First time investors need preparation and discipline amid a volatile market

First time investors need preparation and discipline amid a volatile market
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Adam George Palios knows a thing or two about investing in the real estate market.

The Hamilton, Ontario-based realtor bought his first home nearly a decade ago. In the years since, he’s renovated the property (in a bid to increase its value) and rented part of it out (to help cover mortgage costs). He’s also helped countless clients make the most of their own real estate purchases.

But until very recently, stock market investing was a foreign world to him. “If you asked me a month ago what an ETF (exchange traded fund) was, I’d have no idea,” Palios says. “Honestly, I was completely green.”

Palios waited to start investing until all he’d paid off all off his debts and had a substantial savings fund to withdraw from. Once he achieved both financial milestones, he enrolled in an investing crash course, and by the end of the program he’d outlined a plan for purchasing his first stocks.

“And then, the pandemic happened,” Palios says.

He was wrapping up his last lesson when the country moved into a lockdown state and stock prices plummeted. He’d already settled on his investment criteria (no fossil fuel or mining companies; only companies with at least one woman on their board of directors; and special focus on companies building health-care or renewable energy technologies). After seeing how low stock prices had fallen, he finally took the leap: Palios purchased $5,000 in stocks.

Investing a solid chunk of cash in a market on the decline may feel like a risky move for many — and it’s one that experts say isn’t advisable for those who’ve been laid off or are currently taking financial hits. But for millennials with stable income streams, current market prices may offer an opportunity to scoop up quality stocks at low prices.

Palios admits the value of the sum he put into the stock market has declined by about four per cent in the few weeks since doing so. But he’s taking a long-game approach to investing and says he’ll be happy if sees noticeable returns in five or ten years.

“It’s not money, it’s part ownership and shares of a company that currently is trading at a lower value than history tells us it’s worth, so [from] that perspective, I don’t feel panicked when I look and see that my $5,000 that I transferred over is now only worth $4,800,” Palios says.

He says investing as a first-timer is only advisable for those with the flexibility to take a similar approach. Anyone who’s hoping to see returns within the next year or two should stay away from the stock market, which may remain volatile for the next couple years before rebounding again. He also suggests staying away from investing if you’re still paying off debt or don’t have the security of a built-up rainy day fund (both lessons were among the first he learned in his online crash course).

Toronto-based personal finance expert Barry Choi takes a similar approach. Buying stocks solely because they are “on discount” right now is not enough of a reason to take financial risks, especially as a first-timer, Choi says.

He suggests new investors start with diversified portfolios, like ETFs or mutual funds, and use dollar-cost averaging (continuing to contribute a fixed amount on regular intervals despite volatility in the stock market) to grow their assets over time. The latter approach is proven to work primarily because it prevents investors from making large lump-sum investments that are poorly-timed with stock market prices.

“Quite often people will see things that are ‘attractive,’ like bank stocks, airlines, and stocks that are near all-time lows but traditionally have been more valuable in the past,” Choi says. “Choosing which stock will be the next winner is like gambling.”

He suggests a low-risk approach for first-timers and veteran investors alike in times of market turbulence. If you’ve been laid off or are facing financial difficulty and don’t have emergency savings to turn to, there’s no shame in reducing your contribution or selling your stocks off, even at a loss, Choi says.

But it’s a decision that should be made with caution. If you’re economically stable but prone to bouts of anxiety related to market turmoil, hastily selling shares is probably not the way to go. Instead, turn off the news, limit how often you check your portfolio, and find a way to stay distracted while riding the recession out.

“What we have learned is things will eventually rebound, Choi says. “So once you are employed again or you’ve got the cash flow, as long as you keep investing on a regular basis, and you’ve got time on your side, then eventually your portfolio will go back up in value.”

“As long as you’re dollar cost averaging,” Choi says. “You’ll probably come out ahead in the long run.”

This report by The Canadian Press was first published April 7, 2020.

Audrey Carleton, The Canadian Press

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