. You can set up an online brokerage account or retirement account without leaving home and immediately start researching what you want to buy and how you might like to hold it, such as buying stock in a certain company or buying into an ETF that holds that stock or covers that sector.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
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