CFP: Tips for first-time investors

So, you’ve decided you want to begin investing. You probably have some questions. 

Whether you just cashed your first paycheck or are ready to let your money grow as you progress in your career, learning how and when to invest for the first time can be daunting. 

Luckily, there are a few basics to get you started. For first-time investors, growing your money is about playing the long game, certified financial planner and senior financial advisor Matthew Saneholtz tells CNBC Make It. 

“It’s not timing the market, but time in the market that is the most important thing,” he says. 

To maximize your time in the market and take advantage of compound interest, it is critical to start investing early, Saneholtz says. Compound interest allows your money to grow at a faster rate than simple interest, as you earn returns on not only the principal sum you invest, but on the returns themselves. It’s interest on top of interest.

That compounding “truly pays off over the long term,” Saneholtz adds.

Here are four steps to take if you’re looking to invest for the first time. 

For new investors, the first thing to do is define your investing time horizon, Saneholtz says. “In other words, why and how long are you investing?” he asks.

Financial goals can be categorized into three main categories, he adds:

1. Short-term, such as buying a house in the next couple of years
2. Mid-term, such as sending a kid to college down the line
3. Long-term, such as retirement in a few decades

Your time horizon will help you plan how you invest and the risks you are willing to take. It is the “single most important” factor to consider and should be determined before you put even a dollar into the market, Saneholtz says.

“Anything under five years can be considered more of a short-term time horizon, which may affect what and how you are investing,” he says. “On the other hand, if I’m investing … and don’t plan on using it for 20-plus years, then I can be a lot more aggressive with my investment account.”

Before investing in the stock market, invest in yourself, Saneholtz says. By that, he means it’s important to save up enough to cover three to six months’ worth of expenses in case of an emergency.

Rather than parking that money in an investment account, a high-yield savings account is generally risk-free and will still let your money grow some. Currently, high-yield savings accounts offer around a 5% APR.

You might also consider putting some money toward a big purchase, such as a house or an engagement ring, Saneholtz says. 

While picking a single company to invest in — such as a shiny new start-up you think will ‘go far’ — can be enticing for first-time investors, committing to a more diversified investing approach is far wiser, Saneholtz says. 

“Investing is different from speculating. Don’t let your emotions get in the way of investing,” he says. “Investing is setting a plan and letting the plan work for you. Speculating is buying crypto, a single stock or some small company you think will take off.” 

Instead, “you’re better off buying a basket of companies where you’re buying the economy as opposed to trying to pick one single stock.”

Saneholtz recommends investing in broad-based exchange-traded funds. EFTs are made up of multiple assets, including stocks and bonds, that allow investors to buy into a broader portfolio with a single purchase. They typically have lower fees than actively managed funds, and allow investors to immediately diversify their investment portfolios, therefore reducing their risk.

“Where I’ve seen people get into trouble is when, for the first time, they try to pick individual stocks,” Saneholtz says. “There are so many different variables for a single business to become profitable, stay profitable and achieve and win their industry.”

Although you may be tempted to invest in buzzy companies, “when initially dipping the toes in the water, I would choose a broad-based type of fund which owns many different companies in many different industries,” he adds.

Once you’re invested in your first fund, “slow and steady” is the best strategy, Saneholtz says. While it might be tempting to sell off your investment as soon as its value drops, as long as you’re properly diversified, it’s often better to ride out any market volatility.

“Let the market work and grow for you,” Saneholtz says. “If you are looking to grow, slow and steady wins the race.”

Dollar-cost averaging, a strategy in which you regularly invest the same amount of money, can help you weather ups and downs in the market.

When you hear how the economy is affecting the market in the news, “don’t always react,” Saneholtz says. “Be prepared to invest for the long term.”  

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