When it comes to building wealth, investing is not an option. You can save money all day long, but even with the highest of interests rates, you’re keeping up with inflation at best.
The only way to truly build wealth over the long term is by investing your money. Yes, it comes with a risk of losing value, but when done right and consistently, you’re more likely to see your money grow over time.
People often feel they aren’t cut out for investing, but the truth is there are investments for all kinds of people. The hardest part can be getting started. So, how to start investing, you may wonder.
That’s exactly what I’ll go over today, how to start investing.
What Is Investing and Why Is It Important
Investing at its core can be defined as the act of allocating resources, usually money, with the expectation of generating an income or profit. For most of us, this means we put money into a stock or mutual fund, hoping that it will be worth more money when we want to sell it.
So why is investing so important? As mentioned before, without investing, the best you can do is save your money. Unfortunately, saving you money won’t give you long-term wealth, and in fact, it could hurt you in the long run.
Most bank accounts don’t have high-interest rates. Those with the highest interest rates still don’t typically keep up with inflation over a 5, 10, or 20-year timeframe. So by saving your money, you’re actually losing buying power over the long term.
With investing, you’ll see returns that not only keep up with inflation but will typically outpace it too. Of course, the stock market will have its ups and downs, but historically speaking, it rises about 7% year over year.
Some investments will have lower returns but are considered “safer,” while other, more risky investments will have much higher returns. But even if you decide to go with the most straightforward, vanilla investing strategy, the worst your should see is that 7% rate of return.
Invest Early and Often
One of the most important aspects of investing is time. The more time you have your money invested, the better. Some people reading this might be in their 20’s, some in their 50’s. No matter your age, the important thing is to start investing as soon as possible; it’s never too late to start!
Once you learn how to start investing, it’s important to keep investing. You’re not going to get rich overnight. But, if you keep investing consistently and wait long enough, you’ll start to see gains. The more money you invest, the more gains you’ll see.
Imagine getting those 7% annual returns after investing $100. In this case, now you’d have $107. Now next year, you’d see that rise to $114.49; you got a little more the second year. That is the power of compounding gains. Each year you earn a little more than the last.
Now imagine you kept investing another each month for a total of $1200. Now that 7% becomes an $84 gain, for $1284 (ok, you got me, you’d likely have a little more, but this was easy math). Now imagine continuing this pattern for 5, 10, and 20 years, maybe even increasing the amount you invest each money. You could see hundreds or thousands of dollars in gains each year.
How To Start Investing
Ok, so you’ve gotten to the point where you know investing is a good idea, and the sooner you start, the better. Now you can learn how to start investing. Below are some guidelines you can use.
Decide How Much To Invest
One of the first decisions you should make is how much money you’ll want to invest. Will you have a monthly goal? Maybe a yearly amount you’d like to invest? It’s really up to you. Remember that no amount is too small.
Many investors start with small amounts each month and slowly build their way up. Whatever the amount is, make sure it fits your budget.
Do Your Research
One of the biggest reasons people don’t start investing is a lack of knowledge. The stock market can be confusing, and predicting what it will do is next to impossible. However, there is more than enough information out there to help you make an informed decision about how to start investing.
Here are a few topics that you can look into to learn the basics of investing.
Buying stocks essentially means you are buying part of a company. You’ll own what are called “Shares” of that company. Stocks are typically seen as the riskiest type of investment in the stocks market as they can be volatile and fluctuate in value quickly in some cases.
Mutual funds are essentially ways of buying many different stocks similar to each other but not from the same company. For example, you might find mutual funds that invest in technology companies. Some invest in real estate, others in medical companies. Any way you can group certain companies, there is likely a mutual fund for it.
Mutual funds are typically seen as less risky than stocks because instead of investing in one company, you are investing in many. So if one company’s stock goes down, you’ll have other company stocks that might be way up, bringing the value of the mutual fund up too.
One thing to note with mutual funds is that they come with fees. This is because mutual funds actively trade stocks to try and get the biggest returns. To do that, there are people doing research, executing trades, and managing the fund as a whole.
These fees are typically to help pay for the fund’s managing and active trading. If you decide mutual funds are for you, make sure you take both the average rate of return and the fund’s fee into account.
Index funds are very much like mutual funds, only they typically come with much lower fees. This is because index funds don’t usually have any active trading. Instead, they will invest in their bucket of stocks and don’t change for the most part. Because there is far less management needed to run an index fund, the fees can be significantly lower than mutual funds.
Exchange-Traded Funds (ETF)
Exchange-traded funds or ETFs for short are also very similar to mutual funds with a few subtle differences. For one, mutual fund trading is only done after the stock market closes, while ETFs can be traded at any point during the day, much like stocks.
Although ETFs also have fees associated with them, most try to keep fees lower by not doing as much active trading. As a result, ETFs are almost a blend of index funds and mutual funds.
There are also some tax differences, but understanding the above is enough for our purposes.
Bonds are typically seen as the safest type of investment from the stock market as they are essentially guaranteed to go up in value. Bonds are basically a loan investors give out with interest to the borrower. After a set amount of time, the borrower pays back the loan at the agreed-upon rate set when the bond was purchased.
There are several types of bonds, but they all share the basic principle. Typically the main difference is who is doing the borrowing from the investor. Although a guaranteed return sounds great, the rates on these returns usually are very low. Not much higher, if higher at all than you might find from a high yield savings account.
When looking to invest, some people are interested in finding stocks or other investments that pay dividends. Dividends are essentially a way for companies to share profits with their investors. Both stocks and different types of funds discussed above can pay dividends, but not all do.
