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Beginner’s Guide: How to Start Investing with Confidence

Beginner’s Guide: How to Start Investing with Confidence

Introduction:

Investing can be a powerful tool for building wealth and achieving financial goals. However, for beginners, the world of investments can seem complex and overwhelming. This article aims to provide practical advice and guidance on how to start investing with confidence, making the process accessible and understandable for those taking their first steps into the world of financial markets.

  1. Set Clear Financial Goals: Before diving into the world of investing, it’s crucial to define your financial goals. Whether it’s saving for a down payment on a house, funding your children’s education, or building a retirement nest egg, having clear objectives will help shape your investment strategy.
  2. Establish an Emergency Fund: Before allocating funds to investments, ensure you have an emergency fund in place. This fund, typically covering three to six months’ worth of living expenses, provides a financial safety net in case of unexpected events, preventing the need to dip into your investments during emergencies.
  3. Understand Your Risk Tolerance: Every investment involves some level of risk. Assess your risk tolerance, considering factors such as your age, financial goals, and comfort with market fluctuations. Understanding your risk tolerance will guide your investment decisions and help you build a portfolio that aligns with your preferences.
  4. Educate Yourself: Knowledge is key when it comes to investing. Take the time to educate yourself on the basics of investing, different asset classes, and investment vehicles. There are numerous online resources, books, and courses available to help you build a solid foundation of investment knowledge.
  5. Start with the Basics: Begin your investment journey with simple and well-established investment options. Consider diversified index funds or exchange-traded funds (ETFs) that track broader market indices. These options provide instant diversification, reducing risk for beginners.
  6. Diversify Your Portfolio: Diversification is a fundamental principle of investing. Spread your investments across different asset classes, industries, and geographical regions to mitigate risk. A well-diversified portfolio can provide more stable returns over the long term.
  7. Invest Regularly: Adopt a disciplined approach to investing by contributing regularly. Whether it’s monthly or quarterly, consistent contributions, known as dollar-cost averaging, can help smooth out market volatility and take advantage of varying market conditions.
  8. Take a Long-Term Perspective: Investing is a marathon, not a sprint. Resist the temptation to react to short-term market fluctuations. Instead, focus on your long-term goals and stay committed to your investment strategy.
  9. Utilize Tax-Advantaged Accounts: Take advantage of tax-advantaged accounts such as Individual Retirement Accounts (IRAs) or workplace retirement plans. These accounts offer tax benefits that can enhance your overall investment returns.
  10. Review and Adjust: Periodically review your investment portfolio to ensure it aligns with your financial goals and risk tolerance. Rebalance your portfolio if needed, especially after significant life events or changes in your financial situation.
You can invest in stocks, ETFs, real estate, and more to meet your goals. Learning how to invest isn’t intimidating with our advice on how to start investing.

Investing isn’t just for the 1%. Investing in the stock market is one of the most common ways average Americans become millionaires.

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Learning how to invest for the first time can feel intimidating, but it’s not nearly as scary as you might think once you take your first steps.

This article will help you answer the following common questions about how to invest you want to know:

  • Am I ready to start investing?
  • What investments should I consider as a beginner?
  • Where is the best place for a beginner to invest?
  • How do I open an investment account?

Am I ready to start investing?

As long as you can pay all of your expenses and have at least a bit of money left over at the end of the month, you’re ready to start investing. But before you start investing, it’s important to have the rest of your financial house in order. You should:

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  • Be comfortable with your budget – how much you earn, spend, and save each month.
  • Be free of any high-interest debt, especially credit card debt.
  • Have an emergency fund equal to a few months’ expenses saved in a liquid savings account.

You don’t have to wait until you are completely debt-free to start investing — just make sure debts with the highest interest rates are paid off. But if you have any doubt about whether you’re ready to start investing, refer to my article on How to be financially disciplined before returning to this guide.

Why you should invest

Investing is essential if you want your savings to grow over time. Although keeping money in a savings account appears fine and safe on the surface, the interest you’ll earn isn’t enough to keep up with inflation over many decades.

While riskier in the short term, over the long-term the stock market delivers compound returns that not only keep up with inflation but outpace it.

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If you put $5,000 in an account with an interest rate of 7% and contribute an extra $200 a month, after 30 years you’ll have a little over $284,000. As another example, if you invest $500 a month starting when you are 22 and earn an average of 7%, when you are 65 you’ll have about $1.3 million.

