Twenty-one U.S. states, including Kentucky, Texas, and Virginia, require public schools to provide high school students with financial literacy courses.1 But even among the school systems that provide general financial education to students, the topic of stock investing often remains unaddressed.
What should beginners know to give them the best leg up in the world of investing? What mistakes or potential pitfalls can be avoided? Here we discuss three key investing lessons that most people are unlikely to ever be taught in school.
Although some seasoned investors are able to successfully choose individual stocks, beginners trying to create wealth by YOLOing their savings into a single stock can be a recipe for disaster. There is no match for the experience one gains by watching market gyrations and discovering their own risk tolerance, nor is there a way to shortcut this process.
If you do ultimately decide to invest in an individual stock instead of a broader index or a mutual fund, do your research first. Investigate the company’s profit and loss statements and review public statements and any guidance detailing future plans. Analyze the price-per-earnings ratio, revenue, and other specific metrics to get a better idea of the strength of a particular investment. Although research will not always prevent a “good on paper” stock from flopping, it can help you weed out potential losers at the outset.
A recession has occurred, on average, every 3.25 years over the last 170 years.2 While rising prices and unemployment rates combined with falling stock values can be alarming, they are not out of the ordinary, even if the specific factors that lead to a recession are different from the last one.
Before investing, it is important to analyze your risk tolerance. If you are the type of person who is likely to withdraw your investments during a drop, you may benefit from investing in more stable or “recession-proof” assets. If you prefer to shovel in funds while stocks are on sale, an aggressive portfolio may be the right choice for you.
As the old saying goes, “The best time to plant a tree is 20 years ago. The second-best time is now.”3 The same is true when it comes to investing. It can be easy to tell yourself that you will begin investing when your income increases, or when you are able to pay off a few monthly obligations—but the truth is, even if you can only afford to invest a few dollars per month now, doing so will put you in a better financial position than you would be without investing.
It may also be tempting to bemoan your inability to begin investing during the dot-com bust or the Great Recession, thereby taking advantage of the historic run-up in stock values since these downturns took place. But don’t forget that the investments you make today will also have years (or decades) in which to grow.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
All indexes are unmanaged and cannot be invested into directly.
The PE ratio (price-to-earnings ratio) is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation: a higher PE ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower PE ratio.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by WriterAccess.
LPL Tracking # 1-05296605.
1 States Where Financial Literacy Education Is Working, Money Rates, https://www.moneyrates.com/research-center/financial-literacy.htm
2 Recession: 10 Facts You Must Know, Kiplinger, https://www.kiplinger.com/slideshow/investing/t038-s001-recessions-10-facts-you-must-know/index.html
3 The Best Time to Plant a Tree was 20 Years Ago, No Matter, Psychology Today, https://www.psychologytoday.com/us/blog/joy-and-pain/201504/the-best-time-plant-tree-was-20-years-ago-no-matter