Beginning investors are a nervous bunch.
Their frustrated naivete can be amusing as well as heartbreaking. As a finance professional, it’s my responsibility to walk these folks through the emotional minefield of investing. Along the way, I often need to play the role of pop psychologist and assuage their doubts and fears.
While investing beginners are far from a homogeneous bunch, many seem to share the same problems and concerns. These can range from unrealistic expectations for potential investment gains and losses to bouts of second-guessing about strategy.
As I deal with overtures from investment beginners who aren’t sure that they can afford to save or invest their money for retirement.I give them the following Investing tips.
They might argue that their salary affords them a comfortable lifestyle but doesn’t leave much room for savings. To assuage these doubts and convince these folks to start investing at an early age, I need to give them a quick rundown on the magic of compound interest.
I can pull out plenty of statistics and expert testimonials to back up my assertions. I don’t bore them with a complex mathematical explanation of how compounding affects capital accretion. Instead, I tell them the oft-repeated parable about the 25-year-old retirement investor who made enough money to retire on by the time he reached middle age. I try to make sure my prospective client understands the financial benefits of a tax-advantaged retirement account as well.
Beginning Investors Fear Volatility
I also get plenty of grief about the volatility of the equity markets. Many finance virgins are conservative to a fault and find it perfectly acceptable to direct all of their available cash into low-interest savings accounts and CDs. They look upon the wild market swings that can occur on any given day with abject horror.
Beginning investors need to know two distinct facts. First, the rate of return on classic savings vehicles is virtually nil after accounting for inflation. Even the long-term CDs that still offer annual interest rates of 2 to 4 percent are a bad deal. Although they seem attractive now, they may lock up funds for 10 years or more. No one knows what the financial world will look like in a decade: Inflation could be at 10 percent and that now-attractive 4 percent interest rate would have become an effective negative yield of minus 6 percent.
Secondly, stocks generally offer better returns than fixed-rate savings vehicles. I tell my nervous clients that they don’t have to invest in speculative pharmaceutical or technology companies to earn tidy profits. Instead, I direct them to stable dividend-paying stocks that have steadily appreciated over the years while paying out dividends of 3 or 4 percent.
My new clients might also worry about diversification. I may be able to turn this nervousness into a major advantage. I tell my novice investors that they shouldn’t invest in any single asset class and convince them to move some of their funds from low-yield CDs to higher-yield equities. If they have sufficient funds, I introduce them to the world of corporate bonds and preferred stocks as well. i show them what a balanced portfolio should look like and guide them as they build one. I often remind them of the old adage: “Don’t put all of your eggs in one basket.”
Unless they’re willing to accept a retirement characterized by penury and regret, all beginning investors need to learn how to invest their hard-earned funds for the long haul. After all, patience is a virtue.
About the Author:
This article was created by Roy McClure for the team at Kanetix; to view the Kanetix comparison service visit Kanetix today.
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