How to start investing and how to slowly build a good investment portfolio begins with cultivating good financial habits, like putting away some percentage of your income every month. The little amount you save could be the ideal investment seed to turn around your fortunes and safeguard your future.
Thanks to advances in technology, it is now possible to start investing with as little as $5 a month using a smartphone. A recent study reveals an increasing number of Americans are currently using a range of free online investing platforms that makes stock trading more accessible to internet-savvy investors.
However, as a beginner in the world of investing, you probably have many questions, including where and how to start investing.
Reasons Why People Invest
There is no doubt that saving money is crucial to building a better financial future for you and your loved ones. However, your savings could be diminished over time by the powers of inflation. By investing your savings, you get opportunities to grow your money and keep the powers of inflation from clawing away your wealth.
Some of the key reasons to invest include:
1. Grow Your Money
One of the primary goals of any investment is to grow the seed money. Most investment vehicles, including stocks, certificates of deposits, or bonds, offer handsome returns on your capital in the long run. The investment allows your wealth to accumulate and grow over time, thanks to the power of compound returns. You can increase your money through one or more of the following investment options:
- Interest and dividends from savings or dividends paying bonds and stocks
- Cash flow from real estate or businesses
- Appreciation of value from a stock portfolio, real estate, and profitable assets
2. Save for Kids Education
Being a parent means you have a lot of ongoing expenses and other future financial obligations. You should balance between giving your children the best life now and the need to make wise decisions for their future. With the ever-rising cost of living, the cost of college will keep rising.
Now is the best time to create a robust financial plan that includes saving and investing for the kid’s education as soon as you start a family. The sooner you begin saving for short and long-term education goals, the less stress you will encounter in the future.
3. Save for Retirement
If you have a steady income, you need to start investing for retirement. Consider putting away your retirement savings into a portfolio of investments such as precious metals, businesses, real estate, mutual funds, bonds, and stock. When saving for retirement, the rule of thumb is riskier at a younger age with your investments. The higher the risk, the better the chances of earning greater wealth. However, as you grow old, be more conservative with your investments, especially as you near retirement age.
4. To Qualify for Employer Matching Programs
Most employers offer to match the money you invest in your 401(k) plan up to a certain amount. The only way you can qualify for the matching funds is by actively investing in your 401(k). This is one reason most people strive to invest in their plans to earn matching employer funds. As of 2018, 89% of taxable investor households own a 401(k) account, according to a Financial Capability Report.
How to Start Investing as a Beginner
There are four primary asset classes that most people invest in with the hopes of getting handsome returns. These are:
- Stocks: A recent study reveals 55% of adults in the United States invested in the stock markets in 2020. Returns in the stock market can be high if you choose the right stock. Companies typically sell stocks to raise money for their business operations. When you buy shares of stocks, you gain partial ownership of the company, and your investments grow whenever the company stocks gain. Some stocks also pay dividends to the company’s profits.
- Bonds: When a company or a government needs to raise capital, they issue debts call bonds to investors. When you invest in bonds, you are loaning money to the issuer for a fixed period. The issuer pays a fixed rate of return plus the money you initially loaned them. Due to the guaranteed fixed rate of returns, bonds are typically less risky than stocks. Before you invest in any bond, check the company’s credit ratings first.
- Mutual Funds: Mutual funds are investment vehicles that pool money from a group of investors and invest the capital on different securities, including bonds and bond market accounts. Since the trading cost is spread over all mutual fund investors, the cost per individual investor is lowered substantially. Another advantage that mutual funds offer is diversification because they hold many different securities. Essentially, it is not wise to put all your eggs in one basket when you are starting, and mutual funds can be a great way to spread your risks.
- Exchange-Traded Funds: Exchange-Traded Funds (ETFs) offer the best options for investors looking for an alternative to mutual funds. ETFs are typically considered low risk because they are low-cost and hold a series of stocks and other securities, thereby offering diversification. ETFs can also be purchased on margin and sold short for a quick return with little risk exposure. ETFs have much lower expense ratios than additional actively managed funds due to the absence of costs such as management fees, services fees, and many others.
Easy Steps How to Start Investing
- Step 1: Define Your Goals. Setting clear goals with achievable targets should be your first step to successful investing. Choose meaningful, measurable goals and put them down in writing. Some of your investment goals should cover retirement planning, lifestyle funds, or life events such as school fees over the medium term.
- Step 2: Understand the Investment Basics. You should also get a good grasp of the different asset classes and how they perform. Get to understand the relationship between risk and returns and why diversification is crucial. It is also essential to understand each investment instrument and how much risk it carries. The most popular investments for anyone just starting include stocks, bonds, mutual funds, and ETF.
- Step 3: Check Your Investment Strategy Options and Start Investing. There are several strategies you can use to build wealth and achieve your goals in a short period. Some of the examples include a regular investment plan, investing for growth, and re-investing distributions. Additionally, you need to decide if you need professional help at this juncture. Keeping up with changes to tax regulations, market movements, and tracking investment performance can be a bit tricky if you are a beginner. Essentially, working with a financial advisor can help you achieve your financial goals faster. Don’t spend too much time considering your strategies, watching the stock markets, or planning which funds to put your money into. Pick an ideal investment option and place your money there for it to start working for you.