Dividends might seem like easy money, but there are a few things to consider before investing in dividend-paying stocks or funds. The first thing to note is that many dividend payments you receive are taxable income. So come tax time, you’ll have to fork over part of your profits.
The other thing to consider is that when a company pays out dividends, the overall stock prices are also lowered by that much. If a company gives out $50,000 in dividends a year, the company is worth that much less, and the stock price will reflect that. So if you are looking for more long-term growth, dividend-paying stocks and funds should not be your primary focus.
Pick an Investment Strategy
Ok, you’ve got the different types of investments down, you’re next step in how to start investing is to figure out your investment strategy. Like many parts of life, everyone is a little different.
When determining your investment strategy, you should consider how much you are investing, what your goals are, and how long you want to take to reach those goals. Obviously, more of us would like to invest as little as possible and make a boatload of money. Unfortunately, there isn’t really a strategy for that.
The first step is figuring out your goals for the investment. Do you want nice safe growth? Are you looking to double or even triple your money? You should never invest money you can’t afford to lose, but you should also consider the timeframe in which you might need the money you are investing. If it’s short-term, maybe 1-3 years away, safer investments are likely better. If it’s long-term 5-10+ years, you can afford more volatility and can probably take a bit more risk.
You should also know thy self. Things are always great when investments are going up, but will you panic if they start to go down? Because they will go down at one point or another. Can you handle big swings in value? Knowing what kind of person you are will also help determine what type of investment strategy fits you best as well.
Open a Brokerage Account
Now that you’ve determined what kind of investor you want to be, you’re ready to open a brokerage account. Most major brokerage firms have online options. Schwab, Fidelity, Vanguard are just a few examples. Once you have your account, you’ll be able to fund it.
After you’ve opened your brokerage account, you’ll be able to do even more research into the type of investing you want to do. Most sites have tools that make it simple to find stocks or funds that will match the criteria you are looking for.
If you don’t want to do the leg work to find the right stocks and funds to invest in, many brokers have Robo Advisors. Essentially, you will answer a few questions about your investing strategy, goals, and risk tolerance. Then, they do all the investing for you. Many of these don’t involve extra fees, but you will have to invest a minimum amount to get started.
Diversify Your Investments
We’re getting near the end of our “How to start investing” journey, but this is an essential part of the process. No matter what path you’ve taken up to this point, diversifying your portfolio is a crucial part of investing. There are many ways to diversify your investments as well.
One type of diversification is the risk type of your investments. Even the biggest risk-taking investor should have most of their portfolio in safe to average risk investments. They might have more investing in stocks than less risk-averse investors, but the amount of risk being taken should not all be on the risky side. There should be a mix of mutual funds, stocks, and bonds in everyone’s portfolio.
Another way to diversify your portfolio is to invest in different sectors. For example, buying only stocks of technology companies might sound like a good idea, but if that sector suffers, you’ll lose a lot of your money. Instead, invest in stocks and funds that have a variety of companies in different sectors to reduce your risk at any given point time.
We’ve only discussed how to start investing in the stock market until this point. However, there are other ways to start investing as well. I won’t go into too much detail, but many of these are very viable options and can be a better fit for many investors.
Sites like lendingclub and others allow you to essentially be a bank. When putting your money in a P2P lending site, there are others looking for loans, and you provide a small amount of that loan. Typically, you buy “notes” in $25 increments. As with any other investments, they have different risk categories and strategies you can choose from.
Real estate is a tried and true investment route. You can become a landlord yourself and take care of a property, or you can invest online in crowdfunding real estate opportunities, where I’ve found great success, with sites like Fundrise.com.
Unless you’ve been under a rock for the past decade, you’ve likely heard of cryptocurrency. Understanding exactly how it works or will be used in the future is anybody’s guess. What we do know is that it is becoming more accepted and mainstream by the day.
Buying selling collectibles has never been more accessible. Like investing in the stock market, you can likely do most of it from the comfort of your home. Whether it be sports cards, coins, stamps, NFT’s, you name it, there is likely a market for it if you can collect it.
Angel investing used to be reserved for those lucky enough to already have tons of cash on hand. That’s not the case anymore. Sites like Wefunder.com have enabled everyday investors like you or me to invest in privately-owned companies looking to raise some capital. Now, this comes with its own risks and terms you’ll need to understand, but it’s certainly worth looking into.
Other Invment Platforms
Above, I mentioned only a few of the more traditional brokerage platforms out there. However, there are certainly more out there that are looking to change the way people invest. A few examples are:
- M1 Finance
- SoFi Investing
Each of these will have there own strengths and weaknesses. See which one fits you and your investing style best.
Keep Investing and Stick With Your Strategy
The last stop in our “How to Start Investing” journey is simple. Just keep going! No matter what you eventually decide to invest in, you’re going to have your ups and downs. The stock market doesn’t go up every day, month, or even year. So when there is a bad stretch, don’t panic and have patience. You can’t time the market so that you are always making money, but you can have your money in the market for a looooong time, and that’s when you’ll start to see those compound gains take out.
If at all possible, you should make your investing automatic as well. Many platforms will be able to connect directly to your bank account. If you have it set up to take a certain amount out every month, you won’t have to hem and haw over how much to invest each month, and it will simply become part of your budget. Many funds and platforms offer automatic investing, so you won’t have to decide what to invest in each month either. You can set it and forget it!
Starting to invest can be a scary endeavor, but like anything else, the more you do it, the easier it becomes. If you want to grow your wealth, investing is a must. Simply saving your money will actually hurt you in the long run. Take the time to go through each step outlined above, and you’ll be off to a great start.
Jeff is a fan of all things finance. When he’s not out there changing the world with his blog, you can find him on a run, a Mets game, playing video games, or just playing around with his kids.