Investing for the first time can be a daunting task. Newbie investors face many challenges, particularly due to a lack of knowledge and experience. If you are thinking about investing for the first time, just be aware of a few potential issues for your awareness.
Reigning in the Impulse to Chase Free Money
New investors typically start out with measly amounts of capital. A regular income earner may only have a handful of dollars to invest. When capital is low, it’s possible to fall into the easy money trap, where investors accumulate cheap stocks hoping to quickly sell them off. Some may hope to grow their money day trading.
Trading cheap stocks or daily trading can be lucrative, but only if you know what you are doing. Successful traders often have years of experience in the market and are competent enough to research where stocks originate from. Most new investors don’t have this level of expertise. Therefore, new investors should control their impulses and plan an investment strategy. Don’t hope to win big with quick trades right off the bat.
Risk assessments, understandably, can be challenging even to experienced investors. Some investments assets are subject to wild speculation, market volatility, and unavoidable circumstances. In such cases, making risk estimates can be very difficult. However, newbie investors may disregard highly reliable and convenient metrics for assessing risk.
For example, certificates of deposit are considered a rather safe form of investment, however, CDs are not risk-free. In fact, CDs issued by private financial institutions can actually be subject to high levels of risk. A new investor that chases usually high yields for CDs with a private financier may be accruing more risk than they should.
Risk should also be assessed with regard to reward. Is it really worth it to hold $1,000 in high-yield penny stocks, which are difficult to liquidate, or hold the same amount in secured bonds that may generate lower yields? A legitimate financial adviser would recommend the latter. New investors, therefore, should educate themselves on how to reasonably estimate risk and weigh it against reward when investing in any asset.
Failing to Diversify
New investors are the most likely to be swayed by an asset or a company. It’s not uncommon to see first-time investors put 100 percent of their capital in an asset class that may have generated good returns for them earlier. The mantra in investment is diversification. It’s never a good idea to jumpstart and investment career by putting all your eggs in one basket.
Even new investors do need to diversify, however, there is also such a thing as too much diversification. Don’t rush to buy assets either. Learning is key and it’s important to understand which types of assets are best for your portfolio. If you are unsure, seek help from a financial expert.
Generally speaking, new investors should educate themselves in the basics of finance, the stock market, and assets. As Warren Buffet once said, “never invest in anything you don’t understand.” Identify the challenges awaiting you, and prepare for them well in advance.