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Retirement Weekly: Spread the love — and 3 other things new investors need to know

An extraordinary number of people began investing for the first time during the COVID-19 pandemic, and it’s exciting to see how engaged they are about entering the market. At Schwab we call this cohort of new investors “Generation Investor” (or Gen I), and our research shows that they make up 15% of all current U.S. stock market investors. With so many beginners starting their investing journey at once I thought I’d offer them four pieces of practical advice.

But first, it’s worth sharing a few things we’ve learned about Gen I this past year. Schwab conducted two different studies exploring what drives new investors’ decision making, investing priorities, goals, expectations, and more.

The research shows that Gen I investors are confident in themselves and bullish on the markets. They’re not afraid to consider a range of investments from blue-chip companies and funds to “meme” stocks and cryptocurrencies, and they see the fun and excitement in investing. That said, they’re by no means flippant or unserious about how they manage their finances. They’re planners, and their time horizons tend to be long-term.

I love the combination of energy, engagement, optimism, and pragmatism that Gen I brings to investing. These aren’t just careless speculators, but an eager group of new investors looking to understand and learn. At the same time, a unique thing that Gen I investors share is having only seen one market cycle. But market cycles change, and new investors have to be prepared.

That brings me to my four pieces of advice for them:

1. Do a stress test – Every investor must know their risk tolerance, and it can be hard to measure when markets are rising. But you have to really test yourself to understand how much risk you’re willing to take—both financially and psychologically. Ask yourself, could you afford to lose a significant portion of the money you’re investing? How would you react to a 20% drop in your portfolio? If the answers are “no” and “poorly,” you should invest in ways more in line with your risk tolerance.

Read: Stressed about market volatility and want to change your investments? Do these 5 things before making a move

2. Spread the love – Tech stocks and crypto can be exciting, but beware of overconcentration. A mix of assets can help reduce the impact of any single investment on your portfolio’s performance. Also, when one asset class does poorly, others may do well. So spread the love. Diversify your risks across asset classes, sectors and regions. Make some investments that you may even consider boring — things like bonds. Having a robust mix of holdings can help smooth out the ride.

3. Avoid drift—As markets rise and fall, your portfolio can drift. Consider repositioning assets that have become oversize in relation to the rest of your portfolio and move that money into positions that have become undersized. Staying invested is key to long-term success, but being a prudent investor requires trimming from positions that have increased and caused a portfolio to get out of alignment. This can be emotionally challenging, because you’re selling positions in investments that have gone up, but avoiding drift helps ensure that your portfolio aligns better with your risk tolerance. It’s a good practice to rebalance at least once a year, and potentially more frequently if markets make big swings. Keep in mind, though, that there may be tax implications and other costs associated with selling investments.

4. Choose wisely – Consider where you invest. What kind of tools and services do they offer, and how can you interact with them if you need guidance or have a question about market volatility? A great investing app is important, but not enough for most new investors. Our research revealed that when markets see significant swings upward or downward, 84% of Gen I want access to a person to talk about it. So look for a combination of great tech and human support.

It’s undeniably great news that so many people have started investing over the past 18 months, and we’re encouraged by what we see in the instincts among Gen I to plan. If and when the market cycle changes, having a good plan in place will be critical.  

Amy Richardson is a Certified Financial Planner professional with Schwab Intelligent Portfolios Premium, Schwab’s hybrid digital advisory service which combines a fully automated investment portfolio with a comprehensive financial plan and unlimited guidance from a Certified Financial Planner professional.

The information here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice.

Investing involves risks, including loss of principal. Diversification and asset allocation strategies do not ensure a profit and cannot protect against losses in a declining market.

Schwab Intelligent Portfolios Premium® are made available through Charles Schwab & Co., Inc. (“Schwab”), a dually registered investment adviser and broker-dealer. 1121-1KDR

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