These days, a first-time investor must feel a bit like a person in a Hollywood horror movie, about to peek into that bedroom closet where the creepy sounds are coming from. He or she knows there is a good chance something bad is lurking behind the door but needs to yank it open anyway.
After the up-and-down ride global equity markets have endured during the past 12 months, new stock players might well feel as if sinking money into public companies is as fraught with equally nasty surprises.
But it doesn't have to be that way, say investment professionals.
'If you really feel the world is coming to an end, then you should go find a cave … What I am trying to do is build a steady cash flow for your retirement.' — Norm MacDonald, Edward Jones Ltd.
"If you really feel the world is coming to an end, then you should go find a cave … What I am trying to do is build a steady cash flow for your retirement," said Norm MacDonald, a Nepean, Ont., financial adviser with the brokerage firm Edward Jones Ltd.
Looking way out, not staring at today's gloomy newspaper headlines, is the key for newer investors, he said.
Investor shell shock
Of course, initial investor temerity should not come as much of a surprise.
After all, the Toronto Stock Exchange index lost 46 per cent of its value between August 2008 and March 2009 — and then gained 8 per cent by Dec. 3.
The global credit crunch forced many supposedly secure companies, especially in the financial sector, into bankruptcy or to endure some type of restructuring. Stocks went south as did the economy in many countries.
Now, as firms start experiencing growth once again and government spending programs kick into gear, profits are rising. And so are national economic expectations.
Still, the legacy of tumbling markets has affected the confidence of investors.
'I tell clients what has changed wasn't their long-term plans. What has changed is in the short-term.' — Lee Anne Davies, Royal Bank of Canada
For example, in April, only 15 per cent of American adults believed stocks or mutual funds to be a good long-term investment, according to a Gallup poll. That was a substantial change from the 27 per cent of U.S. men and women who were optimistic about the potential of stocks in a similar poll 12 months earlier.
In Canada, only 17 per cent of men and women polled by Ipsos-Reid in November 2009 said "building an investment portfolio" was a top financial priority. In the same study, 23 per cent fingered "saving for a vacation" as their big savings goal.
What first-time-investors need to remember is that a financial downturn lasts only a few months, while a retirement plan has a multi-year — and likely a multi-decade — lifespan.
"I tell clients what has changed wasn't their long-term plans. What has changed is in the short-term," said Lee Anne Davies, head of retirement strategies for the Royal Bank of Canada.
A good time for new players?
In one sense, beginner investors can benefit from the stock market's recent riptide, stock pickers say. Depending upon when they jump into the market, they can purchase some blue-chip Canadian equities at bargain-basement prices.
For example, the Royal Bank of Canada, the country's biggest bank, was worth a shade under $55 a share in late December 2009, more than double its 52-week low of $25.52 which was reached back in February last year.
"If you had braved the waters you would have been handsomely rewarded," noted Perry Smith, a vice-president with Halifax's Waller Smith Group, an affiliate of RBC Dominion Securities Inc.
Still, even as Canadians who are newcomers to the market look to get their investing feet wet, following the basic rules for purchasing stocks remains a key priority, financial advisers warn.
"The common way to avoid market peril is to invest in good companies that pay good dividends. Yes, your typical Finance 101 but it works," Smith said.
Remember the Royal Bank?
That stock, aside from its doubled share price, has a dividend yield of 3.7 per cent versus the 1.25 per cent return on a one-to-three-year maturity Government of Canada bond.
Playing the field
Also, buying small bits of a number of stocks or mutual funds means that a drop in any one issue will not damage your portfolio too much, Smith said.
"Diversification in any portfolio is paramount, but even more so when you have limited funds," he said.
MacDonald from Edward Jones said he is placing clients' money in particular percentages in specific sectors. For example, for many he recommends six per cent in utility issues, 12 per cent in consumer staple issues and 13 per cent in health care-related companies.
Buying mutual funds, while not as sexy as in years past, remains an effective way of buying companies across a number of sectors or even in different countries to diversify a portfolio.
As new investors dig up the courage to enter the rough-and-tumble markets of North America and Europe, they will also need discipline in order to avoid getting burned. Many expert investors recommend relatively simple investing and diversification strategies, rather than trying for a big return on a hot stock.
In other words, new investors need to keep to the plan and avoid chasing soaring single-equity issues that often wind up crashing to earth. Believing that you are buying the next Microsoft or Research In Motion is a sure way to lose money, MacDonald says.
"People come in and say 'what's hot?' And I say 'I don't know. A stove?'" MacDonald quipped.