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When I first started to invest, I didn’t have a clue as to what I was doing. I kept overthinking what it means to invest, asking myself, “How much money should I have to start investing?” Or, “What is the best strategy to optimize a well-balanced portfolio?” I was a beginner investor for a long time, but with planning, research and knowing thyself, my confidence was boosted, and I could finally take advantage of everything the investing world had to offer!
Simply put: Investing is the vehicle that drives and builds your money into long-term, and lasting, wealth.There are a plethora of options to choose from. You can choose Between mutual funds, exchange traded funds, bonds and individual stocks, just to name a few. However, many people procrastinate and end up randomly making investment decisions. This does not have to be the case!
Getting started as an investor can be a complicated process if you’re not prepared ahead of time, so it’s important to assess your finances, goals, and education first before you start throwing your money into an investment portfolio.
- How much am I willing to invest after my monthly expenses?
- Why am I investing?
- Will I be an active or passive investor?
- How willing am I to take risks with my investments?
Knowing these things ahead of time can mean the difference between long-term wealth, and long-term struggle without reward. It took me years of throwing my money into hyped Wall Street companies before I started to think about why I was doing it at all.
That’s why in this article I want to explain some unique concepts so you can start investing without any headaches or confusion. You don’t have to be a financial expert, or even know a lot about the market, or Wall Street in general, to start investing. But learning about your options now can save you a ton of money down the road.
The best way to figure out how you want your money to grow is to lay out a list of investment goals. Are you saving & investing for retirement? Do you want to make passive income on the side?
This is a crucial step prior to investing. For example, most individuals want to save enough to live comfortably in retirement. A common rule is to save 10% to 15% of your paycheck in a tax advantaged retirement account like a 401(k).
Passively investing in mutual funds, index funds, bonds, and other assets will help you grow your nest egg as well as help with certain expenses. Let’s say your grandmother was generous and gave you a nice portfolio of 5 stocks.
These stocks skyrocket in five years and you are enjoying a nice paper gain. You can sell these shares and use this money to pay off any student loan debt. An investment goal achieved!
To start investing, you must consider how much money you have after taxes and expenses. Budgeting can be a pain in the butt. However, keeping track of your monthly, weekly and daily spending & saving habits will set you up for success.
Take whatever net income you have left over and stash 10%-15% into an exchange traded fund, mutual fund or any type of asset class you desire. For the rest of your money, think about opening a high interest savings account. You’d be surprised at how much interest you can earn over a short period of time.
My father and mother were the ones who would pester me about keeping a strict budget. Being a major risk taker, my father knew how to budget his money with sharp precision. After listening and following his advice, setting aside extra investment money has helped me tenfold in my investing endeavors.
Open an Investment Account
This is the first step to start buying, holding, and selling investments for short and long periods of time.
The two questions you should be asking yourself before you open an investment account are, “Why do I need an investment account?” And, “Should I invest with a financial advisor/planner or do it on my own?”
Why Open an Investment Account?
Opening an investment account will allow you to buy and sell securities and mutual funds/index funds. For most beginners, your best bet is a robo-advisor.
A robo-advisor, such as Betterment or Acorns, is an automated investment service that will pick securities for you without you putting any work in. Many of your investments will be held in pre selected exchange-traded funds.
Back in college I opened an Acorns account. I wanted something simple to start my investing journey so I made sure these questions were checked off:
- What is the minimum balance to open an Acorns account?
- How much money should I allocate to my investments each week?
- How do my long term investment goals line up with what Acorns is offering? Am I more conservative or a risk taker?
- Should I open up a separate retirement account with Acorns?
The best part about Acorns is it’s totally free for college students. Non-college students pay $1 per month. Another great aspect is you get to see your portfolio grow; everything is automatic. You set how much money you want to invest each week. Then Acorn’s pulls the money from your checking account and invests into your pre-selected portfolio.
If I were in the shoes of a beginner, hands down a robo-advisor would be my best option. Once you get more seasoned with investing, you can open up a larger account with TD Ameritrade or E-Trade and then start making bigger investment decisions on your own, or with the advise of an advisor.
Should You Hire a Financial Advisor?
Depending on your age and current income, you could choose to work with a financial advisor. Financial advisors can expertly guide your financial goals. These experts can help with asset allocation and most importantly, tax planning. Again, it all depends on your individual financial goals.
However, according to a CNBC, 99% of people do not use financial advisors today. Majority of people do it on their own and have the best resource on this planet: the internet.
Once you’ve set your investment goals, created your budget, and opened an investment account, it’s time to decide whether you want to be a passive or active investor.
Active investing involves you, or a portfolio manager/financial advisor, to research and develop their own opinions regarding the type of asset class to choose. The main goal is to beat a certain index such as the S&P 500 or DOW.
If your mindset is more of a risk taker and want immediate gains within 2-3 years all while trying to beat the market, then active investing is for you.
