Pattie Lovett-Reid: Top tips for novice investors
When you look at the returns in North American equity markets in 2019, it is easy to understand why first-time investors want to jump on the bandwagon.
If you’re one of them, before you make your foray, ask yourself: Why do I want to invest in the markets? When will I need the money? And what am I saving for?
Here are three tips for young Canadians who are just starting to invest:
1. Invest in stocks for the long run
Investing in equity markets comes down to timing.
If you are likely to need the money within the next few years and are looking for financial stability, consider another investment. The markets are volatile, and there are absolutely no guarantees your capital investment will be there when you need it. It’s helpful to ask these three questions: How much am I prepared to invest for the long term? What reasonable rate of return can I expect from my investment? And how long am I prepared to be invested for?
2. Know your risk tolerance
Risk tolerance is often influenced by your income, net worth, education and even age. How you feel about risk, and the degree of anxiety you feel when risk is present, is personal. If you are a younger investor looking to create wealth, and have a long-term time horizon, you may react differently than someone who is older and in wealth-preservation mode. When it comes to risk, ask yourself: How much am I willing to lose, and how much can I afford to lose? Would I risk $100 to gain $1,000? It isn't right or wrong. It is all about how you would respond to potential outcomes, and knowing where you draw the line.
3. Diversify your investments
Never overlook the power of diversification. Savvy investors do not invest in only one company, one industry, one sector, one country or one currency. What makes diversification work is asset allocation. Asset allocation aims to balance your risk by dividing your money across major categories such as cash, bonds, stocks and even real estate. Each asset class has its own level of risk and behaves differently depending on market conditions. So if stocks go higher while bonds head lower, there is protection against a major loss in your portfolio. Take the time to figure out how much of your money you are willing to dedicate to each category, before deciding which specific assets to invest in.
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