Topic: How To Invest

Tips for new investors to boost their portfolio returns

Following these tips for new investors will help keep you away from impulsive selling, poor advisors, Pendulum Theory and more—and you’ll show better investing results

Investing success comes from making more right decisions than wrong ones over a long period of time.

Stock investing for beginners can be much more profitable with these tips for new investors. They will help you cut risk and increase returns in your stock market portfolio.


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Tips for new investors: Holding your best stocks longer is preferable to acting impulsively

Here’s one of the most instructive one-liners about the stock market that I’ve ever come across: “A rising market climbs a wall of worry.”

The phrase has been around since the 1950s, but it never gets outdated. That’s because it says as much about human psychology as it does about finance.

People generally tend to seek out things to worry about. Investors tend to seek out investment worries even more keenly, because there’s money involved. In addition, many investors find it easy and appealing to speculate about the future, for good or bad outcomes. All this worry-seeking generates an awful lot of false alarms.

If you hope to succeed as an investor, you need to avoid reacting impulsively to the many worries that turn up in the investor news each day. Ultimately only a handful will alert you to serious problems, but many of them can weigh on the market temporarily. You need to overcome the urge to sell just because stock prices have gone down.

It pays to keep this “wall of worry” rule—call it the WOW factor—in mind. Advancing technology, savage media competition and political polarization work together to create a firehose-sized gusher of things to worry about.

Tips for new investors: Avoid financial advisors who use a ‘contrary opinion’ approach so you do not sell too soon

Some advisors believe the great mass of investors are naïve and just don’t understand the market’s risks. These people believe the proverbial “little guy” is now buying against all reason, ignoring potential economic or political negatives. So they feel the smart folks should sell, and only go back in the market when the outlook improves. This reflects a so-called “contrary-opinion” approach.

The contrary-opinion idea is based on a tiny grain of truth. One study calculated the correlation coefficient over the past 20 years between the results of a yearly investor poll and the rise or fall of the Standard & Poor’s 500 index one year later.

If the correlation coefficient was plus 1.0, it would mean that investor optimism and the stock market regularly rise and fall in tandem. This is the opposite of the contrary-opinion view. If the figure was minus 1.0, it would mean the study found the two move inversely—when one goes up, the other goes down. This would confirm the contrary-opinion theory.

If the study found a zero calculation, it would mean there is no correlation between investor optimism and the level of the stock market, and the two move independently of each other. In fact, the study found a correlation coefficient for the 20 years of minus 0.17—much closer to zero than to minus 1.0.

In our experience, the contrary-opinion theory really only tells you much at market extremes. When the market plunges, investors are panicking and pessimism is rampant, that’s often a good time to buy. When prices are soaring, investors are giddy and it seems everyone you meet wants to talk about their stock market successes, that’s often a good time to sell. But these extremes are only obvious in hindsight. Investor sentiment and the stock market never get so high that they can’t go higher, nor so low that they can’t fall even more.

That’s why we see contrary-opinion as a little like p/e ratios—just one of the multitude of things that successful investors consider when forming investment opinions.

Tips for new investors: Avoid following Pendulum Theory as a way to try to time the market

Pendulum theory says that when stocks head downward after a period of overvaluation, they won’t stop at fair value. Instead, they’ll keep dropping until they hit lows that are in some sense as out-of-whack as the previous highs were.

Pendulum theory is a handy way to label the past, and it gives you a sense of how stock prices behave. But it’s useless for predicting the future or timing the market. That’s why pendulum theory generally plays a small part in successful investing. If you qualify as a “successful investor,” you probably recognize that this is a key part of understanding the stock market.

Instead of trying to time the market, our value investing approach seeks to identify well-financed companies that are well-established in their businesses and have a history of earnings and dividends.

Tips for new investors: Use our three-part Successful Investor approach to boost your long-term portfolio returns

  1. Invest mainly in well-established, dividend-paying companies, with a history of rising sales if not earnings and dividends.
  2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry; Resources & Commodities; Consumer; Finance; Utilities.
  3. Downplay or avoid stocks in the broker/media limelight.

What are your most important tips for new investors?

What investing mistakes have you made that you would caution new investors to watch out for?

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