How do I start investing if I know nothing about it?
Despite popular opinion, you don’t have to be wealthy to start investing. Thanks to technology and an effort by financial institutions to make investment options available for everyone, anyone can now invest money, and you don’t need a lot to do it.
Investing your money is the best way to grow your wealth, but you need to educate yourself on the best options that are right for you.
What is an investment?
Essentially, investing is trading your money today for a lot more money in the future. Though traditionally when we talk about investing, it’s related to the stock market. But there are other ways to invest your money like buying a home, starting a business or putting your kids through college.
But before we get into the kinds of investment opportunities that are available, you should take into account some factors:
- Your age
- Your income
- Your financial goals
- Your risk tolerance
- Your time horizon
Taking all of these factors into consideration will help steer you in the right direction when it comes to your financial goals and expectations.
Understanding your risk tolerance
Learning how to become a smart investor means figuring out your risk tolerance.
Market risk is the possibility that the fund you’ve invested in the stock market will lose value if the financial market is down. This mainly applies to stocks, bonds, mutual funds, and retirement plan accounts like 401(k)s.
A quick primer: Stocks are often riskier than bonds because there is no guarantee of profit when you buy stock. If a company performs poorly or falls out of favor with investors, its stocks can drop, and you can lose money. Other investments, such as government bonds and certificates of deposit, are considered safe because they are often federally insured. However, returns from these investments are much lower as compared with stocks.
Remember this: The key principal of investing is striking the right balance between risk and reward. A balanced, diversified portfolio should include a mix of both low-risk and higher-risk investments.
It’s all about timing
As a new investor, it’s all about the long game. Giving your investments time to grow and adjust to the ups and downs of the market will more likely yield to higher gains. Stocks can be erratic. One day they can do really well and the next, they can take a plunge. Sometimes the economy can take a downturn for months on end. If you sell your stocks when the market is low, you could lose a lot of money. But learning to adopt a long-term mindset, leaving them where they are until the market adjusts itself, then you’re more likely to come out on top financially. It just requires patience.
How to get started investing now
It can be intimidating to go through an investment broker when you’re not sure what you’re doing. Our advice is to take baby steps. Here are some good options to get your feet wet in the world of investing.
Invest in your retirement plan
You may already be an investor and not even know it. If you have a 401 (k) or another retirement plan through your job, you’re most likely already putting money there. If you’re not, then you should, especially if your company matches a portion of your contributions. When a company matches, it’s free money and over time, a guaranteed return on investment by the time you’re ready to access it. In 2020 you can contribute up to $19,500 to a 401(k) if you’re 49 and under. If you’re 50 or older, you can contribute up to $26,000. But you can start with as little as 1% of each paycheck, though it’s a good idea to aim for contributing at least as much as your employee matches. When you contribute to a 401(k) this pre-taxed money will go directly from your paycheck into your retirement account without you ever seeing it in your bank account. If you’re not contributing currently to your 401(k) but you’d like to, contact your employer’s HR department.
Let a robo-advisor do the work for you
Though this sounds like a science-fiction movie, a robo-advisor is great for someone who doesn’t want to personally manage their investments but can’t afford to hire an investment firm or financial advisor. Robo-advisors use artificial intelligence and computer algorithms to manage your investments. Because of the low overhead, the fees are relatively inexpensive compared to their human counterparts. Prices vary from .25% to 0.50% of your account balance per year, and many of them allow you to open an account with no minimum. Robo-advisors are a great option for beginning investors because of the low cost and little to no hands-on management. Robo-advisors can also teach you how to invest. While some of these services offer educational tools and content, you should also pay attention to how the services construct your portfolio and what investments are used.
Use an investment app
You’ve got a few options when it comes to investment apps that target beginners. The first and most popular is Acorns. This clever app rounds up your purchases on linked debit or credit cards and invests the change in a diversified portfolio of exchange-traded funds. An ETF, as it’s called for short, is a type of investment fund and exchange-traded product, meaning they are traded on stock exchanges. They are a lot like stocks but with an underlying asset. There is no minimum to open an Acorns account and the service will start investing once you’ve got at least $5 in round-ups. You can also make lump-sum deposits. For a standard investment account, Acorns charges $1 a month for its Lite version, $3 a month for a personal account, $5 for a family package that includes investment accounts for kids and retirement accounts .
Stash is another investment app. This one teaches beginner investors the art of building their own portfolios out of ETFs and individual stocks. Stash has a $5 account minimum and its fee structure is a lot like Acorns.
What kind of investment is right for you?
Investing can get a lot more complicated than this, of course. As you become more familiar with how it works, you can always take advantage of hiring an investment advisor who can help guide you in the best choices to meet your financial goals. Be advised that with the expert advice comes higher costs. For now, take it slow. Again, investing is all about patience.