How to Start Investing

Investing can be a good way to grow your net worth over time and reach your financial goals. 

Before you start, it is a good idea to understand the basics, know your investment options, and find what works best for your life and goals. 

How to Start Investing: Understand the Basics

Before you start diving in with your actual cash, consider taking time to set up a solid investment strategy.

Investment Goals and Financial Planning

First things first: establish clear investment goals aligned with your broader financial plan before you start investing. 

Establishing clear investment goals is crucial for effective financial planning and successful investing. By aligning your investment objectives with your broader financial plan, you can create a roadmap that helps guide your decisions and maximizes your chances of achieving your desired outcomes. Here's how you can use this approach to start investing and plan for your financial future:

Identify Your Investment Objectives

Start by defining your investment goals. These could include short-term objectives such as saving for a down payment on a house or funding your children's education. Consider long-term goals like building a retirement nest egg or creating a legacy for future generations.

Assess Your Time Horizon

Your time horizon refers to the time you have to achieve your investment goals. Short-term goals typically have a horizon of five years or less, while long-term goals extend beyond five years. 

Understanding your time horizon allows you to choose investments that match your timeframe. For example, you might opt for more conservative investments for short-term goals to protect your principal, while long-term goals may allow for a more aggressive investment strategy to potentially earn higher returns.

Evaluate Your Risk Tolerance

Your risk tolerance reflects your willingness and ability to withstand fluctuations in the value of your investments. Consider factors such as your age, financial stability, and comfort level with market volatility. A conservative investor may prioritize capital preservation and be willing to accept lower returns, while a more aggressive investor may be comfortable with higher levels of risk in pursuit of greater potential rewards.

Develop a Diversified Investment Strategy

Once you've established your goals, time horizon, and risk tolerance, it's time to develop a diversified investment strategy. Diversification involves spreading your investments across different asset classes, such as stocks, bonds, real estate, and alternative investments, to reduce the impact of any single investment's performance on your overall portfolio. This can help manage risk and improve the likelihood of achieving your long-term objectives.

Regularly Review and Adjust Your Plan

Financial planning and investing are not static processes. Your investment goals and risk tolerance may evolve as your life circumstances change, such as getting married, starting a family, or nearing retirement. It's essential to regularly review your financial plan and investment portfolio to ensure they remain aligned with your objectives. Make adjustments as needed to stay on track toward achieving your goals.

Seek Professional Guidance if Needed 

While it's possible to create a financial plan and manage your investments on your own, seeking professional guidance from a financial advisor can provide valuable insights and expertise. An advisor can help you clarify your goals, assess your risk tolerance, and develop a personalized investment strategy tailored to your needs and circumstances.

Types of Investments

There are several investment vehicles you can choose from when you start investing. You can also invest in multiple avenues to help diversify your overall portfolio. Here are a few options to consider: 

Stocks

Stocks represent ownership in a company, and by investing in them, you can potentially benefit from capital appreciation and dividends.

Investing in individual stocks provides the opportunity to own shares in specific companies. However, starting the stock market involves researching and selecting companies that align with your investment goals and risk tolerance. This could include studying financial reports, assessing market trends, and seeking advice from financial experts. In other words, it can take a lot of time. On the flip side, while this approach requires more research and understanding of individual companies, it slo allows for a more hands-on approach to building a portfolio.

Mutual Funds

A mutual fund is a professionally managed investment vehicle that pools money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other assets. Managed by professional fund managers, mutual funds aim to achieve specific investment objectives based on the fund's investment strategy, such as capital appreciation, income generation, or a combination of both. You can purchase shares of the mutual fund, and the performance of its underlying assets determines its value. Mutual funds can offer diversification benefits, professional management, and accessibility to various asset classes without requiring extensive knowledge or time commitment.

Investing in a mutual fund typically involves opening an account with the fund company or through a brokerage platform that offers access to mutual funds. You can choose from various mutual funds with investment objectives, risk profiles, and fees. Additionally, you may be able to set up automatic investment plans to contribute regularly to your mutual fund holdings, allowing for systematic investing over time. Mutual funds can offer the opportunity to participate in the financial markets with the expertise of professional fund managers, making them a popular choice for individuals seeking diversified investment options with varying levels of risk and return potential.

Exchange Traded Funds

An Exchange-Traded Fund (ETF) is a type of investment fund traded on stock exchanges, much like individual stocks. It pools together investors' money to purchase a diversified portfolio of assets, including stocks, bonds, commodities, or a combination thereof. ETFs are designed to track the performance of a specific index, sector, commodity, or asset class, providing investors with exposure to a wide range of securities within a single investment vehicle. 

Investing in an ETF is relatively straightforward. Like individual stocks, you can buy and sell ETF shares through a brokerage account. You can place orders to buy or sell ETF shares during regular trading hours, and the transaction is executed at the prevailing market price. With the wide array of ETFs available covering different sectors, regions, and investment strategies, you can tailor your investment portfolios according to your financial goals, risk tolerance, and preferences.

