Newbie Investing Newsflash: You don’t need a Ph.D. in finance to start saving for retirement or other long-term goals.
But you can’t rely on beginners’ luck either. You need to learn and implement some investment fundamentals . keep it simple Even Investing 101 strategies will help you achieve goals like: saving for a home, increasing your 401(k) balance so you can retire in style or become a millionaire.
Here are 10 investment tips that financial advisors say can help the novice investor build long-term wealth.
1. Start early
When it comes to investing , time is your friend.
“When should you start investing ? The answer is as quickly as possible,” says Blair duQuesnay, investment adviser at Ritholtz Wealth Management in New Orleans.
The more time your money invests, the more time it has to grow. The beauty of investing is that you earn interest on the interest you already earned on your original investment – a concept known as “compound interest”. Legendary scientist Albert Einstein once said that compound interest is “the eighth wonder of the world” as well as the “most powerful force in the universe.”
A calculation by the Federal Reserve Bank of St. Louis underscores the compelling math behind the composition. An investor who starts saving at age 25 and invests $5,000 per year for 10 consecutive years and earns 8% per year would accumulate $787,180 per year by age 65. Year 30 would only have $611,730 at age 65.
The more time you invest , the more you will benefit.
2. Always seek knowledge
There is a big difference between saving and investing . Investing is about taking some risk to get greater potential returns.
Big U.S. stocks, for example, produced a 10% compound annual return over the 93 years to 2018, according to Morningstar. In contrast, a 20-year Treasury yielded 5.5% per annum and a 30-day Treasury yielded 3.3 per annum. In that period, the dollar invested in large equities rose to US$ 7,030, against just US$ 142 for long-term bonds and US$ 21 for government bonds.
“In the old days, it was better to invest in the stock market if you had the money on hand,” says Dominique Broadway, founder of Finances De-mys-ti-fied.
3. Focus on your 401(k)
If you just got a job and your employer offers a 401(k) retirement plan, be sure to apply. It’s an easy way to regularly save the money you’ll need when you stop working decades from now.
A benefit of the 401(k) is that you automatically deposit a portion of each paycheck directly into your retirement plan, which offers a menu of investment options to choose from. Since contributions in a traditional 401(k) are made with pre-tax dollars, you also reduce your tax bill. Another benefit is that most employers also contribute to your 401(k) plan through matching postings.
“The first thing I would do as a young investor in a new job is figure out what the 401(k) plan is, (and) what your combination is,” says Broadway.
Ideally, you want to contribute enough to your 401(k) to qualify for full company compliance.
The average company agreement was 4.7%, according to a Fidelity study last year. “Corporate correspondence is like getting an extra paycheck in your retirement account,” says duQuesnay.
4. Keep it simple and keep it simple
Have no idea how to choose the right stocks or mutual funds? Or how to build a diversified portfolio? Do not worry about it.
Most 401(k) plans offer “scheduled date” funds. These funds do all the work for you. They choose individual investments , such as stocks and bonds, making sure their holdings are diversified and not too risky for their age.
“Target date funds are a great place to start,” says Broadway.
See how these funds work. You choose a target year closer to the year you think you will stop working. For example, you would invest in a “2050 fund” if you plan to retire in 30 years. As you approach your anticipated retirement date, the fund reduces the risk profile of your funds by reducing the percentage of more volatile stocks and reallocating cash to safer investments such as bonds and cash.
“Instead of selecting individual funds and deciding how much you want to contribute to each one, they do it for you,” says duQuesnay.
5. Put your savings on “autopilot”
What you don’t want is to stop saving for tomorrow. To avoid delays, put your long-term investing on autopilot, advises Scott Pedvis, financial adviser at Wells Fargo Advisors in New York City.
“Automate your investments,” says Pedvis. If you’re not already automatically saving into your 401(k) through payroll deductions at work, set up a system where money is taken out of your checking account and deposited into your investment account on a set date every month.
“It forces you to save and takes the thrill out of investing ,” Pedvis says, adding that automatic saving also removes the temptation to try to time the market or get in and out at the right time, which is difficult.
6. Don’t apply everything in one place
Do you think Tesla will dominate the electric car space forever? Well, even if you do, don’t invest every penny of your money in Elon Musk’s company.
Why? If you’re wrong and Tesla stock goes down, you’ll have nothing left in your portfolio to cushion the financial meltdown. The concept of owning a variety of investments is called diversification. It is much better to invest in mutual funds that have many stocks in different companies or a variety of bonds that pay interest to spread your risk.
“Diversification doesn’t mean guaranteed returns or no volatility,” says Pedvis. “The idea is to smooth the ride.”
7. Find out your loss limit
Try to determine your maximum pain level or the amount of loss you can take without exiting the market at the wrong time.
“The biggest mistake beginners make is forgetting it’s a long-term investment, ” says Broadway. “New investors can immediately see the value of their accounts plummet, get nervous and sell their investments. Patience is the key.”
To gauge your true risk tolerance, Pedvis suggests the following exercise: Imagine you invested $100,000 in stocks and the market crashed and your account balance dropped by $30,000. How are you feeling? Are you losing sleep? Do you really care? If you are stressed about a potential loss of this magnitude, it suggests that you may need to reduce risk in your portfolio.
8. Try to save at least 10% of your income
“A good rule of thumb is to try to put 10% to 15% of your paycheck into your retirement plan,” says duQuesnay. (Include company correspondence when calculating your savings rate.)
If you can’t save that much at first, she advises, build your savings gradually each year.
“Some 401(k) plans have a feature known as ‘autoscaling,’ where you agree today to save more tomorrow and your company’s plan automatically increases the portion of your paycheck that is deducted each year,” says duQuesnay.
9. Don’t listen to experts
Turn off financial news. The warning of a bear market collapse can take you out of the market at the wrong time. And bulls that predict the market will double can leave you overly optimistic and vulnerable to a big sell if you go all-in.
“A big mistake new investors make is taking what others say as gospel,” says Pedvis.
10. If you need it, look for help
And if you feel uncomfortable going it alone, ask for help, adds Pedvis.
“Many investments can be made independently, but you can’t do everything in life alone,” says Pedvis.
You can get help from a financial planner or advisor, an accountant or lawyer, or people in your life who are successful with money, he says.