7 Important Tips For First-Time Investors to Reduce Risk

I remember being a first-time investor back in 2014 and recall being nervous to get in the stock market, but also excited and a bit overwhelmed.

Technically, I already had a 401k for a year at this point, but I had no idea what was in it or what that even was.

So opening my first account with Vanguard and putting a plan together to start saving and investing was a whole new experience.

Putting your money to work in investments can be extremely smart, but it can still put you at some financial risk if you don’t know what you are doing.

Below are some important tips for first-time investors that I think everyone needs to understand to ensure a great start to the investing experience.

Note: Even the best investor can lose money and feel the effects of market swings (stocks, real estate, etc.). If top-notch Investors can make mistakes, you certainly won’t be perfect either. Don’t be afraid to get started, but certainly don’t get too gung-ho without taking in some of the below tips.

1. Get educated before investing

Before putting a dime of your money investing in the stock market or real estate, you need to educate yourself first.

Investing is exciting and feels good, but you can make costly mistakes without learning the basics.

For example, learn some stock market investing terms, learn how to read a prospectus, read finance and investing books, etc. You have to set aside some time every week to reading and learning.

If you have a successful investing mentor, consult with them too and ask questions.

Going in blindly with your hard-earned money will put you in some financial risk. You may get lucky, but that’s more like gambling than investing.

Related: If you don’t have a lot of money to start or want to test the waters, you can invest your spare change in stocks. Check out the popular investing app, Acorns for more, and when you sign-up get $10 after your first investment.

2. Lose the “get rich quick” mentality

Many first-time investors get overly idealistic and start seeing dollar signs everywhere. But you need to take a step back.

Too many people are looking for the quick way to get rich, but having that mentality can burn a hole in your pockets…FAST.

Sure, you may strike gold and get lucky, but you are bound to have a lot more lows than highs.

Approach investing with a long-term approach, with the idea to grow steadily and effectively.

This will help you avoid investment money traps like random investing tip emails, latest trends, media headlines tugging at your emotions, etc.

If it sounds too good to be true with investing, 99% of the time it is. And if getting rich quick was real, don’t you think more people would be successful?

3. Know your goals for investing

Pretty much like anything else you might do, what is your goal for actually investing your money? It’s something you need to ask yourself before you start putting your money to work.

Are you investing for retirement? Diversifying your assets? Looking for passive monthly income? A combination of things?

Knowing and writing these financial goals down can help you better visualize your purpose for investing money. This helps you analyze if you should be more conservative or more aggressive pending your timelines.

Your goals may shift as you start a family, different life events happen, or your timelines change — so remember it’s fine to re-evaluate.

4. Understand what fees are involved

A big mistake first-time investors make, especially if it relates to the stock market, is not understanding the fees involved.

Unfortunately, many financial institutions have quite high fees that eat away at any of your potential gains.

A lot of people are not aware of these fees, ignore it, or really don’t think it affects much on their gains.

But many mutual funds, for example, may have 1-3% fees on them. So if you had 8% returns that year, you are actually only at 5-7% pending your weighted average of fees now.

Extrapolate that over years of compound interest, you’ve missed out on thousands and thousands of dollars. Money, that could have helped you hit your goals or reach retirement faster.

I had a company 401k, where every fund had recurring fees of 1.2-2%. Again, doesn’t seem like much but it eats into your gains. No thanks!

Look for low-cost index funds or ETFs like those on Vanguard or Fidelity, which can be more efficient. The point is, look at the fees associated with any funds.

Related: A great tool for your 401k is Blooom. You can get a free 401k portfolio analysis with recommendations and helps you uncover hidden fees. Get started for free here.

First Time Investor

5. Don’t go all in – diversify

Sort of two parts here for the first-time investor to know, which I’ll go into a bit more below.

Whatever cash you have, never go all in

As you are just learning and getting started with investing, ensure you do not use all the cash you have.

You are bound to make some of these mistakes listed in this article anyway (I sure did), but you could do some serious financial damage by using all your money.

Ensure you have a basis in your savings and checking accounts, then take a fraction for investing (outside of your company 401k if you have one).

I started with $500 in a brokerage account, then started expanding with IRA’s once I saved more money.

And $500 may seem like a lot right now to you, and that’s okay.

You can test the waters by investing in fractions of shares with as little as $5 with Stash. It might not be a long-term solution, but the app is a great learning tool and a way to start investing some money with minimal risk.

The money you do invest, make sure to diversify

When you do start to invest more money, make sure you are not putting all your eggs in one basket. Ugh, super cliche statement. But necessary to say.

If you are investing in the stock market, make sure to have some various exposure to stocks and bonds.

Find a good balance that doesn’t devastate you during a bear market.

As you get more money saved and invested, look at putting money into some alternative investments — things like real estate, art, businesses, etc. Find ways to mix up where your money goes.

6. Leave your emotions at the door

While it’s good to show emotion in your life — when it comes to investing– you need to leave it behind.

Emotional investing and decision making can be devastating for your investment portfolios and pockets.

Sounds easy right?

But when you see the stock market plummet, can you hold ground and not make irrational decisions?

There, of course, is some time where you may need to sell or cut losses in investing, but you have to know when to ignore the noise.

Even though I knew this when I first started, I’d still sell or move funds around because it wasn’t working right away.

Guess what? I lost money and 9/10 times, it would have recovered and then some if I stood my ground.

Similarly, you may want to buy a stock or not want to sell because it holds some sentimental value to your life.

I understand why, but unless you truly review the investment and it looks good, you have no business investing in it on pure emotion or sentiment.

If you think you are going to make a rash decision, back off for now and keep your money on the sidelines.

7. Reassess your investments and goals

Once you start investing and get your rhythm going, don’t get too complacent.

Even if something does appear to be working, you should still be reassessing your investments and investing goals.

Your personal life changes, timeframes for certain things are altered, and what you can risk may differ. All can and probably will change over time.

Because of this, you should periodically review your investments and how things are going based on your goals.

However, you also don’t want to fall into the trap of obsessive tinkering either as it can affect your financial gains and put you at risk. The real skill is to find a good balance of reassessment.

Final Thoughts

Being a first time investor is an exciting time and you’ve made a good choice to take the steps to change your financial life.

However, you can not blindly start investing or you’ll end up putting yourself in financial danger.

The above tips can help you minimize your risk and ensure you have the right mindset before investing your hard earned money.

Are you starting to invest money? What questions do you have? Are there other tips first-time investors should consider?