Investing is a crucial aspect of financial stability. Not everyone needs to be making daily trades, but people should at least have a nest egg set aside for future needs. Some people invest with retirement years in mind, others set a target year to make a big purchase like a car or home.
If you’re ready to make the leap into the world of stocks and bonds, congratulations! Whatever your goals and however you feel comfortable pursuing them, we’re here to help you embark on your journey to financial peace of mind. Keep reading for the steps you need to take to get started, and some strategies that work best for beginners.
Setting up your investment portfolio is quick and simple. The most difficult and time-intensive part is determining your goals and risk tolerance. Once you define your goals, you can set up your portfolio in an afternoon.
Determine Your Investing Goals
There isn’t just one type of investing. Investment choices are extremely personal, and while advice is helpful, no one can truly tell you the best way to invest. You’ve got to make decisions based on your habits, emotions, and aspirations.
The first step in determining your investment strategy is to set goals for yourself. What do you hope to achieve by investing? Are you investing so that you can retire comfortably? Retirement and home purchases are two of the most common reasons to start investing. Other people have extra cash sitting in checking accounts or savings accounts with low interest rates, and they know they should put their money to work somehow. If you don’t know why you want to invest — you’ve just heard people tell you that you should — that’s ok, too.
At a minimum, your investment goals should look at least five years into the future. The longer your timeline, the more flexibility you have in making investment decisions. Many experts consider five years the minimum timeframe for anyone buying stocks. This allows time for investments to recover from any market dips. Remember, investments always carry risk, and stocks don’t always go up.
Assess Your Risk Tolerance and Financial Stability
Ask yourself how much risk you’re comfortable adding to your portfolio. Investment risks are classified by terms like conservative (least risky), aggressive (most risky), and moderate (a mix of the two). A good way to determine your risk tolerance is to consider a hypothetical scenario:
Imagine that a terrible tragedy has caused the market to crash. In just one week, you lose half of your investment equity. What do you do? If your knee-jerk reaction is to cash out and prevent further loss, you’re a conservative investor. If your gut is telling you to buy more stock while it’s cheap, you’re an aggressive investor. If you’d rather just stop checking your account balance until the market calms down, you’re a moderate investor.
You may feel comfortable taking on a high level of risk, but that doesn’t necessarily mean it’s a good idea to do so. That’s why, after you determine your risk tolerance, you’ve got to assess your financial situation. As mentioned above, your minimum investing timeline should be five years. That means you should have absolute confidence that you won’t need to touch your investment money for at least five years.
The key to financial stability while investing is keeping a healthy lump of cash in a savings account, just in case. If you know you have enough cash to make ends meet for a few months, you’ll be less tempted to cash out your investments if you face an unexpected expense, lose a job, or need to take an extended leave of absence to care for a sick relative.
Choose a Broker
Now that you know how you’ll invest, it’s time to figure out who you will invest with — otherwise known as your broker. As a beginning investor, you should look for three things in a brokerage: low costs, intuitive software, and strong research tools.
Open an Account
If you’re saving for retirement, you’ll want to open an individual retirement account (IRA). IRAs come in three flavors. Traditional IRAs offer some tax benefits upfront for investors. Roth IRAs don’t offer tax benefits upfront, but your money will grow-tax free. Rollover IRAs are best for transferring holdings from another savings account, such as a work-sponsored 401(k) plan.
If you’re investing with a timeline of years, not decades, you’ll want to open a brokerage account.
Beginner investors should start with a cash account. Cash accounts allow you to contribute funds, trade stocks, and withdraw money as you please. Margin accounts allow you to take out a loan to make investments, and this is a risky strategy that only advanced traders should consider. You can always open a margin account after you’ve built up trading experience.
Start With Index ETFs
Index ETFs that track major U.S. stock markets like the Dow Jones Industrial, S&P 500, and Nasdaq are the best starter investments. Many financial institutions offer their own take on index ETFs, but they all track the same underlying bundle of stocks. Buying a single share of any of these ETFs instantly adds broad U.S. stock market exposure to your portfolio. If buying a company’s stock is purchasing a slice of the overall company ownership, you can think of buying an ETF as a slice of the overall U.S. economy.
You can likely find a convincing argument online in favor of any one of these indexes over the others. The best investment for you will come down to research and personal preference. The S&P 500 includes 500 of the country’s biggest companies, making S&P ETFs some of the most popular investment products.
