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If there’s one piece of advice the investing experts agree on, it’s this: the time to start is now. The sooner you begin, the sooner you can begin to compound your gains into a sizable nest egg.
For most of us, this means buying stocks. Because while equities go down at times, over time the market goes up –– at several times the pace of a savings account.
So whether you’ve never even dabbled in investing, you own a few stocks you want to turn into a real investment plan, or you just want faster growth, it’s time to get to work. Here’s how:
You want to invest money you won’t need right away so it has time to grow. So you’ll need to do a few things first.
Build your emergency fund. The common recommendation is three to six months of living expenses. You don’t need to keep this money in your savings and loan though. A money market fund at a broker will work fine.
Pay off high-interest debt. If your credit cards hit you with double-digit interest rates, you’ll save more by eliminating that debt than you’d gain with a lot of investments over the short term..
Commit to your 401(k) to claim any match. Investment decisions for your workplace retirement account can come later. But if your employer matches even 25% of the money you put in, that’s an immediate 25% gain. Free money is hard to pass up.
With those goals in hand you can set up a brokerage account (if you don’t have one already) and start investing.
Your strategy will change over time, but give it some thought as you begin. There are four critical questions:
If you have a workplace retirement plan or own a few stocks, you might already have a broker. You may need more than one, particularly if you want to invest in more specialized products.
Some keys to consider:
You’ll also need to consider what kind of account or accounts to open:
Consider your options and needs when picking a broker.
*Signup bonus information updated weekly.
An investment can be anything you think will increase in value over time, but for most people it starts with stocks and bonds. Here’s a deeper look at those investment options:
In any given year, countless stocks outperform the market average. Tesla grew by nearly 700% just in 2020. Netflix went up 3,900% in the last decade. No question, it’s fun to own the right hot stocks.
But in investing, winning big generally means bigger risks. So while many investors start with individual stocks, as you build a portfolio, it’s best to keep stock-picking to a portion of your portfolio dedicated to riskier investments. Keep the bulk of your gains in safer places, such broad-market index funds, and mind your mix of large blue-chip stocks vs. riskier mid- and small-cap stocks.
Most financial advisors would point novice investors to exchange-traded funds or low-cost index mutual funds before buying a lot of individual stocks. A total market fund will give you a piece of every company in the market; an S&P 500 ETF will give you a piece of the 500 largest.
What they give you is a diversified portfolio across companies and across sectors, which is how you get that steady growth over the long term. When one stock goes down, others go up. To do this with individual stocks is tough; the experts say it takes 20 or 25 stocks at minimum to build a properly diversified portfolio, which takes a large portfolio given the price of market-leading stocks.
In general, ETFs track indexes, matching their performance at a lower cost than mutual funds. Mutual funds have active managers who try to juice returns based on different strategies. But there are indexed mutual funds and actively managed ETFs, so study the strategy, the track record and the fees closely before you buy.
Consider broad index funds as the basics. Over time, you may want to add sector funds, commodity funds and other classes as you become more comfortable targeting your investments and have more money to work with.
Bonds are the traditional hedge for a diversified portfolio. When stocks go down, bonds usually go up, though the returns are generally lower.
The old rule used to be to hold your age in bonds – at 30, 30% bonds, at 60, 60% bonds. But bond returns have been so much lower for so long that new rules have emerged. One says subtract your age from 110 and put the remainder in stocks. So at 30, you’d be 80% stocks, 20% bonds. Investing sage Warren Buffett has talked about a 90/10 mix for even retirees, with the bulk in a broad market index fund.
You can also buy actual bonds, junk bonds and build ladders of bonds reaching maturity at different times –– in short, like stocks, you can get really into bonds.
Stocks and bonds are readily accessible, but almost anything you expect to rise in value can be part of your investment portfolio.
Real estate investing is one way to go. You can buy your house or a rental property (some would question counting your home as an investment since you have to have a place to live, but that is a side issue.)You can try an ETF, a REIT or several specialized investment brokers that let you join a deal with very low buy in.
Investing in metals, and particularly investing in gold, has always been viewed as a safe haven when the market crashes. Most commodities in fact can be invested in via the futures markets, or through an ETFs, though that might not be as satisfying as dropping a gold coin in your pocket. (Storing commodities on your own can be a hardship, though.)
Foreign exchange investing, as well as cryptocurrencies, have grown in popularity in recent years. In forex, you’re basically betting that one country’s currency will rise and fall against another. In crypto, you’re picking one of several digital currencies because you think people will pay more for it down the road. Unlike a stock which is backed by a real company, or a currency backed by a government, crypto is only worth what sometime will pay you for it. So the risks are higher, but the rewards in recent years have been huge.
Collectibles: Almost anything from collectible cars to art to antiques can be acquired and tucked away as investments. Some are literally worth more than their weight in gold. A pristine Action Comics #1 weighing about 3 ounces –– that’s the first appearance of Superman –– goes for more than $3 million. An ounce of gold? Less than $2,000.
The hitch is that for the biggest gains, you have to know the field well enough to figure out what will sell a decade or more down the road. Or have the capital to buy classics when they’re already classics.
That’s at least as challenging as picking individual stocks.
With investing, the idea is to use your money to make more money. By creating and preserving your wealth, you can reap the rewards of:
Risks investors face include:
When assessing risk, consider your age as a key factor. Younger investors can take more risk because they have time to make up for losses. Those nearing retirement are usually told to dial back risk.
No. But a few protections are in place for specific vehicles and situations:
The keys to getting started with investing center on having a plan and understanding the assets you’re investing in. If you can handle the volatility of investing and minimize the risks, there exists an opportunity to grow your money. Evaluate your options, learn what fits you best and compare the products and services that will help you achieve your goals, starting with online trading platforms.
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