What are your investment options?

You can invest in real estate, starting a business, the stock market, or even art. For most new stock market investors, index funds provide the best combination of simplicity, risk, and return.

Stock market investing

Investing in stocks and bonds is the easiest way to start investing, especially given the number of options for stock trading and investment apps out there today. If done wisely, it can also be the least risky (although no investment is without risk). Any investment you make could lose value and many investments will drop in value at least part of the time.

Via the best online brokerage accounts, you can invest in:

  • Individual company stocks you may decide are the best stocks to buy for you at a given time (e.g., Apple, Tesla, Target, or Walmart).
  • Stock funds that bundle different investments by theme or investment goal.

Individual stock investing

Buying individual stocks can be fun because you get to own a piece of companies you love. But it’s also the riskiest type of stock market investing. Despite plenty of people claiming otherwise, very few people — even professionals — can pick stocks that outperform the average of the entire stock market.

While it’s fine to invest a small amount of money in a few companies for fun, we caution against trying to “beat the market” by picking stocks.

Stock funds

Index funds are “baskets” of hundreds or thousands of different investments (like stocks). An index fund may contain stocks based on a theme (such as all stocks in the S&P 500 index or stocks focused on renewable energy), an index fund may contain a mix of investments based on a certain goal (such as a target-date fund that’s designed for someone planning to retire in a certain year).

The beauty of index funds is that they provide a great amount of diversification. You’ve heard “Don’t put all of your eggs in one basket”. That’s exactly what index funds do — they spread your investment through many, many different investments. This way, when some investments do poorly, you’re protected by the winners. Also, when one company goes to the moon, you make sure you own it, even if you wouldn’t have known to pick it yourself.

Bonds & bond funds

Bonds are, essentially, loans to companies or governments where the investors are the lenders. When you buy a bond, you are collecting principal and interest payments from the bond issuer.

Buying individual bonds is an advanced investing strategy. You can add bonds to your portfolio with a bond index fund. Historically, bonds earn less than stocks but are more stable — bond prices don’t go up and down as wildly as stock prices. Bonds also provide a predictable source of income as the issuer makes payments every month or quarter (this is known as the bond yield).

As a beginning investor, you probably shouldn’t concern yourself with bonds. They become a more important part of your investment strategy as you get older and 1) have fewer years left to invest and 2) want to draw income from your retirement investments.

Real estate investing

Real estate can be a great investment, too. To be clear, we’re not talking about your primary residence as an investment. Real estate investments refer to apartments or commercial buildings that you own and then lease. Although most real estate appreciated over years and decades, the power of real estate investing lies in the cash flow from tenants.

If you can charge more rent than you pay in mortgage, taxes, and maintenance, owning real estate can create income you can put in your pocket or reinvest.

Learning how to invest in real estate is a much larger topic that we can cover here, but there are ways to get started quickly on a modest budget. Roofstock is a real estate investment platforms that crowdsource investment opportunities. You can invest as little as $5,000 alongside other investors and share in the profits coming from large, multi-unit apartments or office buildings.

These investments are not without risk, and the companies’ fees eat into returns. But they may be attractive if you want to add real estate exposure to your portfolio without taking on the work and expense of buying and managing properties yourself.

Investing in art

Taking a dive right in and learning how to invest in art isn’t for everyone. There’s quite a bit to know, like what exactly to look for and where, and consider, like how illiquid art can be.

But, if you’re not counting on a quick return and you’re an art lover who can take pleasure in the beauty and talent, investing in art can be an investment option that takes up a small part of your portfolio.

Investments to avoid

Two “investments” I intentionally didn’t mention are cryptocurrencies and options.

Buying cryptocurrencies like Bitcoin is speculating, not investing. Almost everyone confuses these two concepts. You invest in something that has inherent value: a piece of real estate, a company, a bond. Cryptocurrencies don’t have inherent value. While it can be fun to speculate that crypto might be the future of money and put a few dollars into it, it’s not something anybody should bet their entire future on.

Trading stock options is another example of speculation. This is not investing. This is better on whether the price of a stock will go up or down by a certain date. This can be fun, but it’s essentially a kind of gambling. People will try to sell you ways and courses to make a living trading options, but don’t take the bait. Are there professional options traders out there? Yes. Just as there are a few professional gamblers in the world.

