Investing your money is essential to building long-term wealth and achieving major financial goals like retirement. However, investing can seem intimidating, especially for beginners. This guide provides an overview of investing basics, strategies for different goals, and tips to get started. Let’s explore How2Invest your money successfully.
Before diving into types of investments, it’s helpful to understand some investing fundamentals. Investing involves putting money into assets like stocks, bonds, funds, and real estate with the goal of earning returns over time. The main ways to earn returns are through price appreciation of the asset and income like dividends or interest.
Investing comes with risk since asset prices fluctuate and future returns aren’t guaranteed. However, it also provides the potential for higher long-term returns than keeping money in cash. The key is managing risk through diversification and time in the market. How2Invest can help guide you through the basics.
Types of Investments
There are many types of investments with different risk and return profiles. Key categories include:
You buy shares of a public company’s stock, becoming a partial owner. Stocks provide potential for price appreciation and dividends but with higher volatility.
Bonds are a type of debt security that investors buy to lend money to a company or government. They provide interest income with lower risk than stocks. Government and high-quality corporate bonds are among the safest.
Mutual funds pool money from many investors to purchase a portfolio of stocks and/or bonds. They provide built-in diversification and professional management. Index funds that track market indexes have become popular for their low fees. How2Invest covers mutual funds.
Exchange-traded funds are baskets of investments like index mutual funds but trade on exchanges like stocks. ETFs offer diversification, low costs, and trading flexibility.
Asset allocation involves deciding what percent of your portfolio to allocate to different asset classes based on your goals and risk tolerance. A common starting mix is 60% stocks and 40% bonds for balanced growth and income. Beyond stocks and bonds, alternatives like real estate help further diversify.
Investing entails risk, but there are ways to manage it. Diversifying across many investments reduces stock-specific risk. Maintaining an emergency fund covers near-term cash needs if required. Investing for the long term lets you ride out short-term volatility. Rebalancing periodically back to target allocations also helps manage risk.
Choosing a Broker
Online brokers provide convenient, low-cost access to investing. Consider factors like:
Look for $0 commissions on stock and ETF trades. Low expense ratios on mutual funds and ETFs reduce long-term costs.
Evaluate investment research, analysis tools, and educational resources provided. Look for an intuitive, easy-to-use trading interface. How2Invest reviews trading platforms.
Research and Tools
Consider whether the broker offers screeners to find investments, retirement planning calculators, and automated investing options like robo-advisors.
Investing for Beginners
For those just starting out, keep these tips in mind from How2Invest:
Be clear on what you’re investing for—such as retirement, a home, or education. Your goals help guide decisions like time horizon and risk tolerance. How2Invest aligns goals with strategies.
Investment time horizon is how long until you need the money. Longer horizons accommodate more risk for higher return potential. Target more conservative options for short horizons of under 3 years. How2Invest tailors recommendations to time horizon.
Tolerance for Risk
Determine your comfort with potential volatility. Higher risk tolerance allows allocating more to stocks. Lower risk tolerance suggests more bonds and cash to limit potential swings.
How Much to Invest
Experts suggest saving at least 10-15% of your income for retirement. Invest any extra cash not needed for near-term expenses. Consider setting up automatic transfers from each paycheck.
Build a diversified core portfolio of stocks and bonds through mutual funds and ETFs. Look for low-cost, broad-market index funds if going the DIY route. Target date funds are simple if you want hands-off investing. How2Invest recommends specific investments.
Monitoring and Adjusting
Revisit your portfolio allocation periodically and rebalance back to targets if drift occurs. Review overall performance at least annually. Adjust investments if goals or risk tolerance changes over time.
Investing for Retirement
Retirement requires diligent saving and investing. Follow these tips from How2Invest to work towards your retirement goals:
Thanks to compound growth, starting in your 20s or 30s can make a big difference vs. waiting. Time allows your investments to grow exponentially. Use retirement calculators to see the impact.
Take Advantage of Tax-Advantaged Accounts
Use IRAs, 401(k)s, and other tax-advantaged accounts to grow savings tax-deferred or even tax-free. This boosts returns dramatically over time. Contribute regularly and max out if possible.
Consider Your Time Horizon
Think about your current age and estimated retirement age. Target more aggressive, growth-oriented investments with longer time horizons. As retirement nears, shift to more conservative assets. How2Invest adjusts for time horizon.
Adjust Your Asset Allocation Over Time
Early on, allocate more to stocks for growth. Into your 40s and 50s, shift a portion to bonds and cash to reduce risk as retirement approaches. Maintain some stock exposure for growth even in retirement.
Investing for Major Purchases
Setting investment goals for major future purchases can help you afford them. How2Invest provides guidance for major purchases like:
Down Payment for Home
Save for a 20% down payment on a house over several years in safer options like high-yield savings. This avoids costly PMI and provides stability for a homeowner.
Open a 529 college savings plan and invest in target date options aligned with when tuition is needed. These grow tax-deferred and withdrawals are tax-free for qualified education expenses.
Investing for Income
Some investors seek to generate regular income from their portfolios. Sources include:
Many stocks pay quarterly cash dividends. Blue chip stocks with long dividend histories are a reliable option. A dividend ETF provides diversified income. How2Invest identifies strong dividend stocks and funds.
Bonds provide interest payments at regular intervals depending on the type. High-yield and emerging market bonds offer attractive yields. Bond ladders evenly space maturity dates. How2Invest explains how to use bonds for income.
Owning rental property can provide rental income. REITs offer a diversified, liquid way to earn dividends from real estate. Consider the risks and responsibilities of a landlord.
Investing is essential for building long-term wealth but does require knowledge and discipline. Define your goals, educate yourself on types of investments, and create a diversified portfolio aligned with your risk tolerance. Reinvest dividends and profits to compound returns. Consult a fee-only advisor if you need guidance getting started. With patience and prudence, investing can help grow your hard-earned money. How2Invest provides the investing education you need.
What are the main types of investments?
The main investments include stocks, bonds, mutual funds, ETFs, and real estate. Within those broad categories are more specific types like dividend stocks, high-yield bonds, index funds, growth ETFs, and REITs.
How much should a beginner invest?
Beginners should aim to invest at least 10-15% of their income. Invest any extra savings not needed for near-term expenses. Even small amounts like $50-100 per month will grow over time thanks to compounding returns.
How much of my portfolio should be in stocks vs bonds?
A good starting point is 60% in stocks for growth and 40% in bonds for income and stability. You can adjust the mix based on your age, goals, time horizon, and risk tolerance. This is known as your asset allocation.
How often should I check on my investments?
Ideally, review your overall portfolio at least annually. More frequent checking could lead to emotional reactions. Monitor specific investments periodically for significant changes in fundamentals. Rebalance back to target allocations once or twice per year.
How do I pick individual stocks and funds?
Focus on the company or fund’s fundamentals like financial health, management, competitive advantage, fees, and long-term performance. Diversify across sectors, market caps, investment styles, and geographies. Consider seeking guidance from a fee-only advisor.