Source: Federal Reserve Bank of New York.
For someone new to investing, or perhaps someone who hasn't even thought about investing much (if at all) before opening this article, the stock market can appear intimidating.
Although the major U.S. indexes, including the Dow Jones Industrial Average and S&P 500, recently hit dozens of new all-time highs, American consumers are bombarded with news of the recent stock market correction -- and the fear of losing money can often outweigh the dreams new investors have of retiring in style.
Furthermore, stock market analysts don't exactly have the best image among investors. In a recent survey of millennials aged 18 to 29 by the Harvard University Institute of Politics, a meager 14% of respondents said that they trusted Wall Street to "do the right thing all or most of the time." Astoundingly, that was up 2% from the responses of same-age millennials in 2014. Additionally, a Bankrate survey from this past March showed that only around a quarter (26%) of millennials are invested in stocks.
Stock market tips for new investors
Though I won't deny that I was a bit intimidated when I began my investing journey nearly two decades ago, there are important lessons, or should I say stock market tips, I've learned over the years that I believe would benefit novice investors -- along with those who have yet to take the plunge.
In no particular order, consider taking these stock market tips to heart.
Source: Flickr user Virginia State Parks.
1. You'll probably be a winner if you think long-term
I'm pretty sure that the hardest thing about investing for me to learn was that your biggest gains will be earned by holding stocks over the long-term.
I began investing during the heart of the dot-com mania in the late 1990s, when you could essentially throw a dart at an online IPO and land a double overnight. Valuations were driven by emotions, and day-traders dominated by dipping in and out of stocks multiple times per day. Of course, we all know how that ended, with the highly technology-reliant Nasdaq Composite falling by around 80%, and traders learning an invaluable lesson: you can't time the market with any regular success over the long run.
Based on data from Standard & Poor's, there have been 33 stock market corrections of 10% or more since 1950 in the S&P 500. However, while some corrections have taken weeks to erase, and others years, the broadest of U.S. market indexes, the S&P 500, has eventually recouped all of its losses and then some. Therefore, the first of your stock market tips is to gear your investments for the long-term so you have the best opportunity to build wealth.
Source: Social Security Administration.
2. You're going to lose money on some of your investments
Coming in a close second behind realizing that long-term investing really is your best friend is the admission that I'm not perfect. When new investors enter the market I believe they're much less likely to admit defeat if they purchase a stock that winds up heading lower. The reason is new investors think they're invincible, or they have a belief that what goes down must eventually come back up. Although the S&P 500 has a pretty good track record of doing so, around half of all stocks actually move lower over the long run and don't recover.
Thus, the idea that you're going to have bad trades and lose money should be among the most important stock market tips for new investors. Recognizing when the fundamentals of a business or sector have changed, and exiting your positon at a "reasonable" loss before its gets enormous, is an important lesson for new investors. It's also important that you allow your winners to run for as long as possible.
Source: Pictures of Money via Flickr.
3. Dividend stocks tend to outperform non-dividend stocks
Also among the important stock market tips I can pass along is that dividend-paying stocks have a tendency to outperform companies that don't pay dividends over the long-term.
The average yield of a dividend stock in the S&P 500 is only 2%, so it might appear to be a bit of a head-scratcher as to why dividend stocks have whooped non-dividend-paying companies over time. However, it's the meaning of the dividend itself that tells the tale.
A regularly paid dividend acts as a beacon for investors that lets them know a company likely has a positive long-term growth outlook and is strong enough in the near- and intermediate-term to share a percentage of its profits with investors. A dividend payment also adds a little bit of a cushion in the event of a stock market correction, and it presents a basis for reinvestment in order to compound your dividends and wealth over time.
There are certainly more lessons to be learned and stock market tips to be disseminated to new investors, but some lessons can only be learned through experience. If you take anything from my personal experiences, it should be that investing for the long-term with a focus on high-quality dividend stocks and a touch of humility should give you a pretty good chance of reaching your retirement goals.
