FIRST-TIME INVESTORS: THE CHANCE OF A LIFETIME
The recent plunge of global stock markets has sent many investors scurrying for the exits. While more experienced investors should know better and avoid panicking, for young, first-time investors, this could be the chance of a lifetime. The old saying ‘it’s better to be lucky than good’ summarizes the reason that for new investors now is a great time to invest. If you can buy good stocks of quality, profitable companies for a substantial discount, you potentially could be well rewarded down the road. The fact that a young person has managed to save enough to open an investment account or a newly married couple has wedding money at their disposal to invest happens to be lucky, and their good fortune should be taken advantage of.
But why should novice investors take the risk now, when the markets are falling, to start investing? Some investors will say that they will wait to invest until it’s clear that the market is heading up. The problem is that there is no way to know if the market is moving up until after the fact. While none of us can predict the future we can use the past as a guide to try and figure out how past crises worked themselves out, although we should also be aware that past performance is no guarantee of future success.
Buy Low/Sell High
According to an old investment adage, one should buy when prices are low and sell when they are high. Although there is no sure way to declare that the market has finished falling, it is certain that the market would be cheaper after a 13% decline than it was 13% ago. In other words, the market is “on sale.” None of us likes to pay retail prices for anything and with the recent market pullback it could feel as if the investor is getting a great deal and buying wholesale! Now could be the time to implement a classic investment strategy known as ”buying the dips.” An example of this would be to wait for a pullback of at least 10 percent in prices, and then the investor will make his purchase. Relying on long-term statistical analysis, the investor would say that if over time, markets tend to move higher, any opportunity to buy stocks after a severe pullback could result in nice profits. This approach is much different than trying to time when the market will bottom out and start moving higher.
One of the biggest risks of trying to “time” the market is the potential of “missing” the market. This is when an investor, thinking the market will go down, sells his investments and sits in cash waiting to re-enter the market when it’s clear the market will go up. But while the money is on the sidelines, the market shoots up. The investor has, therefore, incorrectly timed the market and “missed” the best performing months. Numerous studies have shown how much an investor can lose by being out of the market. For example, if a person put $10,000 into an investment that performed similarly to the S&P 500 Index in December 1990 and didn’t touch it until December 2005, the $10,000 would have grown to $51,354. But if the investor missed even the 10 best days of the stock market during that 15-year period, his investment would have only grown to $31,994. And if he missed the stock market’s best 50 days, the original $10,000 investment would have been worth $9,030 by the end. Oftentimes the market recovery is so swift that by the time such investors have made up their minds to invest, it’s too late. The market will have already recovered most of its losses.
Getting Started
Last week I wrote about how newly married couples should start investing immediately. Many young couples, mistakenly, put all of their wedding money into the bank, where it makes virtually no interest. Think about the future. How will they be able to afford paying for their children’s weddings in 20 years’ time if their savings do not grow? To get started, a young couple will find it very useful to consult with a financial adviser, who will help them to define their financial goals and needs. Then, an investment plan can be drawn up to achieve these goals and meet these needs.
Let the recent market drop work in your favor and start investing now. Buy wholesale.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc., or its affiliates.
Aaron Katsman is author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, SIFMA. For more information, visit www.aaronkatsman.com or email aaron@lighthousecapital.co.il