Certificates of Deposit (CDs)

Certificates of Deposit (CDs) are a conservative and secure investment option. When you invest in a CD, you essentially lend money to a financial institution for a predetermined period, known as the term length, ranging from a few months to several years. The bank pays you interest at a fixed rate in return for your investment. 

CDs are known for their safety, as they are typically FDIC-insured, providing a level of security for your principal investment. While CDs may not offer the same level of return as riskier investments, they can be an excellent choice for those seeking a low-risk option and a guaranteed return on their investment. However, remember that CDs often come with penalties for early withdrawal, so it's essential to consider your time horizon and liquidity needs when incorporating them into your investment portfolio.

Fractional Real Estate 

Fractional real estate investment involves purchasing a portion or "fraction" of a real estate asset, such as a residential property, commercial building, or a portfolio of properties, alongside other investors. This approach can allow you to access real estate investments with smaller amounts of capital than purchasing an entire property outright. Fractional real estate platforms facilitate these investments by pooling funds from multiple investors to acquire and manage properties. 

Investors typically own a percentage of the property proportional to their investment, and they may receive income through rental payments or capital appreciation when the property is sold. Fractional real estate investment can offer diversification benefits, the potential for passive income, and exposure to the real estate market without property management responsibilities.

Index Funds

Index funds are investment funds that aim to replicate the performance of a specific financial market index, such as the S&P 500 or the FTSE 100. These funds passively manage their portfolios by holding the same securities in the same proportions as the index they track, thereby providing investors with diversified exposure to a broad market or specific sector. Index funds are designed to closely track the performance of their underlying index rather than trying to outperform it through active management. Due to their passive approach, index funds typically have lower fees and expenses than actively managed funds, making them a cost-effective investment option for many investors seeking long-term growth or exposure to the overall market.

Investing in index funds is straightforward and can be done through various channels. You can purchase shares of index funds directly from fund providers or through brokerage platforms that offer access to a wide range of funds. Many retirement accounts, such as 401(k) plans and individual retirement accounts (IRAs), offer index funds as investment options. 

Invest Alone or Seek Help?

When you start investing, you have a few options. You can invest on your own, utilize automatic investing platforms, try out robo-advisors, or work with a pro. There are pros and cons to each option. 

Robo-Advisor

Robo-advisors are online platforms that use algorithms and computerized algorithms to provide automated investment services. They typically offer a low-cost, hands-off approach to investing. They use modern portfolio theory and algorithms to allocate and manage investments based on the client's goals, risk tolerance, and time horizon.

Robo-advisors usually employ predetermined algorithms to create and rebalance investment portfolios, often utilizing exchange-traded funds (ETFs) or mutual funds. Clients interact with the platform through a web interface or mobile app, inputting their financial information and investment goals to receive a suggested portfolio allocation.

Automated Investing

Automated investing refers to any investment strategy or service that uses computer algorithms to automatically make investment decisions without requiring human intervention. This can include robo-advisors, but it also encompasses other automated investment strategies, such as algorithmic trading, which involves using computer programs to execute trades based on predefined criteria or rules.

Automated investing can range from relatively simple strategies like dollar-cost averaging (regularly investing a fixed amount of money into a particular investment) to complex high-frequency trading algorithms used by institutional investors.

Working with an Investment Professional

Working with an investment professional involves engaging with a financial advisor or investment advisor who provides personalized investment advice and services.

Investment professionals typically offer a range of services, including financial planning, retirement planning, portfolio management, tax planning, and estate planning. Unlike robo-advisors, working with an investment professional involves direct interaction with a human advisor who can offer personalized guidance tailored to the client's unique financial situation, goals, and risk tolerance. However, investment professionals may charge fees based on a percentage of assets under management, hourly rates, or flat fees for specific services rendered.

The option you choose is ultimately up to you and what works best for your lifestyle and goals. Keep in mind that you can also try out different options to get a feel for what works best. 

The Importance of Planning and Review

Taking a somewhat hands-on approach is important to give your portfolio its best shot. 

Regularly review your investment goals and make adjustments as needed. Life circumstances, financial priorities, and market conditions can change, requiring a flexible approach to your investment strategy.

Periodically review your portfolio to ensure it aligns with your investment goals and risk tolerance. Rebalancing involves adjusting your asset allocation to maintain the desired level of risk and return.

Remember, you can always seek one-time or ongoing help from a financial advisor. 

By establishing a solid financial plan and aligning your investment objectives with it, you can set yourself up for success. Whether you choose to invest in stocks, mutual funds, ETFs, CDs, fractional real estate, or index funds, the key is to diversify your portfolio and regularly review and adjust your strategy as needed.

Read Next: Lesson 6 — How to Start Planning for Retirement