If you’re new to financial markets, the thought of jumping right in and taking all your savings with you may seem like a terrifying leap.
There are frequently stories about investments getting wiped out, unexpected crashes and unwise decisions. With all that pressure — and with so much noise coming out of the financial world — how can an eager but relatively green investor know which way to go?
Financial experts have different takes on what types of investments you should make, but they all point to the same starting point: To become a savvy investor, you must first learn how investing works.
“Forget about performance and start looking at how to invest,” said Adrian Mastracci, a portfolio manager with KCM Wealth Management Inc., a firm that focuses on long term investors.
“You’re going to go through the trauma of making the first lousy investment. You’re going to lose some money. You’re going to have to learn to look at a loss and say, ‘It’s time for that loss to go.“’
He suggests approaching your foray into the markets gradually, over the span of a year, so that you train yourself to put your money at risk and learn to deal with the highs and the lows.
To educate yourself, Mastracci suggests reading a few books on the topic and talking to friends, all while trying to figure out how much time you have to devote to investing and whether you know enough to move forward.
Mastracci, for example, put together an investment club when he was in university.
He rounded up some like-minded friends for regular meetings, and each person would bring forward a stock or bond and make a pitch for it. If the others were interested they could go out and buy some shares. If not, they would move on the next.
He also suggests trying to diversify your investments, buying quality stocks and making your strategy a straightforward one that makes sense to you.
“This is the time when it’s going to cost you the least amount to make a mistake, this is the time to make it,” he said.
It’s also a good idea not to get overwhelmed by the sheer amount of information available to the average investor, through mainstream media outlets and countless investment websites.
“There’s never been so much noise, there’s never really been so much (financial) coverage,” said Ernesto Salvi, a financial adviser with Edward Jones in Vancouver.
Over the last four to five years in the U.S., investors have faced a barrage of uncertainties linked to the financial meltdown, largely reflecting an agonizingly slow recovery from the financial collapse of 2008.
The complications have made it difficult for some new investors to navigate their investment options with any sort of confidence. When it comes to the actual sectors you should invest in if you go straight to the stock market, what you pick will depend on your comfort level with risk.
If you want to play more offence, Salvi said, you should look at the energy sector, as well as financials, industrials, materials, technology and consumer discretionaries.
If you’d rather take more of a defensive stand, you’d be better off looking at communications, health care, consumer staples and utilities.
When in doubt, buy a balanced fund that includes stocks and bonds, because the mix can shield you from potential downturns.
“You can buy a balanced fund for as little as $50 a month, so there’s no excuse,” Salvi said.
He suggests starting as soon as possible, because of the effect on time on compound interest.
An investment of $50 a month at an average rate of return of eight per cent, for instance, will give you $9,000 in 10 years or $45,000 in 20 years.
An exchange-traded fund, or ETF, is a helpful way to go because it provides diversification with just one trade, which saves on fees and commissions.
Salvi also cautions against borrowing to invest, which increases your risk because if you incur losses on your investment, that will multiply how much money you owe the lender, and could send you into a debt spiral.
If you start to panic, you can also approach a financial adviser, who can talk you through some of your investments and be a voice of reason.