Entering the market and becoming a first-time investor can be intimidating; so much so that many people simply avoid it all together, and that goes double for the younger generations.
According to a 2016 survey by Bankrate , just one in three millennials, a group comprising 18- to 35-year-olds, invests in the market.
Why are young people staying away from the market? Fear and a perceived lack of funds. According to Bankrate , when asked why they don’t invest, 46% of millennials said they feel they don’t have the money.
For example, 22-year-old Bethia Feldman, who works at an early childhood program in Oneonta, New York, shared with Bankrate that “seeing a cut in my paycheck, even though it was very small” was her reason for not participating in her workplace retirement plan.
But the lack of understanding of what the market can do for you, and how even small investments can make a difference, could be costing people some serious cash in the long run.
Luckily for millennials, and everyone else, we’re here to help. Here are five important things a first-time investor needs to know about entering the market.
1. Think About Your End Game
Before you start, it’s key to think about what you’re goals are and why now could be a good time to start investing. Do you want to save for retirement? Are you looking to save for a down payment on a home?
Perhaps you’re trying to pay down student loans, buy a car, or go on a big trip. Each of those motivations takes a different investment strategy. Think about what you want and tailor your financial education from there.
2. Learn Some Investment Lingo
Getting into the investment game means learning an entirely new language. It’s true that investing jargon can be overwhelming, so here are a few key investment glossary terms to get you started.
What Is a Stock?
Buying a stock means you are buying a portion of a company, otherwise known as a “share.” Among other factors, the stock’s price can rise and fall with each of the company’s successes and failures. Individual stock prices can vary greatly, from a few dollars per share for a smaller company to a few hundred dollars per share for larger companies, like Apple, Google, and Microsoft.
What Is a Bond?
Bonds act as loans for an organization. When you buy a bond, you’re loaning your money to said organization. Typically, bonds are bought and sold for a fixed term. At the end of the bond’s term, your money is returned plus interest. While not risk free, bonds are usually a safer option for your investments; however, they also typically offer lower returns than stocks.
What Is a Mutual Fund?
Mutual funds are a grouping of stocks, bonds, and other investments. When you invest in a fund you’re investing in pieces of each. Mutual funds are an excellent way for new investors to diversify their financial portfolios without having to do a ton of work.
What Is an ETF?
Exchange-traded funds, or ETFs, are similar to mutual funds as they allow you and other investors to purchase a collection of investments — stocks, bonds, and other investment vehicles. Though ETFs can be traded and sold in the stock exchange, they can only be purchased by a broker.
What Is Risk Tolerance?
Risk tolerance is just as the name implies. According to Investopedia , just one in three millennials, a group comprising 18- to 35-year-olds, invests in the market. explains it as “the degree of variability in investment returns that an investor is willing to withstand.” In other words, it describes how risky you’re willing to get with your money.
Are you willing to go through large swings in the market and hold out for long-haul potential gains, or would you rather bet on a surer thing that may not pay as high dividends in the end? Each person has their own approach and there is no wrong answer, but it will help you decide if you’d rather invest in stocks, bonds, or mutual funds.
Age may also play a role when it comes to risk tolerance. As Money Under 30 noted, a person investing in a retirement account in their 20s could invest more heavily in stocks as he or she will not need their retirement funds for many years to come. This means they can be a riskier investor and potentially reap more reward, or have more time to recoup any losses.
However, if you’re in your golden years, you no longer have decades before retirement for your money to grow, meaning it might make sense to make more conservative choices with your investments.
Money Under 30 suggests the following formula: 100 – age = percentage of stocks. So, if you’re 20 years old they recommend that your portfolio contain 80% stocks with the rest diversified into bonds, or other means. But, again, it all comes down to your personal feelings on the market and just how risky you want to get with your cash.
3. Understand You Can Never Predict the Market
Though all first-time investors wish they could predict the future, you simply can’t. Thinking you, or anyone, can time the market and predict exactly what kind of gains you’ll make is a fallacy. Why? Because despite what it may look like, the stock market isn’t all dollars and cents. It also comes down to human emotions.
Just look at what happened to Facebook’s stock in 2018. When consumers found out that their beloved social network was selling their private data, the company’s user numbers plummeted, causing their stock to drop more than 11% in a single month , shaving billions from its valuation. Moral of the story: You can’t predict stock behavior.
4. Enter the Market Through a Retirement Account Like a Company-Sponsored 401(k)
If you’re fortunate enough to have a job that offers a matching 401(k) program, you absolutely should be taking part.
Why? Because it’s essentially free money. Here’s how it breaks down: If you make $50,000 a year and your company says it will match 100% of your contributions up to 5% of your income, that means they will put up to $2,500 into your 401(k) each year. But you must also put $2,500 a year into your 401(k) as well.
5. Consider an advisor or automated advisor
A traditional personal financial advisor is someone who advises you on your finances. They do just as the name implies and can advise you on how to manage your money, perhaps by providing information on which stocks to buy.
They might also provide investment management. If you choose to hire someone to do your investment management make sure they are a fee-only financial advisor who doesn’t earn commissions based on product sales. That way he or she won’t try to sell you on a good or service that he or she gets a kickback on.
Robo-advisors — otherwise known as automated investing or online advisors — take the guesswork out of investing, making them an ideal tool for first-time investors. Typically, these services use advanced algorithms to both build and manage a diversified portfolio for investors. And that’s exactly what a SoFi invest account can do for you.
With a Sofi Invest® account, investors can set goals for what they want their money to do — be it save for retirement, save for a home, pay down debt, or more — then they can allocate a specific amount of money to deposit into their account each month.
The algorithm takes it from there, investing your money for you and rebalancing as needed. And if you really want to talk to a human, you can, and it’s complimentary — personalized investment advice from real financial advisors comes as part of the package. So, what are you waiting for? Sign up and start dipping your toe in the investment game today.
Choose how you want to invest.
SoFi can’t guarantee future financial performance.
This information isn’t financial advice. Investment decisions should be based on specific financial needs, goals and risk appetite.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Advisory services offered through SoFi Wealth, LLC, a registered investment advisor.