When I first started investing, I had many questions. Fortunately, I had helpful and experienced investors around me who were able to guide me through my first steps as a stock market investor. However, others may not be so fortunate and may, as a result, be put off from investing due to fears of making a mistake.
Because of this, I thought I would answer three common questions that new investors might have.
How much should I invest in my first stock?
This may be the first question that many new investors might have. In reality, there is no simple answer to this question. It depends on a multitude of factors such as your risk appetite, portfolio size, and investment strategy.
Having said that, I believe that all investors should still follow a few rules of thumb before making a decision on this.
First, our investment size should be large enough such that the commission charges do not exceed 1%.
For instance, investors should try not to make a transaction below $1000 while using brokerages that charge a minimum of $10 per transaction. Overlooking the effects of these transaction fees could be detrimental to our overall portfolio returns.
Second, investors should diversify their portfolio adequately and each stock should ideally not exceed 10% of your entire portfolio. This is to ensure that any bad investments cannot overly affect your total portfolio returns.
Where can I get stock ideas?
Recently, I wrote an article on three good ways we can screen for stocks. Firstly, by screening for stocks those are undervalued or trading at low premiums. Investors can also take a top-down approach and seek out growing industries, before narrowing their options to specific companies within that industry.
Finally, and maybe the best option for new investors would be to use a stock recommendation service that provides monthly new stock picks for investors. It is important to choose a reasonably priced stock recommendation service that has a long history of beating the market.
Should I actively manage my own portfolio or use professionals?
Before deciding whether to manage your own portfolio, it is important that we understand our own investment capabilities.
Investing requires patience, good control of emotions, and an understanding of businesses and stocks. New investors who are looking for above average returns and have the confidence and knowledge on stocks should consider managing their own portfolio. This is because we can have better control over our finances and can avoid paying hefty management fees.
Unfortunately, there are also often numerous retail investors who over-estimate their capabilities or are prone to investing mistakes due to greed and fear. This has led to retail investors underperforming the index by a considerable amount.
For instance, between 1990-2000, the S&P 500 index returned 7.81% annually. On the contrary, retail investors averaged only 3.49%. If you fear that you are unable to make good investment decisions due to poor control of emotions, seeking a professional for help may be your best option.
The Foolish bottom line
New investors will unsurprisingly have many questions before they start investing. Hopefully, this article adds a little bit of insight for new investors who are just starting out on their investment journey.