10 Lessons You Should Learn Before Investing

Six in 10 Americans have money invested in the stock market, either in an individual stock, a mutual fund or a self-directed 401(k) or individual retirement account (IRA), according to a 2024 Gallup poll. What's more, everyone seems to be getting in on the action, regardless of education, age or income. For example, 51% of non-college graduates surveyed own stock, as do 48% of adults under age 35 and 29% of adults with an annual household income less than $50,000.¹

If you're interested in becoming an investor, here are 10 vital lessons to keep in mind before you put your money on the line.

1. All Investing Includes Risk

When you invest, you take on some level of risk. And investments that have the possibility of a higher return—such as stocks or equities—come with a higher chance that you could lose money. Other investments, such as government bonds, have much lower levels of risk but also offer lower yields. Cash equivalents, such as certificates of deposit (CDs) and high yield savings accounts, offer some interest income but also come with FDIC protection. Most experts advise choosing a mix of investment types—called your asset allocation—to mitigate risk.

READ MORE: CDs vs. Bonds: Key Differences & How to Compare Your Options

2. Let Goals Guide You

You may be investing to support your family, buy a home, pay for a child's education or fund the retirement of your dreams. These financial goals are the key to making the right decisions with your money.

If you're investing for a goal that's 25 years away, for example, you can tolerate wild swings in the stock market in the short term. The important thing is that, on average, your annual returns are strong. In that case, you'd want an asset allocation with a higher percentage of equities.

On the other hand, if your financial goal is in the near future, you'd want to opt for a low-risk asset allocation that protects your savings, even if it doesn't offer the same opportunities for long-term growth.

3. Don't Put All Your Eggs in One Basket

By diversifying your holdings among different types of companies across various industries and geographical locations, you increase the odds that at least some of your investments will perform well, even if others don't. This is why many investors opt for mutual funds and exchange-traded funds (ETFs), which offer exposure to many stocks or bonds at once.

4. Research Stocks Before You Buy

To understand what you're investing in, you need to do your homework. For an individual stock, that could mean looking at the annual and quarterly earnings reports of the underlying company and studying its competitors and the trends of the sector in which the company operates. For a mutual fund, research could involve looking at the fund's holdings, historical performance and volatility, as well as its investment philosophy.

5. Remember to Rebalance Your Portfolio

As markets go up and down, the total value of stocks and bonds in your portfolio will stray from your original allocation. To make sure you maintain your preferred risk profile, you'll need to rebalance your portfolio every so often—at least once a year is best—which means you'll sell off some assets and/or buy others to get back to your preferred allocation.

If you have an investment adviser, they'll do this for you, as will some robo-advisors. Also, be sure to reassess your asset allocation periodically to ensure you're not exposed to too much risk as you approach your investment goals.

6. Use Your Head, Not Your Gut

It's easy to get caught up in the madness of crowds—the “sure thing" everyone is talking about or a collective rush to sell in the face of a market downturn. But fear of missing out—or of losses—should not guide your investment decisions. Often, the stocks and sectors in the news are getting all that press because of past performance and are nearing their peak valuations. And selling after a crash due to panic, instead of waiting for markets to recover, will only realize losses that would otherwise just be on paper.

7. Timing the Market Is a Fool's Errand

It's impossible to predict what markets will do at any given time, so the chances of selling right before a dip or buying immediately before a rally are not in your favor.

For example, research shows that a 14% increase in the S&P 500—an index that tracks the stock performance of 500 of the largest publicly traded companies in the U.S.—came from just eight disparate days of trading throughout 2023. And investors who stayed on the sidelines for any one of those days would have missed out big time.² That's why experts recommend investing in the market monthly or at other set intervals (called dollar-cost averaging) to help you maximize your returns.

8. Don't Forget About Fees

With easy access to online brokerage accounts, ETFs and a host of new trading apps, there are more ways to invest than ever before. But be sure to understand all the fees that may be involved with the investment options you choose, such as monthly administration costs or commission fees on trades.

Also, find out what percentage fee is charged as the management expense ratio (MER) on any mutual funds or ETFs you hold. These fees aren't always apparent, since the value of your holdings at any given time has already been adjusted to account for the MER.

9. Investing Can Impact Your Taxes

Investment earnings come in two forms:

• • Yields, which you must pay taxes on every year, include any interest income from bonds or cash equivalents and any dividend payments from stocks you own.
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• • Returns are the profits you make when you sell investments (called capital gains), and you pay taxes on them only in the year you sell the investments. The good news is that you can sell investments that have experienced losses at the same time to offset those gains on your tax bill.

The rate of tax you pay varies depending on the type of investment, how long you've held it and your total income. You can defer or avoid tax payments on your investments if you hold them within a tax-advantaged account such as a 401(k), IRA or Roth IRA.

10. Trading Is Not Investing

Traders buy investments with a plan to sell them within a short period—between a few hours and a few months—for a quick return. Investors buy assets they believe will grow over a span of years or decades. To be successful, traders have to devote a great deal of time to researching the markets as well as individual companies. Even then, they still can get things wrong and must tolerate much more risk than long-term investors.

Invest in Your Future!

The markets have historically rewarded investors who create a risk-appropriate, diversified portfolio to support long-term goals. And with the rise of online brokerage accounts, investing apps and easy access to ETFs, the markets are now open to more people than ever before, not just the wealthy. At the same time, IRA or 401(k) accounts allow you to invest now and save money at tax time. So, what are you waiting for? The sooner you start investing, the more time your money has to grow.

Want to learn more? Start by reviewing these key terms every investor should know.

 

Tamar Satov is a freelance journalist based in Toronto, Canada. Her work has appeared in The Globe and Mail, Today's Parent, BNN Bloomberg, MoneySense, Canadian Living and others.

 

Sources/references

1. Jones, J.M. Stocks Up, Gold Down in Americans' Best Investment Ratings. Gallup. May 15, 2024.

2. Pisani, B. Why market timing doesn't work: S&P 500 is up 14% this year, but just 8 days explain the gains. CNBC. November 8, 2023.