If you’re thinking about investing in stocks or other securities for the first time, getting started can be nerve wracking and intimidating. You may be unsure of how much money you should invest or what to invest in. Trying to answer these unknown questions right off the bat could be enough to make you want to throw in the towel before you even make your first trade! So, close your eyes, take a deep breath, and forget about the “stock wisdom” you’ve heard on TV and read online. Here are five questions to ask yourself before you even open up your brokerage account.
1. WHAT ARE YOUR GOALS?
Why do you want to start investing in stocks? Are you looking to buy a house? Save for retirement? What you plan to use money from your investments for should impact your investing strategy because it dictates both your time horizon and your risk tolerance- more on those later.
Identifying your investing goals early will help you remain motivated throughout the process. If you know that you want to buy a house in the next 5 years, for example, you may find it easier to refrain from spending money on things like lattes and dining out. Spending less money on unnecessary items now allows you to allocate more money to investing in stocks or other securities.
2. WHEN DO YOU NEED MONEY?
Knowing when you will need money, also known as your investing time horizon, can make it much easier for you to build your portfolio. By knowing your time horizon, you can assess what types of stocks, ETFs, or ADRs you should be investing in. This is also known as your asset allocation plan. If you know you’re investing for retirement in 20 years, you may be willing to allocate your money into riskier investments, such as individual stocks, than if you want to buy a new car in 5 years, in which case you may invest in a fixed income ETF, for example. This is because stocks tend to fluctuate in value over shorter periods of time, but longer term tend to rise. For example: If you could have invested $1,000 in the Dow Jones Index on January 1, 2008, and sold it on December 31, 2010, you would have lost approximately $130. If you didn’t need to sell until today, you would have a gain of about $230.
3. HOW MUCH ARE YOU WILLING TO LOSE?
No matter how well you plan your investing strategy, there is a chance you could lose money. Knowing how much you are willing to lose will help you determine how much of your assets you are willing to place in riskier investments. You can manage the amount of risk you take by diversifying your investments. For example, it may not be a good idea to devote your entire portfolio one company or industry because, if that industry fails your entire portfolio is at risk. Imagine where you would be if you had put your entire portfolio into typewriter stocks. Instead, allocate your investments across multiple industry sectors.
4. HOW MUCH MONEY CAN YOU PUT ASIDE EACH MONTH?
You may have a large sum of money that you have saved up for investing. If you can, start saving and ear-marking some of your savings for investing. Financial planners will tell you that it’s important to keep some cash on hand as an emergency fund. So, if you have zero to little savings, it may be a good idea to build savings to have for those unpredictable life emergencies before you start investing.
When you are ready to start investing, think about how much money you can put into your portfolio each month. Build this amount into your monthly budget and make an effort to deposit that amount into your brokerage account each month. If you make investing part of your monthly routine, just like paying your utility or cable bill, it will be easier to stick with it over time.
5. HOW MUCH TIME DO YOU HAVE ON YOUR HANDS?
You can create an investing strategy that’s as simple or as complicated as you want it to be. If you want to learn about the stock market and select your own individual stocks by conducting research, there are tons of resources to guide you as you begin investing in stocks!
However, putting together a strategy for investing in stocks doesn’t have to be complicated. If you don’t have a ton of time to devote to conducting stock research, you may consider investing in ETFs which are managed funds that can give you automatic diversification. ETFs are designed to track an index, such as the S&P, a commodity, bonds, or a basket of assets. For example, investing in an ETF that mirrors the performance of the entire S&P 500 gives you access to Apple, Exxon Mobile, and General Electric, among others.
Once you answer these 5 questions for yourself, you should start to feel more confident about investing in stocks for the first time.
- The stocks and ETFs referenced in the above article were mentioned for illustrative purposes only and do not constitute a recommendation to buy or sell.
- All investing carries risk. Past performance is not indicative of future returns, which may vary. Investments in stocks and ETFs may decline in value, potentially leading to a loss of principal. Online trading has inherent risk due to system response and access times that may be affected by various factors, including but not limited to market conditions and system performance. An investor should understand such facts before trading. The risks associated with investing in international securities, including US-listed ADRs and ETFs that contain non-US securities include, among others, country/political risk relating to the government in the home country; exchange rate risk if the country’s currency is devalued; and inflationary/purchasing power risks if the currency of the home country becomes less valuable as the general level of prices for goods and services rises.
- Most inverse ETFs “reset” daily, meaning that these securities are designed to achieve their stated objectives on a daily basis. Their performance over periods longer than one day can differ significantly from the inverse of the performance of their underlying index or benchmark during the same period of time. This effect can be magnified in volatile markets, making it possible that you could suffer significant losses even if the long-term performance of the index showed a gain. While there may be strategies that justify holding these investments longer than a day, buy-and-hold investors with an intermediate or long-term time horizon should carefully consider whether these ETFs are appropriate for their portfolio.
- Before investing in an ETF, an investor should consider the investment objectives, risks, charges, and expense of the investment company carefully. The prospectus contains this and other important information about the investment company. You should read the prospectus carefully before investing.