Investing in the stock market can be a powerful tool for growing wealth. However, as Sebastian Pillay, Head of Share Investing at FNB, highlights, it’s essential to approach the stock market with knowledge and level headedness to avoid common pitfalls and make the most of your investments and time horizon.
He offers some tips to get your journey as a new share investor off on the right foot:
- Know why you are investing: Before diving into the stock market, it’s crucial to have a clear purpose for your investment. Are you saving for retirement, a home deposit, or wealth generation? Understanding your motivations can help guide your decisions and ensure that you’re not investing blindly. And knowing your ‘why’ will help keep you focused and avoid emotional decisions during market volatility.
- Have an investment strategy: While it doesn’t have to be a complex one, outline a well-thought-out strategy, that considers your financial goals, time horizon, risk tolerance and amount that you want to invest. In addition, it should include how you plan to allocate your capital, what type of assets you’re focusing on and how long you plan to stay invested. This is key to a successful foundation as it forms the bedrock of your investment journey.
Pillay recommends considering whether you prefer growth stocks, dividend-paying companies, or a mix of both. As your circumstances change and you go through the various life stages, your strategy may need to adapt – but starting with a well-defined plan will keep you disciplined and focused.
- Keep it simple, start with an ETF or unit trust: If you’re new to investing, starting with an Exchange Traded Fund (ETF) or unit trust is a smart way to diversify your portfolio without the complexity of selecting individual stocks. “ETFs allow you to spread your risk geographically and across sectors, ensuring that you’re not overly exposed to one specific share or sector,” says Pillay. Keeping your strategy simple, makes it easier to manage your investments when you are starting out. As you gain experience and confidence, you can then branch out into individual shares and other asset classes, even setting up multiple portfolios, each with their own strategy tailored to your needs.
- Be realistic: Starting out as an investor can be exciting, but it’s essential to remain grounded. Don’t give in to the temptation of using money you need for day-to-day expenses or to service debt. There will be periods of anxiety and stress, however keeping to your strategy is vital for reaching your goal. Only invest with money you are comfortable to part with, ensuring that you are financially stable even if the market dips.
- Be consistent: Consistency is key in the world of investing. Pillay advises deciding on a monthly amount you can afford to invest, and then sticking to it. “Regular, consistent investments allow you to build wealth over time, regardless of market conditions and helps with dollar cost averaging, then, as your financial situation improves, you can gradually increase this monthly contribution to grow your portfolio further. It is advisable to set all your investments as a debit order so that at the end of the month you know that you have kept to your plan and whatever is left over is additional funds you can choose to further invest, use to settle some debt, or just treat yourself.
- Do your homework: Pillay emphasises that investing is not gambling, so educating yourself and doing research is vital. “Don’t just chase shares that have been outperforming, as you risk buying in when they’re already expensive. Look for companies and sectors with solid long-term growth potential, and ensure they are well-positioned to succeed in the future.”
- Review your performance: Reviewing your portfolio and performance history is key in tracking how well you have done in relation to the market. Many investors suffer from overconfidence bias as this can lead to excessive trading and bad investment decision. By performing a review, you reduce this bias and can readjust your portfolio and understand your pitfalls.
“The keys to successful investing are patience, discipline, and continuous learning. By staying committed to your goals, making informed decisions, and adapting as needed, you will be well on your way to building a strong and resilient portfolio that can grow with you over time. Start small, stay focused and let your investments work for you,” say Pillay.