Whether you are fresh out of high school or college, towards the end of your career, or somewhere in between — investing should be part of your life. Investing is a way to prepare yourself for the future by growing your wealth over time. The good thing is that you can literally start investing with any spare amount of money you can gather. You don’t need to have millions of dollars to start your journey.
There are so many ways you can invest your money nowadays, and it is so simple to get started. All you need to do is to identify your personal investment strategy, understand what types of investments there are, and ultimately decide where to make your investments.
What Is Your Investment Strategy?
Your investment strategy comes down to a combination of a few factors. Your style, your budget, and the amount of risk you feel comfortable with, all dictate your strategy.
What Is Your Personal Investment Style?
What type of investor are you? A day trader looking to capture many quick, small, short term wins? Or maybe you’re a long term investor, building a diversified portfolio that doesn’t need to be touched often. Whichever route you take, it’s important to make a plan and stick to it. For those looking for a little more assistance, consider looking into prebuilt portfolios provided by online advisors, or meeting with a financial advisor.
What Is Your Budget?
A budget is an estimate of your expenses compared to your revenue generated over a set amount of time. For example, if you are a salaried worker you most likely get paid monthly or bi-monthly. Within that allotted time, budgeting simply means trying to keep that income generated greater than your expenses.
Knowing what your income is, is an important first step to controlling your finances. You should be cognizant of the amount that is coming in from your main income source, as well as any side gigs you may be involved in (e.g. Uber, DoorDash, etc.). You should also write down all of your expenses so you know where exactly your money is going. For example, your mortgage, car, cell phone, and even Netflix subscription.
Knowing your current finances and how much you are able to put towards investing is a critical first step. Once bills can be paid for, you should see what money you have leftover to save or invest. Try to set a monthly goal of what to put away. This could be as little as $100 from each paycheck.
What Is Your Risk Tolerance?
Perhaps like most people, you are hoping to make significant gains on the market. Maybe you want to see steady and gradual growth without witnessing the roller coaster ups and downs that the market goes through periodically.
You must decide for yourself how much risk you are willing to take on while making your investment decisions. The degree to which you can withstand variability in your returns is known as risk tolerance. Every person has a different comfort level, so you must decide if riskier investments are the right choice for you, or if a more conservative approach is best. Find out more here on how to determine your risk tolerance.
Types of Investments
Now you understand what your goals are, how much money you are capable of investing, and what your risk tolerance is. You can begin to dive into what type of investments are at your disposal. Some investment vehicles include:
Stocks, also known as equities, are types of securities that give its stockholders a share of ownership with a company. Investors will buy stocks in order to gain capital appreciation, which happens when the stocks price rises. You can also receive dividend payments from a company, which is when they distribute some of its earnings to the shareholders.
There are two main types of stocks — common stock and preferred stock. These stocks can fall into one or more categories, such as growth stocks, income stocks, value stocks, cyclical stocks, defensive stocks, penny stocks or blue-chip stocks. One other way to categorize stocks is with the company’s market capitalization rate, these range from small-cap, mid-cap, large-cap stocks to even mega-cap.
Bonds are debt securities, essentially an “IOU”. Borrowers issue bonds in order to raise money from the investors who are willing to lend money to them for a certain amount of time. When you buy a bond you are lending to the issuer. The issuer promises to pay you a specified rate of interest for the life of the bond until it matures. The issuer could be the government, municipality, or a corporation for example.
There are a few main types of bonds, such as corporate bonds, high-yield bonds, and municipal bonds, government bonds, each with their own benefits and risks. People buy bonds because they are a predictable income stream typically. If bonds are kept until maturity, then you will get your entire principal back as the bondholder. It is a good investment tool to preserve capital and avoid the typical market volatility that accompanies the stock market.
According to the SEC, Mutual funds are SEC-registered investment companies that pool funds and invest the money from investors into different types of securities. These securities may include stocks, bonds, or some sort of money-market instruments.
The collection of these securities or assets that are owned by the mutual fund are what is known as a portfolio. Every share of a mutual fund represents proportionate ownership of a fund portfolio by the investor. There are different types of mutual funds that you can invest in. These can include money market funds, stock funds, bond funds, or target-date funds (each with their own risks and rewards).
ETFs, or exchange-traded funds, are an investment product that offers investors a way to pool their money in a fund that makes investments in stocks, bonds, and other products. ETF investors receive exposure to the fund’s specific investments. For example, Invesco’s QQQ Trust ETF is based on the Nasdaq-100 index and invests in Microsoft, Apple, Google, and other tech giants.
ETFs share the features of a mutual fund. You can purchase or redeem at the end of the day at its NAV per share. With an ETF however, you are able to trade intraday on a national securities exchange at the market prices. There are many types of ETFs, some examples are stock ETFs, bond ETFs, industry ETFs, commodity ETFs, and many more.
Where To Invest
Depending on your personal investment style, you will go down one of the following routed. Whether you wish to actively manage your investments through an online broker, or passively manage them through an advisor of sorts, you have many options.
An online broker, also known as an online brokerage firm, is an online entity that allows individuals to buy and sell securities. Essentially it is a tool that anyone can use to perform their own investing. Examples of online brokers include Fidelity, Charles Schwab, Vanguard, or E*Trade. These firms offer online technology and research capabilities for investors and traders to take in-depth analyses in securities.
Robo-advisors use computer algorithms to build portfolios and manage your assets based on the goals you set and risk tolerance. Robo-advisors automate the investment process and management, and therefore typically accompany lower costs than a financial advisor. Look into Betterment, M1 Finance, or SoFi for potential robo-advisors.
A financial advisor is a professional who provides their clients with expert advice on personal finances, specifically investments. They may work independently or with a larger firm, but regardless, they must be licensed appropriately to work with clientele. Financial advisors work on many things with their clients, such as, budgeting, saving, insurance, taxes, and investing.
Getting Started Investing
Investing in your future is one of the most important things you can do in your lifetime. When you are young, you may think you have plenty of time to worry about investing. Perhaps right now you just want to worry about living life. The problem with that thought process is that little changes in your investment strategy now can have life-changing effects down the road.
No matter what your current budget is or how risky you can afford to be — there is an investment vehicle that will meet your style. You could start investing in Stocks, Bonds, or some type of investment fund. There are a lot of options available that you can begin investing in. Some people feel that they do not need any assistance and can go forward with an online broker. If you would like guidance and expertise, a financial advisor could help get you started on the right foot.