How to Start Investing: Beginner’s Guide
Mar 9, 2023
5 min read
One of the most important things you can do with your money is protect your future – and the future is expensive! Having a million dollars at retirement only replaces 85% of what a household with $70,000 income brings in each month.1
To get where you need to be, investing is critical, but it doesn’t need to be scary. Learn how to start investing with this beginner’s guide.
Understand Saving vs. Investing
Both saving and investing is important for your future, but they are not the same thing. Saving means setting money aside to be used to reach a financial goal. Investing is the process of deciding what to do with that money.
There are a variety of different goals you can pursue with your investments. Maybe you want to protect your initial investment (the principal) and don’t mind smaller returns. Maybe you want to accept some risk in the hopes of higher returns. Understanding the basics of investing – Investing 101 – can help you make decisions about how to best reach your goals for the future.
Start With the Investing Basics
Even for professionals, there is no way to predict how the markets will move and what the best decisions are, but putting these basic investing principles in place can help you navigate market risk and reach your goals.
Set an Investment Goal
What is your investment goal? Beginning with the end in mind helps ensure that your decisions are setting you up for success.
First consider your time horizon. Are you investing for a short-term goal, such as a new car or a wedding? Are you looking more mid-term, like a home renovation or child’s education? Or are your sights set on a long-term goal like retirement? Knowing this helps determine your risk tolerance.
Risk tolerance is the level of risk you are comfortable with in relation to the money you have invested. Are you comfortable risking more in the hopes of a higher payoff? If you have a longer time horizon, you might be willing to risk more because market movement won’t matter until you get closer to your goal, when you’re more likely to move your money into lower-risk investments that aren’t as likely to fluctuate.
Create an Investment Strategy
Take a look at your financial situation and determine how much you can afford to invest. You can always invest a large amount at once – such as a tax return or inheritance – but small, regular amounts are the most common way people invest.
When you invest regularly, such as monthly, you begin to utilize a strategy called dollar cost averaging. That means you invest regularly based the calendar, without regard to prices. Sometimes the markets will be up and your investment won’t purchase as much, but you’ll also be taking advantage of dips so over time you’ll be riding the average. Because it’s impossible to time the market and “buy the dip”, this will ensure that you’re continually making progress toward your goals.
Dollar cost averaging also has another benefit: you don’t have to wait to get into the market. No matter what your situation is, today is the best day to start investing. That’s because the sooner you start, the sooner you’ll start leveraging compounding interest. That’s when you make interest off of interest. Say you invest $100 and soon that turns into $105, which you keep investing. That extra $5 can continue to earn you money – and those earnings can earn more, and so on.
There are a variety of advanced investment strategies you can explore, such as growth investing, value investing and income investing, if you feel comfortable or are interested in investing in individual companies. Otherwise, you can explore groupings to help build your portfolio.
Build a Portfolio
The different companies and/or funds you are invested in make up your portfolio. The foundation of your portfolio is your risk tolerance, which will help you make investment decisions. From there, two keys to building your portfolio are asset allocation and diversification.
Asset allocation is the process of determining where to put your money. Diversification means mixing a variety of investments so all of your eggs are not in one basket. Having a diversified portfolio with money in different asset classes helps reduce risk because different asset classes perform differently. For example, you may want to have investments in individual stocks, bonds and cash. Your stock investments may be further split between large-cap stocks, mid-cap stocks and international stocks.
Diversification also includes having investments from different industries in your portfolio to ensure that something that negatively impacts one industry – such as weather issues or an input shortage – won’t hurt everything in your portfolio.
Stay the Course
If you notice, everything that you’ve done thus far to start investing has been outside of market forces. Whether the market is up or down, the building blocks remain the same. That’s why it’s important to stay the course once you’ve built a diversified portfolio that reflects your risk tolerance and your goals. A lot of money is lost trying to time the market or jump on “the next big thing,” but sticking with the plan that fits you is key.
If something changes for you – such as a new goal or a change to your risk tolerance – then update your investments accordingly, but don’t get caught up in market swings. Your end goal is more important than short-term performance.
Rebalance Regularly
You’ll want to check on your portfolio regularly – about one to four times per year – and rebalance your portfolio if needed to ensure that your asset allocation mix stays the same. A good rule of thumb is that if your portfolio has shifted more than 5% from what you originally specified, you may need to rebalance.
For example, if large-cap stocks are down, your regular investment may have been buying more of those in comparison to other investments. To rebalance, you’ll either want to sell some of those assets to make purchases in other areas that have a lower percentage of your portfolio than you intended or, if you have the capital, leaving your current investments as-is and purchasing more of the categories that need attention. Either way, regularly rebalancing ensures that over time, the allocation within your portfolio continues to match the percentages you’ve decided to allocate to specific asset categories.
Where to Start Investing
There are a variety of vehicles you can choose from to start your investment journey. Investing basics in this guide can help you get started, regardless of which type of investment vehicle you choose.
Retirement Accounts
Retirement accounts are a common and easy way to start investing for your future. If your employer offers a 401(k) or 403(b), enrolling is easy and the regular withdrawals from your paycheck means you’re taking advantage of dollar cost averaging. If your employer offers a match, you should put the percentage needed to get the full match into your retirement account – that match is free money!
Traditional or Roth IRAs (individual retirement accounts) are also great retirement savings vehicles, and you can enroll through a financial institution (versus at your employer). These can be in addition to or instead of an employer plan, though keep in mind that IRAs have contribution limits that don’t apply to employer-sponsored plans.
There are a variety of different tax benefits and implications to different types of accounts, which means you can find one that best fits your situation.
College Savings Plan
A college savings plan can help save for your or a family member’s education – typically college, although some plans can also pay for tuition to elementary or secondary schools up to a certain limit. A common type is a 529 plan, which is a tax-advantaged account managed by your state to help you pay for qualified education expenses. There are other college savings options, such as ESAs, that can also help meet your needs.
Mutual Funds
Mutual funds are accounts managed by professional money managers that pool money from various shareholders to invest in stocks, bonds and other investments. Each mutual fund has investment objectives outlined in a prospectus, and the portfolio is structured to meet those objectives. Mutual funds are beneficial because they give you access to diversified, professionally managed portfolios regardless of how much you have available to invest.
Many employer-sponsored retirement accounts invest in mutual funds, but you can also utilize mutual funds outside those plans. There are several different types of mutual funds that cater to different goals.
Get Professional Help
Not sure where to start? A Farm Bureau financial advisor can help you make a plan to reach your goals and find investment options that work for you.