The Dow Jones Industrial Average is similar, but it only tracks 30 of the largest companies. The Nasdaq is the newest of these three markets, so it includes relatively newer companies like Apple, Intel, and Microsoft. The Nasdaq is generally considered a tech-heavy index, but more than just tech stocks are included.
Diversify With Bonds & Global Stocks
A single index ETF will add a mix of U.S. stocks to your portfolio, but there’s more to the world of investing than U.S. stocks. Once you’ve added your first ETF to your portfolio, it’s time to add some diversity.
How diversification manifests in your portfolio will heavily depend on your risk tolerance. If your strategy is moderate or conservative, it’s crucial to add bonds to your portfolio. The easiest way to add bonds is to buy a bond ETF. There are different kinds of bonds, so pay close attention to what kind of bond ETF you buy. Long-term U.S. Treasury bonds are generally considered the safest bond investment, while corporate and municipal bonds typically offer higher yields in exchange for higher risk of default.
If your strategy is aggressive and you’re willing to take on extra risk after adding U.S. stocks to your portfolio, you may want to add global exposure. You can pick individual foreign stocks and ETFs to achieve the same goal. Global ETFs can focus on specific regions, such as Europe or the Asia Pacific, or they can aim to replicate the global economy more broadly.
Maintaining Your Investments
Of course, getting started is just that — your role as an investor has just begun. You’ve loaded up your portfolio with a balanced ratio of stocks and ETFs, and now you’ve got to track them.
The best investors stay on top of their investments by continuing to assess their choices, potential opportunities, and the broader market. Here are three ongoing strategies you should apply to your investments.
“Dollar-cost averaging” is a fancy way of saying that you should constantly contribute to your investment portfolio. That sounds simple, and it is, but it’s also enormously helpful advice for beginning investors. The primary benefit of dollar-cost averaging is that it removes any considerations of market timing.
It’s extremely difficult to perfectly time when to buy or sell stocks. By buying $100 worth of stocks every week, for example, you’ll sometimes buy overpriced stocks, and you’ll sometimes buy underpriced stocks. Over time, the theory goes, it all evens out and you end up being better off than if you had tried to decide for yourself when stocks were overpriced or underpriced.
This is similar to the concept of “reinvesting your dividends,” which you should also be doing. If a company or ETF pays a dividend, don’t withdraw it as cash. Try to keep it in your investment profile, and when you’ve earned enough dividends, use them to buy more shares.
Set Aside Money for Experimenting
If your only exposure to stock markets has been through movies, then all this probably sounds pretty boring. No high-pressure trades on a crowded stock market floor, no sudden explosions of wealth. The truth is that kind of trading does exist, but frankly, it’s a bad idea to dive straight into those behaviors. Most investors, especially beginners, would be best served in buying broad, relatively safe investments and holding them for decades.
However, that’s not to say you can’t have fun and experiment with trading. You just need to be purposeful about adding higher risk strategies. One way to do this is by setting aside a small percentage of your overall investment portfolio for risky, short-term trades. That way, you can try your hand at swing trading or take a risk on a hot stock without compromising your overall goals. If you lose the money you’ve set aside for experimenting, take a break and focus on safer investments for a while.
Never Stop Researching
The best investors are endlessly curious — not just about their investments, but about the overall economy. Even if you don’t want to become a day trader, you should push yourself to continue learning about financial markets, even after you’ve got your investment plan in place.
Try learning how to read company financial reports, teach yourself what all those key statistics actually mean, and watch for patterns of how news cycles impact the stock market. You’ll become a better investor this way, even if you can only afford to set aside $5 a week for stock purchases.
Have Fun Investing
Investing should be a fun way of growing your wealth and engaging in the broader economy. If you feel yourself getting overly stressed out on your investments, something is wrong. You may have invested too much money, or you chose investments that were too risky. Consider building up your cash savings or adding more bond ETFs to your portfolio to fix this problem.
The solution isn’t to stop investing altogether. Investments are an important part of building financial stability for your retirement years. If you’re getting too stressed, try to focus less on your gains and losses in the short-term. Take a break from checking your account. If you try that and you’re still stressed, consider consulting a professional financial adviser who can give you personalized advice.