5 Things You Learn After Your First Investment
So you finally did it. You overcame your fear and confusion and decided to jump into the world of investing. Maybe it went well, or maybe it was a total fail. Either way, you probably came away with some valuable lessons.
You may be asking yourself, “Was my first stock investment worth it?” Just taking the leap to invest was a commendable first step. About half of all American households don’t invest in the stock market at all, even through retirement accounts. Young people seem especially frightened of investing, with just 37% of Americans below the age of 35 owning stock.
Millennials might be afraid to put their money in the market because they lived through the Great Recession or they may be more focused on immediate needs, given rising student debt and housing costs.
Still, investing is important, especially for younger people who have more time to withstand the ups and downs of the market and allow their assets to accumulate in the long term. Taking advantage of the power of compound interest is key to saving for retirement and building wealth.
But all investing strategies are not created equal. Whether or not it was successful, your first investing experience may be able to teach you about everything from your risk tolerance to how the stock market works.
Those lessons can help you make better choices on your next investment. The important thing is that “my first investment” not turn into “my last.”
Lessons You Learn as a First-Time Investor
1. Getting Your Financial Priorities Straight
If you invested before you were ready, you may have learned the hard way that it pays to have your financial ducks in a row first. While investing can be a smart move for many, it makes sense to have certain priorities checked off first.
First, you may want to pay off any high-interest debt, such as credit cards. As of November 2019, average interest rates for credit cards are over 21%, and you’re unlikely to earn that kind of return in the market.
Second, many experts suggest building up an emergency fund that can pay for three to six months of living expenses before investing.
That cash is there in case you lose your job, rack up medical bills, or run into other unexpected costs. If your money is tied up in the market, there’s a risk it won’t be available when you need it or that you’ll be forced to sell at a loss.
2. Knowing Your Goals and Timeframe
If you invested hoping that you’d have enough for a down payment next year, but ended up losing money, you’ve realized the importance of thinking ahead.
Before you start investing, you may want to become clear on what your financial goals are and when you want to achieve them. Are you planning to use the funds for a wedding in two years, starting a business in five years, or retirement in 40 years?
If you want to use the money in the short term (less than three years), it may make sense to keep it in cash equivalents or low-risk investments, such as high-yield savings accounts, money market accounts, or CDs. That way, you ensure that you can access the money quickly when you need it.
For mid-term goals (three to 10 years), you may want to look for a balance between earning a return that outpaces inflation and keeping your money safe. For example, you may want to invest 60% of your portfolio in stocks (which can be more volatile) and 40% in bonds (which are generally less risky).
If you’re investing for more than 10 years down the line, you may want to be a bit more aggressive, since you’ll have more time to withstand short-term losses and see your principal grow over time.
As you get closer to needing to withdraw the money, you can gradually shift your investments to be more conservative. Generally, the more time you have, the more risk you can consider taking on.
3. Recognizing the Importance of Diversification
If you bought stock in a single company only to watch it crash and burn, you’ve learned how important it is to diversify when investing—and also the meaning behind the adage “don’t put all your eggs in one basket.” Because no one can predict with certainty how any given investment will do, diversifying helps you reduce risk and potentially increases the chances of higher returns.
Diversifying involves holding investments that are unlikely to react in the same way to a given economic event. That could mean spreading your portfolio across different sectors, geographies, and types of assets.
For example, stocks tend to do better than bonds in a strong economy, but bonds often outperform stocks during a downturn. By investing in both, you are more likely to mitigate your losses during market fluctuations.
4. Understanding Risk
If you lost money on your first investment, you may have learned the lesson that risk is inherent in the process. When you invest in the stock market, no one can predict the exact return you’ll make or guarantee that you won’t suffer losses. There are several types of risk to worry about, including:
• Business risk: The company that issued a stock or bond you own declares bankruptcy or goes out of business.
• Volatility risk: Stock prices go up and down due to events within a company or sector, or in the market or world as a whole.
• Liquidity risk: You can’t access your money when you want to, because you can’t find a buyer for your investment or will owe a penalty for early withdrawal.
Some investments (such as CDs and bonds) tend to be less risky than others (such as individual stocks). And without taking any risks at all, you are unlikely to earn a return that exceeds inflation and allows you to save for retirement or build your wealth. You can determine the right investment mix for you based on your goals, time horizon, and tolerance for risk.
5. Doing Your Homework on Fees
You have probably learned that investments come with varying price tags. This can include fees charged by an investment manager or advisor, usually as a percentage of the assets under management.
It also encompasses expense ratios on mutual funds, which are taken out of the returns you earn.
You may also be responsible for transaction fees when you buy or sell stock. Some mutual funds or brokerages may also charge an annual fee or a closing fee if you close the account.
Continue Learning With SoFi Invest®
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The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC .
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Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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