If you're just getting started, investing may seem overwhelming, but it's an essential step in growing wealth and saving for a variety of financial objectives. Don't become too preoccupied with whether or not now is the ideal time to begin investing because you will come across a variety of market settings during your investing career. However, novice investors must understand their risk tolerance before making any investments. You don't want a nasty surprise after you've invested because some investments are riskier than others. Consider your ability to go without the funds you will be investing in and whether you can go a few years or longer without having access to them.
Here are a few great beginner investment ideas.
1. High-yield savings accounts
This may be one of the simplest ways to increase your investment return beyond that of a typical checking account. High-yield savings accounts, which are frequently opened through an online bank, tend to offer users regular access to their money while generally paying greater interest than normal savings accounts on average. This can be a wonderful place to save cash that you're putting aside for a purchase you want to make in the next few years or just keeping in case of an emergency.
2. Certificates of deposit
An alternative to high-yield savings accounts is a certificate of deposit (CD), but this will tie up your money for a longer period. You can buy a CD for as little as six months or as long as five years, but normally you can't access the money before the CD matures without incurring fees. They are thought to be very secure, and if you buy one from a bank that is federally insured, you're covered up to $250,000 per depositor, per ownership type.
3. 401(k) or another workplace retirement plan
This may be among the simplest methods to begin investing, and it comes with some significant benefits that may help you both now and in the future. The majority of employers offer to match a percentage of the amount you decide to set aside from your regular paycheck for retirement. You are passing up free money if your employer offers a match and you don't take advantage of the opportunity. Contributions to a standard 401(k) are paid before taxes are due, and they grow tax-free up until retirement age. You won't pay taxes on withdrawals made during retirement if you choose this option. These corporate retirement plans are excellent savings tools because, once you've made your initial selections, they run automatically and let you make regular investments over time. The majority of the time, you can even decide to invest in target-date mutual funds, which manage their portfolios by a predetermined retirement date. The fund's allocation will change to reflect a shorter investment horizon as the goal date approaches by moving away from riskier assets.
4. Mutual funds
Investors who may not be able to readily put together a portfolio of stocks, bonds, or other assets on their own have the opportunity to do so through mutual funds. The most well-liked mutual funds follow indexes like the S&P 500, which includes about 500 of the biggest U.S. corporations. Investors in index funds typically pay extremely little or no fees, depending on the product. These affordable fees enable investors to retain a larger portion of the fund profits, which can be a wonderful way to accumulate money over time.
While exchange-traded funds, or ETFs, fluctuate throughout the day as stocks do, they differ from mutual funds in that they own a basket of securities. The minimum investment for ETFs is lower than that of mutual funds, which is normally a few thousand dollars. ETFs can be bought for the price of one share plus any applicable fees or commissions, though you can start with much less if your broker supports fractional share trading. In tax-advantaged accounts like 401(k)s and IRAs, mutual funds and exchange-traded funds (ETFs) are excellent investments.
6. Individual stocks
The riskiest investment strategy we've examined here is purchasing individual company stocks, but it may also be one of the most lucrative. However, you should think about whether purchasing a stock makes sense for you before you start making trades. Ask yourself if you understand the business you are investing in and if you are investing for the long-term, which is typically defined as at least five years. Because equities are priced every single second of the trading day, those who own individual stocks sometimes succumb to the short-term trading mentality. However, a stock represents a portion of ownership in a legitimate company, and as a result, as time passes, both your wealth and that of the underlying business will increase. Instead, think about using the more diversified method provided by mutual funds or exchange-traded funds (ETFs) if you don't feel you have the knowledge or stamina to ride it out with individual equities.
Why should you start investing?
To retain the purchasing power of your money and achieve long-term financial objectives like retirement or wealth accumulation, investing is essential. Your hard-earned money will eventually lose value if you leave your savings in a standard bank account where there is little or no interest. You may ensure that your funds keep up with or even beat inflation by investing in assets like stocks and bonds.
While saving for a major purchase like a car or a down payment on a house, short-term investments like money market mutual funds or high-yield savings accounts can help you earn more on your savings. For long-term objectives like retirement, stocks and ETFs are preferred because they have a higher chance of generating superior returns over the long run, but they also come with increased risk.
Important considerations for new investors
- Risk tolerance: Before you start investing, you’ll want to understand your risk tolerance. Volatile investments such as stocks can make some people very uncomfortable when they decline, which can cause you to sell at the worst possible time. Knowing your risk tolerance will help you choose which investments are best suited for you.
- Financial goals: Establish both short- and long-term goals that you want to achieve through saving and investing. Understanding your goals will help you develop a solid plan.
- Active or passive: You’ll also need to decide if you’d like to be a passive investor or an active one. A passive investor typically owns an asset like diversified mutual funds or ETFs that charge low fees, while an active investor might choose individual investments or mutual funds that aim to outperform the market. Studies have shown that passive investing tends to outperform active investing over time.
- Do-it-yourself or hire someone: You can also choose to manage your investments through an online broker, or hire a financial advisor (or Robo-advisor) to help you out. You’ll likely incur lower costs if you do it yourself, but an advisor can be helpful for those just starting.
- Taxes: If you own investments in an individual or joint account, you’ll likely need to pay taxes on the interest, dividends, and capital gains you earn. You can avoid these taxes by owning investments in tax-advantaged retirement accounts such as an IRA.
If you're just getting started in the world of investing, be sure to think about your risk tolerance and your financial objectives before putting money into an investment. Certain investments, such as high-yield savings accounts, enable instant access to cash in case of emergency. Stocks, on the other hand, need to likely be a component of a long-term investing strategy. Many new investors use Robo-advisors, where an algorithm chooses and maintains a diverse portfolio of exchange-traded funds on your behalf based on your unique financial needs and risk appetite.