(Benzinga) – The stock market is on a roll heading into 2021, and trading apps like Robinhood have made it easier than ever for American investors to jump into the stock market for the first time. You don’t need to be a finance genius to start investing, but there are four simple steps each person should take before buying that first share of stock, according to Austin Root, director of research at Stansberry Research.
Set Goals: First, Root says investors should define clear investment goals. If your goal is simply to have fun speculating in the market, that’s perfectly fine. But that goal involves a completely different approach than someone looking to build wealth, generate income or diversify assets.
Someone looking to build wealth will likely be focusing on stocks or ETFs like the SPDR S&P 500 ETF Trust SPY 0.57%.
Income investors will be looking for dividend stocks or bonds. An investor looking to diversify could be interested in commodity ETFs like the SPDR Gold Trust GLD 3.45% or the iShares Silver Trust SLV 6.92%.
Second, Root says investors should determine their investment horizon. Someone investing for a year or less should take a completely different approach than someone investing for five years or more. Stocks have traditionally been the highest-returning asset class in the long-term, but they are also the most volatile in the short-term.
The S&P 500 has historically gained between 8% and 15% annually over any 30-year stretch in history, but it frequently has drawdowns of 30% to 50% in any given year.
Be Honest With Yourself: Third, Root says investors should carefully consider their risk tolerance. Could you realistically watch half of your account balance disappear in the event of a stock market crash like the one that happened in 2008 and 2009?
For long-term investors, those types of sell-offs are just a bump in the road higher. But you can only overlook these drops if you have the stomach to ride out the volatility without panic-selling your investments.
Finally, Root says investors need to do an honest inventory of their finances. Specifically, Root says it is unwise for anyone that has high-yield debt to buy a single share of stock until any debts with 6% interest rates or higher are paid off or consolidated at a lower rate.
At the end of the day, Root says there are a lot of people out there who probably shouldn’t be buying stocks at all: “If you’re primarily looking to stay wealthy … if you have an investment horizon of less than five years … if you can’t stomach big short-term losses … or if you currently owe debts with interest rates of 6% or more — you should not be investing in the stock market today. Full stop.”
Benzinga’s Take: Fear of missing out, or FOMO, is always a powerful force driving investors at or near stock market tops. In reality, the periods of time in which making money in the stock market seems easiest are often some of the worst times to be buying stocks.