An example of an active investment strategy would be a mutual fund manager charging you an annual fee; they use that money to research and select a pool of stocks. They also pick stocks that are underpriced relative to its current share price.
A major downside to active investing is failing to beat an index.
Passive investing requires no due diligence on your part. The main goal is to match, not beat, the performance of a specific index. Think of passive investing as a robo advisor. These investments are 100% automated. The main advantage of passive investing is lower expenses.
Think and plan accordingly before you open up an investment account, and always keep your long-term goals in mind while you invest.
Educate Yourself on Various Asset Types
Even if you invest with an employer sponsored 401(k) plan, you are the one who decides where your money goes.
Understanding the different asset types is critical prior to investing any money. Check out the most well known asset types.
- ETFs offer low operating costs than traditional funds. They also have great tax efficiency and portfolio diversification. Any type of securities can be traded within an ETF including commodity ETFs.
- For new investors, this is a great option because the share price is lower than a mutual fund. If your budget is rather small, highly consider an ETF.
- Owning a share of a company is very exciting. You can stay on top of current news about the industry & company you invest in.
- You are purchasing an equity, also called a stock, at its market value which can be trading at a low price or a very high price. Investing in individual stocks can be a risky business for the new investor. Investing in an exchange traded fund or mutual fund is highly recommended, as the risk is minimized.
- If you are working for an employer who offers a 401(k) plan, most likely their offering is a selection of mutual or index funds. Now, if you decide to invest in a mutual fund outside of your employer, mutual fund minimum requirements can range from $1,000 to $3,000 depending on your broker.
- Mutual funds are mainly actively managed by a portfolio manager or analyst. They are the ones usually picking the holdings of the portfolio. The price of the mutual fund, or its net asset value, is determined by the total value of the securities divided by the number of shares outstanding in the fund. To note, you do not own any securities in the mutual fund. You own shares in the fund itself.
Municipal & corporate bonds
- Municipal bonds are fully backed by the federal government; they are issued by a state or city to fund local expenditure projects such as schools, bridges and hospitals. The best part about investing in municipal bonds is its tax advantage. If you are looking for a tax break, the income generated from these bonds are usually exempt at the federal and state level. Be sure to check with a financial professional before investing in these mysterious bonds.
- Corporate bonds are, of course, bonds created by large corporations in order to fund acquisitions or expand operations. The interest earned is taxed at the federal and state level. Comparing its risk to stocks, bonds are generally less risky. If you want lower returns, and are more conservative, bonds will suit you well.
Commodities/Treasury Inflation Protected Securities
- The allure of gold, oil, and various metals such as copper and silver will boost your portfolio diversification strategically. If you want to protect yourself against rising inflation, investing in such commodities will boost your overall returns.
- Treasury Inflation-Protected Securities, better known as TIPS, is a great hedge to your investment portfolio. TIPS provide zero inflation risk meaning if inflation rises in the future, you are protecting your purchasing power, or the amount you bought the security at.
Real Estate Investment Trusts (REITS)
- Real Estate Investment Trusts is a great portfolio diversifier. They are known for their strong dividend income. Dividends are fueled by a stable income flow of rents paid by tenants. Long term holdings of REITS are similar to holding value stocks and they usually have better returns than bonds.
Opt into a 401(k) plan
Obviously, this is the most common way to start investing. If your employer offers a 401(k) plan, which most large organizations do, you are in good hands. There is no DIY, or do it yourself, investing, because the company you work for makes the investment decisions on your behalf. The only thing you do is hand over what you want them to invest.
The process is so simple everyone should be taking advantage of this option. You can even invest as little as 1% of your salary into the plan.
Committing to a 401(k) plan has a major benefit. That is the tax deduction. You can save thousands in taxable income. Contributions and capital gains are not taxed until distributed, which means more money in your wallet when you go to retire.
My first job right out of college was a game changer. The company I worked for offered an amazing 401(k) plan. They gave me a list of mutual funds offered by various brokers such as JP Morgan and Wells Fargo. Spreading out my earnings in multiple mutual funds helped me tremendously while matching at least 6% of my salary with their contribution.
However, there are disadvantages to a 401(k). One of the biggest downsides is paying more in taxes when you retire. You will have to pay taxes on the money you withdraw from your 401(k) at retirement. Plus if you withdraw any money before the age of 59.5, you are subject to a 10% penalty of your contribution amount.
Make sure a 401(k) plan fits into your long term investment goals. For those of you just starting out in your career or prefer hands on investing, other saving vehicles that do not defer taxes may be a better choice, like a ROTH IRA.
Start investing now
No matter what age, investing at the present time will give you stability in the future. Growing your wealth through various means will take the burden off your back when retirement rolls around so that you will be able to enjoy the lifestyle that you have always dreamed about.
Having financial security does not come overnight, but takes years to attain through saving, investing and being smart with budgeting so you are able to apply all three for your long-term goals.
Contributor’s opinions are their own. Always do your own due diligence before investing.
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