Alongside saving, investing is a cornerstone of building wealth. It is not always easy to know where to get started, however, in part due to the sheer range of possible investment options. Should you dive straight into stocks? What about ETFs and mutual funds? And how do bonds fit into the whole picture?
If your head already feels like it’s spinning, don’t fret: “With the right tools and resources, investing can be much easier than you’d expect” — and “you don’t need a lot of money to get started,” said Vanguard, a top investing company. Here’s what you need to know.
What investments are good choices for beginners?
Arguably, the best starter investment is likely one you are already familiar with: your retirement plan. “Why? Contributions are taken right out of your paycheck, which helps you build an investing habit,” said NerdWallet, plus you may get the added bonus of an employment match (essentially free money) and the tax benefits associated with some types of accounts, like 401(k) plans.
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Beyond that, some solid options to consider are funds — like exchange-traded funds (ETFs), index funds and mutual funds — because they effectively offer a short-cut to owning a range of investments, which means your portfolio will not rely too much on the performance of any one investment. Mutual funds, for instance, “give you the opportunity to invest in a basket of stocks or bonds (or other assets) that you might not be able to easily build on your own,” said Bankrate.
What should you consider when building your portfolio?
Just as important as what investments you choose for your investment portfolio is an understanding of why you are investing. Common investment goals include: being able to retire someday, covering the cost of a child’s education or saving up for a house.
Your specific goals will also provide some clarity on your investment timeline and the level of risk it is reasonable to take on. 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,” said Vanguard. Risk tolerance also comes down to personal comfort, as some people can stomach market swings better than others.
Also take into consideration just how involved with the management of your portfolio you would like to be. This can partly shape your strategy — for instance, a “passive investor typically buys low-cost, diversified mutual funds or ETFs, and holds them for the long term,” whereas “active investors generally choose individual investments or mutual funds that aim to outperform the market,” said Bankrate. It also may indicate whether you want to outsource some of the work, such as through a robo-adviser.
Lastly, do not overlook the importance of diversification. Basically, this entails “choosing a variety of investment types,” which in turn can “help lower your risk and improve your chances of achieving your investment goals,” said Vanguard.
When should you start investing?
In short, now. If you have any cash flow to spare (and let’s be honest, most budgets do if you look closely), then it is one of the biggest financial favors you can do for your future self.
“Investing is crucial if you want to maintain the purchasing power of your savings and reach long-term financial goals like retirement or building wealth,” said Bankrate. Otherwise, if left to sit in savings, “eventually inflation will decrease the value of your hard-earned cash.”