While investing in stocks may be as simple as opening a brokerage account, deciding what (and what not) to invest in can be more complicated than you may think. When you invest in the stock market, you purchase ownership shares in a publicly-traded company. If the company does well, your shares may increase in value. If the company’s performance declines, you could lose money. Many beginning investors turn to a Wealth Management team like ours to help them create an investment strategy to support their financial goals.
Keep reading to learn everything you need to know about investing in stocks. Want more help with your investment decisions? Schedule a free consultation with one of our team members today.
Setting Investment Goals
If investing in stocks is a part of your broader investment strategy, a good first step is to articulate the goals you hope to achieve through investing in stocks. We encourage you to think of investing as a long game. So, instead of thinking about short-term goals like paying for a vacation, it’s better to focus on long-term plans such as retirement, a child’s college education, and more.
Follow these tips when setting investment goals:
- Be as specific as possible. For example, what kind of lifestyle do you hope to enjoy in retirement?
- How will you measure this goal? For example, a certain amount of time or a specific dollar amount.
- What concrete steps do you need to take towards your goal?
- Are the goals you’ve set realistic for your life and current situation?
Every individual or family’s financial goals will be different. And everyone has a different risk tolerance, which we’ll discuss next.
What Is Your Tolerance for Risk?
As with investment goals, the answer to this question is a personal one that will vary between different people. While all types of investments carry certain risks, some have more than others. In this section, we’ll cover the three levels of risk, but first, let’s talk about time.
Time is a finite resource for all of us, which is why it plays an important role in investing. While risk tolerance is an individual preference, younger investors can afford to be more aggressive because they still have plenty of time to recover from losses or temporary dips in the market. As investors approach retirement age, they may want to be more conservative about risk.
The three levels of risk are as follows:
- Aggressive: Investing mostly in stocks
- Moderate: Investing in about a 50/50 split of stocks and bonds
- Conservative: Investing mostly in bonds
Schedule a free consultation with our Wealth Management team in Southern California to discuss your risk tolerance and how to invest accordingly.
Choosing How to Invest
If you’re ready to get started with investing, learn about your options for how to invest and the different approaches you can take.
- 401(k) or IRA: Investing in your employer’s 401(k) or opening an IRA on your own is a good option for the beginning investor. You’ll be able to purchase individual stocks and choose from a selection of stock mutual funds. Both 401(k) and IRA accounts also offer certain tax advantages, though there are penalties for early (before age 591/2) withdrawal. You can set up recurring contributions and take a hands-off approach.
- Online Brokerage Account: This type of account allows individual investors to buy, sell, and trade stocks. You can take a hands-on approach to your investments, but it may not be the best option for a beginning investor. In recent events, there have been a few tragic instances of novice investors succumbing to their situation’s mental and financial burden after unintentionally losing hundreds of thousands of dollars on trading apps. Start small with online brokerage accounts until you’re more confident in your investing capabilities.
- Investment Advisor: If you want an expert to manage the process for you, help you craft and maintain an investment strategy, and provide advice about the general state of the market, schedule a free consultation with our Wealth Management team.
What Are the Risks of Investing?
Whichever approach to investing you choose, it’s important to understand the risks. Investing is inherently risky. All types of investments, such as stocks, bonds, mutual funds, and ETFs can lose some or all of their value if the market drops.
However, each type of investment generally carries a different level of risk depending on its potential return. Essentially, the higher the risk, the higher the potential reward. The levels of risk can be broken down as follows:
- Highest Risk: Options, Futures, and Collectibles
- Medium: Real Estate, Equity Mutual Funds, Large Cap Stocks, and High-Income Bonds
- Lowest Risk: Government Bonds, Money Markets, CDs, and Cash
Historically, stocks deliver the best average annual returns over the long term, followed by corporate and Treasury bonds. The longer you hold onto your stock portfolio, the lower your chances of losing your principal (the amount you initially invested). However, no type of investment or strategy is without risk.
While you may not be able to eliminate risk entirely, there are two basic strategies for mitigating investment risk.
