New investors should clearly define their time horizon, prioritize savings, diversify their portfolio and practice patience when participating in the financial market.
Many people start looking for ways to make money when they receive their first paycheck or a promotion that comes with a new income. No matter how you start, figuring out how and when to invest for the first time can be daunting. For beginners, growing your wealth is a long game, says Matthew Saneholtz, a certified financial planner and CNBC senior financial advisor.
“To maximize your time in the market and take advantage of compound interest, it is important to start investing early,” the expert says.
Compound interest allows money to grow at a faster rate, because you earn a return not only on the original investment but also on the interest it earns. Compound interest "really pays off over the long term," Saneholtz adds.
Investors monitor the market at a stock exchange in District 1, Ho Chi Minh City, March 2021. Photo: Quynh Tran
Here are four steps to take if you're looking to invest for the first time.
Set up an investment "timeline"
For new investors, the first thing to do is to determine your investment time horizon. Saneholtz advises that each person should ask themselves: How long will I invest and why? Accordingly, financial goals can be divided into three main categories: short-term - such as buying a house in the next few years; medium-term - such as a financial plan to raise children until college; long-term, such as retirement in the next few decades.
Determining your time horizon will help you plan how you invest and what risk you're willing to take. Saneholtz says it's the "most important" factor to consider and should be determined before you put even a single dollar into the market.
Anything under 5 years can be considered short-term, which can affect what you invest in and how you do it. On the other hand, if you don’t plan on using your money for more than 20 years, you can be much more proactive in your investing.
Accumulate savings
Before you invest in the stock market, invest in yourself, says Saneholtz. It’s important to have enough saved to cover three to six months of expenses in case of an emergency. Instead of putting that money in an investment account, a bank deposit is typically risk-free and will still allow your money to grow a little.
Experts advise everyone to be really careful before spending money on a large-value item, so that they can practice controlling their spending to increase savings.
Diversified investment
Choosing a single company to invest in, such as a startup with a promising business model, can be appealing to first-time investors. But a diversified portfolio is the way to go. Instead of picking a single stock, you should buy a basket of stocks that are more representative of the economy as a whole.
“Investing is different than speculating. Don't let your emotions get in the way of investing,” says Saneholtz.
Saneholtz suggests exchange-traded funds (ETFs). These are investment funds made up of multiple assets, including stocks and bonds, that allow investors to gain a broader portfolio with a single purchase. They typically have lower fees than actively managed funds and allow investors to diversify their portfolios at once, thereby reducing risk.
“I have seen people get into trouble the first time they try to pick individual stocks. There are so many different variables that go into making a business profitable and sustainable and winning in the market,” he noted.
You may want to invest in well-known companies, but when you're just starting out, it's still best to choose a broad-based fund that owns a variety of companies across a variety of industries.
Be patient
When you're investing, "slow and steady" is the best strategy, says Saneholtz. It's easy to sell when the market is down and vice versa. But as long as you're properly diversified, the best thing to do is ride out any market volatility, he says.
"Let the market operate and develop for you. Slow and steady wins the race," he emphasized.
Experts suggest a dollar-cost averaging (DCA) strategy. Investors will divide their capital and invest regularly at different times, helping to reduce the impact of market fluctuations compared to buying a large amount at once.
"When you hear news about how the economy is affecting the market, you don't always need to react. Be prepared to invest for the long term," Matthew Saneholtz shared.
Xiao Gu (according to CNBC )
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