A quick investing guide for beginners
With the right tools and resources, investing can be much easier than you'd expect. Best of all, you don't need a lot of money to get started. Simply start out small, and gradually increase your contributions over time as your income and savings grow. The important thing is to start saving for your goals as early as you can, so your money has more time to potentially grow.These simple investing steps consider your personal needs and preferences and include supporting resources to help you make decisions that are right for your unique financial situation.
Retirement should always be the first investing goal on your list. But it's also important to plan and save for other goals like a house or a child's education. Once you've defined your investing goals, it's time to consider your:
- Financial situation. Figure out how much you're spending every month and how much is left over to save toward your goals.
- Time horizon. Determine how much time you'll need to achieve your goals. For example, if you have many years until retirement, it's a long-term goal. If you're planning to buy a home in 5 years, that's a short-term goal. The longer your time frame, the more time to potentially benefit from the power of compounding, where your earnings generate their own earnings over time.
- Risk tolerance. Think about the amount of market volatility and potential loss you're willing to accept. Your risk tolerance will likely vary depending on the time horizon for each of your goals. For example, the longer you have to reach your goal, the more time you have to weather market ups and downs, which means you may be comfortable taking on more risk.
There are several different types of investment accounts to support your goals. Here are a few:- A 401(k) plan is a retirement plan offered through an employer. It allows you to save a portion of your paycheck before taxes are taken out. Your employer may even match part of your contributions, which can help you save faster.
- An individual retirement account (IRA) is a powerful tax-advantaged account designed to help you save for retirement. Depending on whether you choose a traditional or Roth IRA, your earnings will grow tax-deferred or tax-free. IRAs often offer flexible investment options, making them a great way to further diversify your investments and boost your retirement savings.
- A 529 plan is a tax-advantaged account specifically for education savings. It offers a variety of surprising benefits and flexibility. For example, 529 plans aren't just for 4-year colleges, pay for more than just tuition, and can be transferred to another qualified family member. Contributions could be state tax-deductible, and you could benefit from tax-deferred growth and tax-free withdrawals for qualified education expenses.1
- A brokerage account allows you to buy and sell a variety of investments, including individual stocks, bonds, and funds. Brokerage accounts are a good option for investors who want more control over their investments. Since it's a taxable account, you might owe taxes when selling investments that have increased in value.
Now that you've identified your financial goals, and picked the right investment account for you, it's time to determine your asset allocation—how to divide your portfolio among stocks, bonds, and cash based on your goals, time horizon, and risk tolerance. Different asset classes tend to act in specific ways. Choosing how to allocate your assets helps to give you a certain amount of control over your investing experience.
Check out this investor questionnaire for help. It suggests an asset allocation based on your investment objectives and experience, time horizon, risk tolerance, and financial situation.
There are many types of investments to choose from to suit your needs, including mutual funds, exchange-traded funds (ETFs), and individual stocks and bonds. Be sure to diversify your portfolio by choosing a variety of investment types to help lower your risk and improve your chances of achieving your investment goals. Here's how:
- Invest in different asset classes. A portfolio that includes stock, bonds, and cash can help reduce your risk of potential losses if one class underperforms. Mutual funds and ETFs offer an easy way to accomplish this because they invest in a diversified mix of individual investments.
- Invest in different sectors. Within each asset class, there are different sectors. For example, the stock market is divided into sectors such as technology, health care, and finance. By investing in different sectors, you can further reduce your risk.
- Invest in different geographical regions. This can help reduce risk if one country's economy underperforms. Total market funds offer an easy way to get broad exposure to both domestic and international stocks and bonds.
Ready to invest? See how to open an account. If you're not sure whether you want to create and manage your portfolio on your own or take advantage of advice for guidance, we've got you covered in the section below. It covers important considerations to keep in mind when choosing your investment management strategy.
Once you get started, there are many ways to keep the momentum going, such as setting aside all or a portion of your annual work raises or bonuses to help fund your investing needs. Another convenient way to build your savings is by establishing regular automatic contributions that pull money from a specified account on a set schedule.
Your asset allocation can change over time as the markets fluctuate. It's important to update and rebalance your portfolio at least once a year to ensure it remains aligned with your target asset mix. If something has changed with your overall goals or your life circumstances, be sure to revisit your asset mix to see if it still works for you.If you're knowledgeable about investing, you might want to consider a self-directed approach, where you invest on your own. However, if you'd prefer to have help creating and monitoring your plans, a robo-advisor or financial advisor are 2 great options. Here are general pros and cons of these three investment management strategies.
- Control: You have full control over investment choices and the flexibility to adjust your portfolio whenever you see fit.
- Lower costs: You'll typically incur fewer fees with this approach since you're not paying for professional management services.
- Personalized learning: You can significantly enhance your financial literacy and understanding of the market through managing your own investments.
- Speed: You may be able to execute trades faster without having to go through a third party.
- Time commitment: You may need to spend a significant amount of time researching and managing investments effectively.
- Risk of mistakes: You may be susceptible to common investing mistakes, such as emotional trading, without professional guidance.
- Lack of expertise: You might miss out on expert financial strategies and market opportunities that advice services typically offer.
- Stress: You may find it stressful to manage your own investments, especially during volatile market conditions.
- Lower costs: Typically charge lower fees than human advisors, making them an affordable option.
- Efficiency: Can save you time by automatically managing and adjusting your portfolio and giving you access to tools to help you make informed investment decisions.
- Low investment minimum: Often have low or no minimum investment requirements, making them accessible to a wider range of investors.
- Consistency: Operate based on algorithms, which can be helpful for maintaining a consistent investment strategy without emotional interference.
- Limited personalization: May not be suitable for more complex financial situations.
- Less or no human interaction: Don't offer a personal relationship with an advisor, which can be a downside for those who prefer face-to-face communication.
- Dependence on technology: Rely heavily on digital platforms, which can be a drawback for those uncomfortable with technology.
- Expert guidance: Offer professional advice tailored to your specific financial situation and goals.
- Complexity: Can handle complex financial planning needs, including taxes, retirement, and estate planning.
- Emotional discipline: Can help you stay on track, maintain discipline during market volatility, and potentially prevent costly emotional decisions.
- Personalized service: Build a personalized relationship with you based on a solid understanding of your unique needs.
- Higher costs: Typically more expensive than managing investments on your own or using a robo-advisor.
- Time commitment: Require a time commitment for regular meetings.
- Variability in quality: Differ widely in quality and effectiveness, requiring careful selection.
