Diving into the world of investing can be intimidating. After all, you’ve worked hard for your money. You’ve put in the hours and balanced your budget so that you have extra cash available to invest in the first place. The last thing you want is to see it disappear because of a bad stock market investment. 

The good news is that by following a few key strategies, you can have greater confidence that your investments are going to generate positive results for you in the long run — especially if you enlist a financial advisor to help you along the way. 

No matter what your current income levels might look like, all newbie investors should focus on a few key principles as they start to grow their finances. 

1. Understand That Investing Is a Long-Term Gain 

Yes, it’s possible to make money quickly from investing. But in most cases, it’s just not plausible. Trying to achieve quick, short-term gains can be extremely risky due to the general landscape of investing. 

Every investment — be it a stock, mutual fund or bond — carries some type of risk. Stock prices can fluctuate up and down based on a wide variety of factors. Stock prices don’t just fall when a company is about to fail. Even things that a company doesn’t control, such as politics or overall market trends, can drastically affect its pricing. 

For example, there was a global stock market crash in 2020 because of the instability and uncertainty caused by the COVID-19 pandemic. If you entered the market then with a short term focus, you could have had major losses. However, those who stuck it out have since seen the market recover to reach new highs. 

The most successful investors are focused on long-term gains for big-picture goals. This helps them be less worried by the ups and downs that are part of any month, week or even day. They focus on the long-term outlook for the companies they are invested in, considering what their investments will look like several years down the road. 

Paul D. King, AWM, senior vice president and financial advisor at RBC Wealth Management says, ”New investors should only be investing money after fully contributing to a retirement plan. After completing this, they should take a percentage of their take-home pay and have it auto deducted into a separate account for investments. A portion of this should be in a money market for emergencies and the remainder in dollar cost averaging every month into a stock fund. Usually, it’s best to work with a financial advisor to help make better investing decisions from the beginning because you get to avoid a lot of costly mistakes that will make a huge difference in the long term outcome of the accounts. Also, it gives you the opportunity to have someone be on the same page about your short and long term goals, investment objectives, risk tolerance and more.”  

2. Slow and Steady Wins the Race 

When doing things on your own, you’re more likely to get big losses when trying to get a quick return. Investing all your money in a single company that looks like a sure winner can quickly backfire if that company was to experience heavy losses or go out of business.  

If you’re constantly jumping in and out, buying and selling, you’re going to be more likely to make mistakes. You’re also going to miss out on the potential to earn compound interest through your investments. 

Investing in an account that earns compound interest means you don’t just earn interest on your original investment. You will also earn interest on your returns. The longer you keep your investments in place, the more of a chance your money has to grow. By adding to your investments at a steady pace, you will stay on track to reach your financial goals. 

Even though the annual rate of return can vary, over the long-term you can expect good returns,  even from relatively low-risk investments. For example, the S&P 500 has had an average annualized return of 10.15% between 1957 and December 2022. 

“The simplest advice I could provide would be to pick one or two exchange traded funds and focus on adding to the investments on a regular basis, then continue to increase your contributions,” says Wes Shannon, CFP, a financial advisor at Brazos Wealth Advisors and SJK Financial Planning. “Every time you get a pay raise, add half of the raise to your investments and increase your spending with the other half,” Wes continued.  

Just like the fable of the tortoise and the hare, slow and steady really can win the race. Working with a financial advisor can help you identify which stocks or mutual funds to invest in, as well as a pace for adding to your contributions that will keep you on track to reach your financial goals. 

3. Know the Rule of 72 

One thing that can help you practice patience when investing your hard-earned cash is understanding the Rule of 72 — or how long it will take for your investments to double. 

The Rule of 72 is a mathematical principle that has historically been used to predict exponential 

growth. Most notably, it is a good way to illustrate how compound interest can help your 

financial investments grow and eventually double. 

The Rule of 72 can be used two ways. The first divides the number 72 by the expected annual 

rate of return of your investment to tell you how many years it would take to double your 

investment. So, if you expected 6% annual growth, you’d take 72/6, which equals 12. In other 

words, with an annual rate of return of 6%, your investment would double after 12 years. 

The other option is to divide 72 by the number of years you want to double your investment. 

This tells you the annual rate of return you’d need to get to reach that investing goal. Let’s say 

you wanted to double your investment in five years. 72/5 equals 14.4 — so you’d need a 14.4% 

annual rate of return to double your investment in that time. 

