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New investors advance in stages

Discerning Investor

Published: July 11, 2024

Are you considering investing in the stock market for the first time, but are hesitating? If you are serious about taking the plunge, think of your situation in terms of behavior change. That is, think of what it takes to go from being an outside observer to an actual newbie "investor."
Behavior change works in stages. The Transtheoretical Model of Behavioral Change (TTM), developed in the late 1970s to describe the "process of intentional behavioral change," can be a guide. (Abstract available at tinyurl.com/yc6tu2sp.)
According to the authors of the study, TTM consists of six stages: "precontemplation, contemplation, preparation, action, maintenance and termination."
Stages can be applied to the hesitant future investor as well. "The New Investor Roadmap," part of the recently released report by the FINRA Investor Education Foundation and Commonwealth titled "Exploring the Stages of the New Investor Journey: Actionable Insights for Industry Stakeholders" (tinyurl.com/mpwxrc9p), does just that. Commonwealth is a national nonprofit building financial security and opportunity for financially vulnerable people through innovation and partnerships. FINRA's foundation provides educational programs and research to help consumers reach their financial goals (tinyurl.com/bdhn96xj).
The New Investor Roadmap identifies four stages: Contemplating; Starting; Engaging and Integrating. As we talk about each stage, see if you can identify where you are in the process.
In Contemplating, one starts "to weigh the benefits, barriers and risks." The length of the contemplating stage can vary, as people consider "whether investing is right for them." This stage can last "anywhere from weeks to years."
Contemplating is a time for gathering information: "Networks, such as family and friends, can help determine how long new investors remain in the Contemplating stage." Also, "Trusted representatives of financial institutions within local communities can help [people] gain awareness and knowledge about investing."
The Starting stage comes next, where "potential investors transition from contemplating to actually opening an account and making their first investment." These newbie investors consider financial basics: "How much to invest, where to invest and risk tolerance."
Making decisions on investments "can be influenced by how easy or difficult products are to understand." Also, investors "are in search of others with similar goals and experiences, including looking toward friends and family for support."
At the third stage, Engaging, these new investors become "more familiar with how investing works" through gaining experience and knowledge.
Now, there is continued learning and self-discovery based on how their investment decisions are playing out. Educational resources (newsletters, webinars, interactive tools) remain important as investors seek to expand their knowledge so they can reach their investment goals and minimize their losses.
In the fourth stage, Integrating, investors "no longer desire to constantly engage with their investment accounts" and "are now in a position to start exploring whether different investment opportunities would align with their objectives and risk tolerance."
Within their personal networks, new investors "recognize the value of accurate information and seek this from trusted professional sources, rather than from family or friends." In addition, "they start sharing their knowledge with family and friends."
Seeing things in stages of behavioral change can help with "an investor's journey, from the first time they learn about investing through becoming a knowledgeable and confident investor," according to the report.
Before leaving this subject, be sure to take advantage of tools and guidance from regulators. FINRA, which oversees the U.S. broker-dealer industry, provides helpful information about investing basics and other subjects at tinyurl.com/muyuj33k. The U.S. Securities and Exchange Commission, the federal regulator of the financial industry, also provides resources on its Investor.gov website. See Introduction to Investing (tinyurl.com/3fkbnker).
If you are thinking about becoming an investor, send me questions I can answer in this column (readers@juliejason.com).
Seasoned investment counsel (tinyurl.com/52nus8hz) and award-winning columnist and author, Julie Jason, JD, LLM, promotes financial literacy and investor protection. Read her latest book, "The Discerning Investor: Personal Portfolio Management in Retirement for Lawyers (and Their Clients)" (tinyurl.com/4u7h9pjs), published by the American Bar Association. Write to Julie at readers@juliejason.com. While all questions cannot be answered, each email is read and reviewed and can lead to discussion in a future column.
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