2 Useful Tips for New Investors

The recent Invest FAIR 2015 was a great opportunity for Foolish investors to gather and talk about investing. As one of the Fools at the fair, I had the chance to talk to people from all walks of life.

Among those I had the privilege to meet, I found that there was a fair number who are interested in investing and who are just starting out.

In a previous article, I talked about how starting to invest can feel like learning how to drive for the first time. It can feel simultaneously exhilarating and scary. Just like how flooring the accelerator pedal the first time you’re in the driver’s seat is not a wise move, move too fast with investing and it can become a slippery slope to gambling.

There are better ways to treat your hard earned money. Here’s a short snippet I wrote in my aforementioned earlier article:

“If a new investor is putting aside savings of $1,000 per month to invest, it may be useful to consider dividing up the savings in two portions and only invest $500 per month. The other $500 can be put aside as a cash cushion. This way, the new investor would have achieved two things by the end of the first year: invested $6,000 while having another $6,000 as cash on hand.”

In my opinion, the new investor might be better served by taking baby steps into the stock market. That’s the first tip for the new investor. The second tip involves the cash cushion – or more specifically, its benefits.

Dealing with volatility

The stock market can experience steep drops from time to time. In fact, at the time of writing, the Straits Times Index (SGX: ^STI) is down around 17% from its 52-week high.

For some, stock market drops like these may look like the “end of the world.” Such feelings of dread are actually commonplace. But, it’s worth pointing out that large declines in stock prices can be quite normal in the grand scheme of things.

Take a look at the maximum drawdowns by year that’s been experienced by the Straits Times Index over the last twenty years (maximum drawdowns are the largest peak-to-trough declines in a given timeframe).

Maximum drawdown for Straits Times Index, 1993 - 2014

Source: S&P Capital IQ

It’s not easy to deal with the anxiety and stresses that likely will come when your brokerage statement’s flooded in a sea of red temporarily. This is where having a cash cushion can come in handy – it can help provide some emotional stability. There are other advantages to having a cash cushion.

Market plunges are not fun but, they may serve up some tasty discounts if we keep our eyes open. Here’s a personal example of mine: I was able to pick up some units in Parkway Life REIT (SGX: C2PU), a real estate investment trust specializing in healthcare properties, during the Global Financial Crisis of 2008-09. Because of the low price at which I scooped up Parkway Life REIT and the growth in the REIT’s distributions, I’m now sitting on a very comfortable double-digit yield on my initial cost basis.

Having a cash cushion can give one options to make beneficial investments when things head south.

A Fool’s take

In my opinion, the best thing for new investors to do is to consider taking baby steps into the market and to keep their eyes focused on the long-term.

If a new stock market participant dumps all of his or her investing capital at a single point in time, he or she’s at the mercy of short-term stock market gyrations. But by spreading out the money over time, the new investor may stand a better chance of staying invested for the long-term and thus reap the appropriate benefits.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong owns shares in Parkway Life REIT.