Both are much less common and much more difficult than you think with the profitable ones not seeking to teach others for a set fee.

Where to invest: The best ways to invest money

Personal finance is personal. The best way to invest money for you is going to be different than the best way to invest money for me.

Some things, however, are universal.

Everybody should invest money for retirement that you won’t touch for many decades. It can be difficult to feel the need to plan for retirement when you’re in your 20s or 30s. But we need to take care of our future selves and squirreling away enough to live a comfortable retirement is no easy task. The sooner you start investing, the easier it will be.

Robo-advisors

If you want to keep things as simple as possible, consider the best robo-advisors. Robo-advisors use technology to invest your money in a broadly diversified portfolio of stocks and bonds that’s tailored to your goals and risk tolerance. Opening an account is as simple as answering as answering a short quiz and providing your anticipated tolerance for risk.

In comparison of robo-advisors to financial advisors, robo-advisors are inexpensive and frequently don’t have minimum balance requirements or ones that are very low.

The downside is that you’re limited to a handful of investment strategies. With most robo-advisors, you can’t customize your portfolio beyond their recommended portfolios. You also cannot purchase individual stocks (though some, like Acorns, offer this in their highest pricing tier).

  • Best for investing less than $500: Acorns
  • Best for investing $500+: Wealthfront
Great for New Investors
Acorns

Acorns

Acorns make it easy to start investing (even if you know nothing) and provide helpful tools to help you save more automatically. In under 3 minutes, start investing spare change, saving for retirement, earning more, spending smarter, and more.

Offer: Sign up and claim your $20 bonus investment! Make your first successful recurring investment (min $5) – get a $20 bonus within 10 days of the following month.

Pros:

  • Effortless automated investing
  • Easy-to-use savings features
  • Low-cost solution to manage money

Cons:

  • A flat monthly fee more expensive for smaller accounts
  • Can use more robo-advisor features

Stock brokerages

If a robo-advisor is like a restaurant that serves a menu of prepared meals, brokerages are like investment supermarkets; you can buy (almost) anything you want, but you must know how to cook. When you want to buy a lot of different stocks or you’re looking for a specific investment, this is a good thing. If you don’t know what you’re looking for – or you can’t cook right now — it can be overwhelming. 

With a stock brokerage, you can design your buy-and-hold portfolio with a few exchange-traded funds. Of course, you can also trade individual stocks as often as you want.

Why choose a brokerage? Two reasons: Customization and cost.

  1. If you feel comfortable choosing index funds, you can build a portfolio that’s more customized to your goals than you can buy at a robo-advisor.
  2. Doing this will cost you less. Investment funds (ETFs and mutual funds) charge annual fees as a percentage of how much you invest. Good index funds cost very little – as little as a few hundredths of a percent (for example 0.05% would cost $50 per $10,000 invested). However, robo-advisors charge slightly higher annual fees on top of the fund fees. For example, a robo-advisor might charge 0.25%, or $250 per $10,000 invested, in addition to the fees charged by underlying funds. Buying funds directly with a stock brokerage can avoid this additional cost.

There are dozens of stock brokerages to choose from, including some apps that are possibly best-suited for frequent trading. Unless you’re a power user looking for specific features to help you with advanced trading strategies, it’s hard to go wrong. We’ve also compiled this list of the best brokerages to consider.

  • Best for full-featured trading: Interactive Brokers
  • Best for casual trading: Robinhood
Interactive Brokers

Interactive Brokers

Interactive Brokers is a longstanding favorite trading platform for professional and serious individual investors alike. IB gets you access to institutional-grade trading tools, foreign stock markets, and popular cryptocurrencies.

IB features commission-free stock trades and $0.65 options contracts, and there’s no minimum to open an account.

Pros:

  • Professional-grade trading tools
  • Trade on foreign markets
  • Low margin rates

Cons:

  • Institutional features can be overkill for basic investors

Conclusion:

Starting your investment journey can be both exciting and rewarding. By setting clear goals, understanding your risk tolerance, and educating yourself on the basics of investing, you can embark on this financial adventure with confidence. Remember, consistency, diversification, and a long-term perspective are key elements of a successful investment strategy. As you navigate the world of investments, stay informed, be patient, and let time work in favor of your financial goals.

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