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Most people have probably heard this Chinese proverb: the best time to plant a tree was yesterday. The second best time is now.
Investing is no different. But how do you start the process?
Thankfully, wading into the world of investing on your own isn’t as scary as you might think.
Mutual funds and exchange-traded funds are great options for the new investor, and they don’t take a finance degree to figure out. Read on to learn how you can go from being a green investor to a grizzled veteran.
Investing Basics
The first thing to lock down is your reason for investing. Do you want to fund a nest egg for your retirement? Do you want to save for your child’s education? Do you want to create wealth to last for generations? Having a clear reason will help determine what you invest in, what your timeline is and how much money you need.
Investors should aim to have a diverse portfolio, made up of national and international companies and small and large firms. Some companies provide more growth while others yield income for the investor. A mix of income and growth companies is vital.
Most people hear about the stock market in terms of companies like Apple, Google and General Motors. But a better way to gauge the overall economy is through indexes such as the Dow Jones Industrial Average or the S&P 500. These indexes act as holistic snapshots of the stock market, and avoid focusing on specific companies or areas of the market.
Don’t let these indexes intimidate you: They’re not as complicated as they may appear. Like with most investment related information, learning the basics will make everything else easier to understand.
Why Mutual Funds or ETFs?
So once you have a basic knowledge of the stock market, what kinds of investments should a newbie look to make? Many people decide to invest by picking single companies, but holding your money in a few corporations exposes your investment to a lot of risk.
Mutual funds and Exchange Traded Funds are like baskets that hold a cornucopia of funds. One share in a mutual fund guarantees you more diversity than a single share in Apple, and that inherent diversity makes it a perfect choice for the new investor.
By buying mutual funds or ETFs that hold shares in a variety of companies, you lower the chances that the market’s downturns will affect you too much. Plus, many of these funds have low fees, so you won’t lose a huge chunk of your earnings. Find a fund that charges 1% or less in fees – any higher and you’re getting ripped off.
For retirement investing, you can choose a 401k, offered by an employer, or an Individual Retirement Plan, which you can open through a firm such as Charles Schwab, Fidelity and Vanguard.
How to Choose?
Funds can be conservative, aggressive or in between, depending on the investor’s needs. More conservative funds are good for seniors getting ready for retirement, while aggressive funds are better for younger people who have decades to save and wait.
Some people choose to invest more aggressively or conservatively than the norm. Older people whose risk tolerance is low might stick to income securities such as bonds, while younger people who want to grow their assets will choose more stocks.
No matter how you invest, it helps to be rational and calm. Too many investors let their emotions dictate their financial decisions. Many choose to sell when the market is down, panicking at the thought of losing all their money.
Remember to stick to your original plan. The market can swing up and down, but continue to invest carefully and regularly. The best investors focus on long-term goals, tempering their reactions to short-term market volatility.
When you’re a new investor, the key is to start small and think big. You shouldn’t throw your life savings into the stock market right away; take some time to learn the process and monitor how your funds are performing. Once you’ve mastered the basics, you can start building towards a financial future to look forward to.
That’s when investing really starts to get fun.