The idea of investing can be a lot to take in at one time. Luckily, this step-by-step guide will break down each area to focus on so you can go at your own pace and start making progress.
Define your investment objectives
Contrary to popular belief, the first step to start investing is not to run out and open a brokerage account. First, determine your goals through your investments, such as a long-term savings plan, capital growth, or generating income. Think about why you want to invest and what your financial goals are.
You may even want to talk to afinancial advisorto get personalized direction based on your situation. Once you have a clear objective, you can start sorting out which strategies will suit you, depending on your investing goals.
Choose the investment tools
Once you know your objectives, it’s time to explore your investment options and the type of account you want to open. Each investment vehicle has its own purpose and risk. Not all of the differentinvestment typeswill fit into your overall approach.
For instance, stocks offer a higher interest rate return but are also high-risk investments. Conversely, bonds are investment products that are less risky but tend to offer lower returns. Retirement accounts like a 401(k) offer tax-free benefits and tax advantages since you contribute with pre-tax dollars.
Depending on the type of investment, you may need a brokerage account. A brokerage account is similar to a bank account but is specifically used for investing in securities like stocks, bonds, mutual funds, and ETFs. Various online brokerages offer low fees and easy access to investments.
Determine your ideal investment amount
Next, determine the amount you can comfortably invest. You should only invest the funds you can afford to lose, so don’t invest your entire savings account balance or borrow money to put it in the stock market. Considercreating a budgetto identify how much money you can allot for investing each month.
If you’re investing in an individual retirement account like atraditional IRA, there’s an annual maximum contribution limit each year. You can use this limit to determine how much you want to put into the account each month. Or, if you plan to diversify with a retirement account and brokerage account investments, you can budget for a total monthly amount and divvy it up among your different investments.
Figure out your comfort with risk
Risk and reward are inseparable in investing. This doesn’t mean you should take risks you’re uncomfortable with.
If you’re a conservative investor, you might want to avoid high-risk investments that can lead to significant losses. If you’re willing to take on more risk, you may be comfortable with high-volatility investments like company stocks, which can be more unpredictable than low-risk investment options.
Consider taking a risk tolerance assessment to figure out your preferences and determine how much risk you’re willing to take. This can help you build wealth at your own comfort level and timeline.
Decide your investment approach
Do you prefer an active or passive approach?Active investinginvolves a more hands-on approach, where you make specific investments to outperform an investment benchmark index. This strategy requires a significant amount of time, expertise, and analysis.
On the other hand,passive investingis a strategy that aims to maximize returns by mimicking the performance of a specific index. Passive investors often invest in index funds – a diversified pooled group of underlying investments – and hold them for an extended period. While active investing can potentially lead to higher returns, it comes with higher risk and fees. Consider taking expert advice to navigate your investment strategy effectively.
Build a diversified portfolio
Constructing a diversified portfolio helps you balance your long-term investments and any risks. If one investment isn’t doing well, for example, your entire investment portfolio won’t take a sharp decline if it’s diversified. Determining thebest investmentfor your situation may involve choosing several high-risk and low-risk options. Some of the different types of assets you can invest in include:
Stocks
When you buy a stock, you purchase a small piece of a company. If the company performs well and more people want to invest in them, your stock price increases. The opposite can also happen.
One of the main advantages of investing in stocks is the potential forcompounding returns. This means that as you earn dividends on your stocks, you can reinvest them back into buying more shares, thus increasing your overall investment. Over time, this can lead to significant growth in your portfolio.
However, stocks also come with a high level of risk. The stock market can be volatile, and the value of stocks can fluctuate based on various factors such as economic conditions or company news. Carefully research andselect stocksthat fit your risk tolerance and investment goals.
Bonds
Abondis when an investor lends money to a business or a government. The borrower promises to pay back the loan with interest. Bonds typically offer lower returns than stocks but also have less risk. That’s because bonds have a fixed rate of return and are not as affected by market fluctuations. They can stabilize a portfolio and act as a hedge against stock market volatility.
There are different types of bonds, such as government bonds,floating rate bonds, corporate bonds, and municipal bonds. Each type has its own risk level and return potential. For example, treasury bonds issued by the U.S. government are considered among the safest investment options, while corporate bonds carry more risk but offer higher returns.
Mutual funds/ETFs
If you don’t want to invest in just one stock or bond, you can invest in amutual fundor an exchange-traded fund (ETF). With these, you buy a basket of stocks and bonds. They are usually considered less risky than buying individual stocks – even if one stock decreases, your entire investment won’t decrease.
Mutual funds and ETFs offer diversification within a specific asset class. Specialized mutual funds and ETFs focus on specific industries or sectors, such as real estate. This allows investors to gain exposure to different types of assets and further diversify their portfolios.
Continue to oversee and adjust your portfolio
Regularly monitor and adjust your portfolio to align with your investment objectives and risk tolerance. Follow updates on the stock market, review your investments regularly, and make adjustments as necessary. Rebalancing your portfolio periodically can help ensure your investments remain diversified.
A financial planner can help with portfolio management and rebalancing your portfolio during your desired investment time horizon. If you use a robo-advisor, it may automatically monitor and rebalance your investment portfolio for you.