Asset Allocation
Include different types of assets (stocks, bonds, real estate, and cash, for example) in your investment portfolio. This spreads your risk across asset classes, making it more likely that at least some of your investments will deliver good returns even if others do not grow or lose value.
Diversification
In each asset class you’re invested in, divide the money you put into that particular type of investment, such as stocks or bonds, among a variety of investments within that asset class.
Essentially, asset allocation and diversification are about not over-emphasizing one type of investment or individual stock.
Try a Stock Market Simulator
A simulator is a risk-free practice for trying out trading strategies and assessing different stocks.
Glossary of Investment Terms
Whether managing your investments yourself or taking a more hands-off approach, it’s good to familiarize yourself with common terms.
- Brokerage: A firm that manages transactions between buyers and sellers. The brokerage earns a commission for each trade.
- Stock: An ownership share in a company. Businesses sell their stock to raise capital to invest in and grow the business.
- Bond: Represents a debt that must be repaid with interest over a predetermined time.
- Exchange-Traded Funds (ETF): A type of investment fund traded on stock exchanges that allow you to purchase various stocks or bonds at the same time.
- Dividend: This is a type of profit-sharing in which companies make payments to shareholders based on earnings. Earning dividends is one way to make money as an investor.
- Bear market: This refers to when broad market prices, like the stock market, fall by 20% or more from their previous high point.
- Bull market: The opposite of a bear market, bull markets are when securities prices rise for a prolonged period.
- Growth Investing: A strategy for growing the value of your portfolio and thus growing your net worth.
- Value investing: A strategy for choosing stocks that are undervalued.
- Dollar-Cost-Average (DCA): This approach to investing means making regular contributions to your portfolio regardless of how the market is doing on a given day. For example, establishing a regular contribution to your 401(k) from your paycheck is a form of DCA.
Set a Budget for Investing
As a general rule of thumb, you should invest 10% to 15% of your income each year for retirement. However, you don’t want to sacrifice your ability to cover bills and living expenses. So, start small if need be. An oft-repeated piece of advice says that you should not invest money you are unwilling to risk losing.
Remember those pre-tax dollars will further contribute to your investment portfolio and reduce your overall taxable income (consult your tax advisor for details). If your employer offers a match on a percentage of your 401(k) contribution, try to contribute at least enough to get the full match. Otherwise, you are leaving money on the table.
You can have a 401(k), Traditional IRA, and a Roth IRA if you want to, though the Roth offers tax savings in retirement with tax-free withdrawals. Set up automatic recurring transfers to your investment accounts, so you don’t have to think about it or remember. Consult your tax advisor for details about Roth IRAs’ income limits and other Traditional IRA rules.
However, investing in non-retirement accounts may be advisable if one of your goals is to use investment income before you reach retirement age.
Investing Pitfalls to Avoid
Investing can be fun, but be wary of falling into any of these traps:
Falling in Love with a Company
It’s easy to get swept up in the excitement or splashy headlines. But falling in love with a company can lead you to make emotional investment decisions that may not work out well in the long run.
Moving Too Fast
Remember that investing works best as a long game. As Warren Buffett said, “The stock market is a device for transferring money from the impatient to the patient.”
Trying to Time the Market
People who study the stock market for a living understand its patterns and historical data. Still, no one can accurately predict the top or the bottom of the market. That’s why, for most beginners, a Dollar-Cost-Average strategy is best.
Constantly Watching the Market
You want your investments to be fairly boring. Checking your quarterly returns should be enough to keep an eye on things. If not, it may indicate that your investments are too volatile for a beginner.
Schedule a Consultation with Our Wealth Management Team Today!
At SkyOne, our Wealth Management team understands that every person’s financial goals are different. Risk tolerance can also vary dramatically among individuals. To discuss your specific situation and investment goals, schedule a free consultation today. You can also open your own IRA account with SkyOne!
Check out SkyOne’s Wealth Management video:
Please note: This article is for general investment advice and is not specific to anyone. Consider the risks and make educated choices that best suit your needs.
Non-deposit investment products and services are offered through CUSO Financial Services, L.P.(“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. The credit union has contracted with CFS to make non-deposit investment products and services available to credit union members.