However, financial advisors tend to use what is called the Rule of 69.3 instead. This rule operates essentially the same as the Rule of 72 — but replaces 72 with 69.3 for a more accurate reflection of how long it would take to double an investment thanks to continually compounding interest. This means that money from an investment will actually grow somewhat faster than what the Rule of 72 would indicate. 

As the Rule of 72 reveals, your invested money will eventually double, even if you never add to your initial investment. Of course, there’s a big difference between doubling $100 and doubling $10,000. And your money will grow even faster if you regularly add to your investments. But the fact remains that the power of compounding interest can make a big difference for your long-term financial stability. 

4. Don’t Get Greedy 

In the investing world, when people say, “don’t get greedy,” they’re usually referring to advice from Warren Buffet — one of the most successful investors of all time. Buffet famously offered the advice to be “fearful when others are greedy, and greedy when others are fearful.” 

As Investopedia explains, “This idea comes from understanding market psychology. Often, investors, especially in aggregate, are driven by emotions like fear and greed. If markets are rising, greed can keep people buying and bidding up prices, hoping for ever-larger returns or profits. This, in turn, can lead to asset bubbles, which will eventually pop.” 

In some ways, this could also be seen as a warning against blindly following trends. A lot of Warren Buffet’s success has come from buying in situations when others were wary of investing in a company — like investing millions in GEICO when others thought it was on the verge of bankruptcy. Because the company promised to return to its previously successful business model, Buffet invested, and saw significant gains. 

Of course, being able to make these types of successful investments requires that you understand the business model of the company you invest in, and whether it is poised for long-term success. You might not have the time or expertise to do this. But when you find a quality financial advisor with the help of your AdvisorCheck’s search tool, you’ll have someone on your side who can. 

“A lot of people who get involved in the stock market want quick, fast returns, “Says Leonard Kim of AdvisorCheck. This may lead them to trading stocks quickly, or using leveraged accounts. The vast majority of people who do this end up blowing their accounts and losing most of the money that they set aside to trade with, sometimes their life savings. The same occurs when someone invests into a penny stock that they think is going to have the same types of results that Apple had at inception, and lose everything instead. While wanting to make money is a great motivator, greed should be left out of the stock market. And sometimes, it’s best to just let a professional manage your account for you instead,” Leonard continued.  

5. Meet with a Financial Advisor 

This last point should be obvious for any newbie investor: working with a quality financial advisor should be one of your top priorities! 

Financial advisors work with you to understand your current financial situation, including your goals, debt level, the amount of money you have available to invest and so on. They then match this information with their own knowledge of the market and your risk tolerance to help you select the investments that will help you meet your goals. 

Working with an advisor isn’t a foolproof process. No one can claim to predict the market with 100% accuracy, and there’s always going to be risk involved with any investment. But when you work with a knowledgeable advisor who understands the market, you can greatly lower your risk and increase the potential for lucrative gains.  

Advisors strive to adapt your investing strategy based on your specific needs — no “one size fits all” approach here. Personalized guidance can ultimately help you make far better investing decisions than 100 money-related blog posts ever could. 

Find the Right Advisor with AdvisorCheck 

Of course, not all advisors are created equal. That’s what makes AdvisorCheck’s free membership and Advisor Search tool so powerful. By getting a complete picture of key stats like the number of clients an advisor has, their average portfolio value or the presence of disclosures on their record, you can make an informed decision on who to work with. 

The best advisors understand that investing can be intimidating, no matter how much or little money you have available to invest. They can help you understand how quickly your money will grow based on your expected rate of return, and keep you focused on your goals so that you don’t fall into common traps like getting greedy at the wrong time or trying to make a bunch of short-term moves. 

With a strong working relationship with a quality financial advisor, you can have confidence that you’ll be able to reach your goals. 

Written by Lucas Miller, Entrepreneur Magazine Contributor  

Fact checked by Billy Quirk  

Reviewed by KJ Kim 

Disclosure

The information provided in this article was written by the research and analysis team at AdvisorCheck.com to help all consumers in their financial journeys, by providing the resources and the insights to help improve one’s financial health, make it through recessionary and inflationary periods of time, and save their earnings to use them towards building a secure financial future. 

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