Investing can often seem intimidating, but in today’s environment, it’s actually never been easier for first-time investors to get involved in the market. Fractional shares and no-minimum accounts  allow just about anyone to start investing, even if they only have a few dollars they can invest.

While increased accessibility to investing is a good thing, it doesn’t mean first-time investors should dive right in. I recently had the opportunity to speak with Ramsey Brock, president of Brock Asset Management. During our conversation, he highlighted the importance of developing a “plan of attack” before investing, and why a well-thought out plan is an absolute must for every investor.

1. You Must Define Your Goals

First, Brock recommends that investors have clearly defined goals for what they want to accomplish with their investments. For some people, saving for retirement is a valuable “first” goal, especially since the sooner you start investing toward retirement, the more you’ll be able to grow your investments through compound interest. But you could also invest toward other goals, like a down payment for a home, a new car or your child’s education. 

“A clear goal gives you a quantifiable amount you need to reach, which then guides how you carry out your investing strategy,” Brock explains. “You can estimate the cost of what you’re investing toward and set a timeline for when you want to reach that goal, which will help you determine how much you need to invest to get there.”

2. Determine Your Level of Risk Tolerance

As part of deciding on investing goals, Brock also recommends that first-time investors determine their level of risk tolerance. “Your risk tolerance is the level of loss and market volatility you’re willing to accept for your investments,” he explains.

“This will directly influence the types of investments you make. If you have a lower risk tolerance, you’ll invest in low-risk positions, which may deliver lower returns but are less likely to cause you to lose your money. There’s always risk involved in investing, and you must be aware of this to guide your decisions.”

Regardless of your level of risk tolerance, Brock advises using a balanced, diversified portfolio to lower overall risk.

3. Decide How Much You Can Invest

“As with any other part of life, you need to set a budget for what you’re able to invest,” Brock recommends. “Ideally, investing should be considered part of your overall budget. Consider your other necessary expenses and how much extra you have at the end of each month. The ‘extra’ money you have left after addressing other key expenses can then be distributed to your investments and other short-term savings accounts. Don’t invest all that extra money, however — be sure to set some aside for emergencies.”

The amount of “extra” money left over for investing could vary from month to month, but even relatively small contributions can make an impact on long-term outcomes. In Brock’s view, consistency is what really matters.

4. Consider How Investing Aligns With Other Financial Needs

As part of deciding how much you can invest, you should be especially mindful of other financial needs. For example, financial experts recommend that you save three to six months’ worth of expenses as an emergency fund in case of job loss or other financial crises. Placing this money in a savings account is a safer option than investing it, where it could be subject to short-term losses.

Similarly, households with high credit card debt should focus on paying down that debt prior to investing, as current credit card interest rates average above 20% — well above the average return of the market. Investment decisions (including amounts and timing) should consider these other key needs.

5. Educate Yourself Regarding Investment Options

Developing a plan of attack also requires that first-time investors educate themselves regarding different investment options. Understanding the differences between stocks, bonds, mutual funds and ETFs will play a critical role in helping you decide which asset classes to invest in based on your goals and risk tolerance.

First-time investors should also try to understand the underlying principles and values for any asset they wish to invest in. Making research and education a part of your plan will help you avoid high-risk investments and find options that are a better fit for your needs.

6. Develop a Long-Term Mindset

Finally, Brock emphasizes that first-time investors must develop a long-term mindset for their investments. “Investing in the stock market works when you adopt a long-term strategy. Rather than trying to time the market, focus on making consistent contributions to your account so you can take advantage of compound interest,” Brock says.

“This will allow you to grow your investment significantly over time, as opposed to trying to time the market to maximize short-term gains. Timing the market usually doesn’t work, but a long-term approach will put you on track for reaching your goals.”

Planning for Success

As Brock’s insights reveal, success in investing doesn’t happen by accident.

By developing a clear plan for what you want to achieve and how you’ll go about doing it, you can significantly increase the likelihood of turning your investing goals into reality. Even with a relatively small amount to invest, a clear plan of attack will put you on the right track.

Published by: Khy Talara