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It’s understandable to feel nervous when you start investing. While this income-building strategy isn’t risk-free, following these steps can help you build a diversified portfolio to save for short-term and long-term financial goals.
5 Steps To Start Investing
Here are a few steps you can follow if you want to start investing.
1. Choose Your Investment Goals
There isn’t a one-size-fits-all investment strategy as the best plan depends on several variables, including:
- How soon you need to start making withdrawals
- How much you need to save
- Your risk tolerance
So, a 20-year-old will invest more aggressively than a 50-year-old person who is entering wealth preservation mode and can benefit more from smaller yet guaranteed fixed-income returns. For instance, they may invest in stocks that have more long-term growth potential but are very volatile and not an efficient place to store wealth they anticipate needing soon.
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Common Investing Goals
Here are some of the investment goals that you might plan for:
- Retirement
- College
- Home downpayment
- Emergency fund
For retirement, you are more likely to choose investments, such as stocks, with a long-term holding period that have more growth potential but have a fluctuating market value.
However, for emergency funds, a high-yield savings account or a no-penalty CD is a better option as you earn a competitive interest rate but can quickly withdraw your funds if needed.
2. The Best Investment Accounts to Open
Knowing your investing goals helps you choose the best investment account, as retirement-focused accounts offer tax advantages and employer-funded matching contributions.
Taxable Brokerage Accounts
A taxable brokerage account is the best option for non-retirement goals or when you anticipate tapping your balance before turning 59 1/2 (when you can start making penalty-free IRA and 401k distributions).
This is because you can withdraw funds without paying an early redemption penalty.
This account lets you buy or sell positions on demand while the stock market is open, but you will need to report your investment gains or losses at the end of the year. Additionally, your dividend income is subject to taxes (just like savings account interest income) even if you don’t sell any investments.
Individual Retirement Accounts
An individual retirement account (IRA) lets you save for retirement and only pay taxes once on the balance. There are two different types of IRAs:
- Traditional IRA: Contributions grow tax-deferred, so you pay taxes on the withdrawal amount. As you don’t pay taxes upfront, your contributions reduce your taxable income during the contribution year.
- Roth IRA: Contributions grow tax-free as you pay income taxes on the contribution amount immediately.
This retirement account isn’t linked to your workplace, and you make contributions from your take-home pay. However, the annual contribution limits are lower than an employer-provided plan.
401k
Your employer may offer a traditional or Roth 401k or a similar account type such as a 403b or thrift savings plan (TSP). The option depends on your career field and whether you have a private or government provider.
Two benefits of workplace retirement plans are that your employer can match a portion of your contributions and the annual contribution limits are higher.
This account type can be the easiest way to start investing as the contributions come directly from each paycheck. Additionally, matching contributions are “free money” that motivates you to at least invest enough to earn the full match.
One downside of this account is a potential lack of low-fee investments. You may be better off only investing enough to get the employer match and then keep investing in similar yet fee-friendly funds through an IRA.
3. Diversify Your Portfolio
A diversified portfolio allocation minimizes downside risk if a particular investment underperforms the market or loses money. Your asset mix will hold a variety of stocks and fixed-income assets and will gravitate to more conservative investments as you near your withdrawal date.
Here are some assets to consider adding to your investment account:
- Index funds: These funds should be the core position for most investors as they provide the most exposure to stocks and bonds with low investment minimums and fees. After establishing a good foundation, you can branch into individual stocks and funds.
- Individual stocks: Shares of individual companies can help you build wealth from promising growth stocks or dividend stocks. A stock newsletter makes it easier to find winning companies.
- ETFs: You can invest in exchange-traded funds (ETFs) and mutual funds that focus on a specific industry or investment strategy. Two examples are target-date retirement funds and a tech sector ETF.
- Fixed Income: Income-producing assets like bonds, money market funds, and CDs provide stability and a predictable yield to offset the downside risk of stocks.
4. Automate and Rebalance
You don’t have to constantly monitor your portfolio and trade like a day trader to make money from investing. Instead, a better course for novice investors and working families is to automate your investment frequency so you keep investing and have more opportunities to build passive income streams.
You will also want to rebalance your portfolio periodically by trimming winning positions and gradually increasing exposure to fixed-income assets with less volatility. A robo-advisor like Betterment or Fidelity Go will do this work for you. But, it’s still a good idea to keep tabs on your portfolio performance to make sure you’re investing enough and have the correct strategy.
Related: Can You Buy Stocks With A Credit Card?
5. Keep Learning About Investing
While the investment basics remain the same, the stock market trends are constantly changing. Therefore, it’s a good idea to keep a pulse on the markets and see which strategies work best for today’s stock and bond situation.
For instance, the best investments from 10 years ago are likely different from today because of sector rotation and technology advancements.
The Motley Fool can help you learn about today’s market leaders that have a probability of outperforming the market for the next five years. You can also learn more about building a stock portfolio and planning for various investment goals.
Related: What Is The Best Investment Newsletter?
Summary
In conclusion, you can start investing with as little as $1 with several online brokerages. Some offer managed portfolios and research tools that can help you choose the best investment options for your goals. Many charge no or little platform fees so you have more to invest in brokerage and retirement accounts.
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