If you want to make headway on building your wealth, simply saving money might not be enough. Your next move to maximize your savings should be to begin investing. Investing is an important building block of a sound financial future — and can help you get more returns on your money than you’d get from a savings account or certificates of deposit.
To get a better understanding of what investing is and how to start, use these essential tips from experienced financial professionals.
1. Set the Stage for Sound Investing
Before putting a dime in any investment markets, set the stage for sound investing. Mark Morelli, of The Mathematical Investor, a site that educates on savings, budgeting and investing, advised:
“First, set up a budget with all monthly and infrequent expenses such as insurance and taxes, with 20 percent of gross expenses targeted toward savings. Next, get rid of all credit card debt and car loans. Third, create and maintain that important emergency fund.”
2. Ask for Help Setting Up Your Investment Account
For brand-new investors, the process might be overwhelming. Here’s how Julie Rains, long-term investor, journalist and publisher of Investing to Thrive, recommended getting started:
“If you are unsure of how to open an account, fund an account, or even select a mutual fund or exchange-traded fund, call the customer service area of a brokerage firm. Representatives will be glad to answer questions and step you through the process. Generally, they won’t give specific investment advice, but they can point you to tools to help you make a decision.”
3. Start With Simple Investing
Mike Piper, certified public accountant, publisher of ObliviousInvestor.com and Wall Street Journal contributor, is known for his smart and simple investing approaches.
“To me, the best way to invest is to keep things simple,” Piper said. “Automate your contributions every month — whether to an IRA, a retirement plan at work, or both. And find a low-cost, all-in-one fund with an allocation that’s appropriate for your risk tolerance. That way, both monthly saving and portfolio management are hands-off, thereby saving you time and minimizing the likelihood of mistakes.”
4. Learn Where to Invest Your Money
George Papadopoulos — a certified public accountant, certified financial planner and fee-only wealth manager in Michigan — offered this advice on where beginners should invest:
“For beginner investors who are most likely investing in just one account — usually the 401k plan at work — and not willing to spend time managing and rebalancing, they should just pick a target-date fund and ‘set it and forget it.’ Further, new investors should focus on expanding their marketable skills and aim to contribute more — ideally, to the point to capture the full matching — to their workplace retirement account.”
5. Invest Using Dollar-Cost Averaging
Dollar-cost averaging is the practice of regularly transferring a certain amount of money into an investment account to buy stocks or funds.
Dollar-cost averaging is a disciplined approach that forces you to buy more shares at lower prices and fewer shares when prices are higher. You can practice this investing strategy by simply investing in a 401k or 403b, or by having a set amount transferred from your paycheck into an investment account.
6. Keep Investment Amounts Small
Rains said even small amounts matter — there’s no need to wait until you have a big cash stash to invest.
“Buy a mutual fund with a low minimum, no load, or transaction fee; set up automatic purchases or just invest random amounts whenever you have extra money,” Rains said. “Schwab has index mutual funds with minimum initial investments of just $100. After that, you can invest just $1.”
7. Diversify Your Portfolio and Keep Expenses Low
Cristina Guglielmetti, founder of Future Perfect Planning and certified financial planner, suggested keeping expenses low. Even if you have great investment returns one year, high expense ratios can slash the juicy returns. Here’s how Guglielmetti suggested keeping investing expenses low:
“Choose a broadly diversified index fund. Look up the expense ratio — the annual amount you will pay to own the fund — and compare it to others in its class. Over time, those fees can make a huge difference in the value of your portfolio.”
Most mutual fund companies offer access to low-fee index funds such as the Fidelity Spartan 500 index fund or the Schwab Standard & Poor’s 500 index fund.
8. Don’t Use the TV as Your Investment Guide
So many investors believe that in order to prevail, they must monitor all of the financial market news and heed the advice of business television commentators. CNBC is not your investment advisor. Guglielmetti said that investing guides and sound advice on investing for beginners shouldn’t involve heeding the advice of TV talking heads. Short-term thinking doesn’t belong with a long investment horizon.
9. Use Social Data for Investment Ideas
The methods behind social data trading were first described by Peter Lynch and then again by Chris Camillo in his book “Laughing at Wall Street,” said Laura Casey, co-founder of TickerChicks, a site dedicated to educating and empowering women to take charge of their financial future. Essentially, if you see a popular product or know how the general public feels toward a company, you can use that information to recommend an investment for further study, Casey said.
Casey suggested using social data as a springboard to gather ideas for conventional stock research methods. “For example, over the course of the past year, there have been multiple shootings involving police officers,” she said. “When these terrible events happen, people begin to talk on Twitter about how the police should be required to wear cameras. The publicly traded company Digital Ally manufactures police body cameras.”
The investor would then study and analyze the stock further by reading the company’s 10-K annual reports and 10-Q quarterly reports and analyzing profitability and other stock data ratios.
10. Invest in Stocks for Free
Several pros suggested using Robinhood for individual stock market investments. This free investing app can cut your trading costs: Robinhood charges nothing for stock trading. Just remember that investing in individual stocks is riskier than investing in a diversified portfolio of low-cost index funds.
11. Rebalance Your Investment Portfolio Annually
When investing, it’s wise to choose an asset allocation that reflects your risk tolerance and risk capacity. If you’re younger, you can hold more higher-risk and higher-return stocks and fewer bonds. After setting your preferred asset allocation, make sure to rebalance your portfolio every year to get back to your original allocation. This simple strategy can yield a small increase in returns and a decrease in volatility.
12. Don’t Time the Stock Market
John Hogue, CFA and owner of Peer Finance 101, offered this advice for investors:
“Don’t try to play the professional game of watching technical charts and trying to time the stock market. Play the amateur game. Don’t try to squeeze out every percentage of return from stocks by trading and analyzing. Pick investments in companies that have great products you love and will be around forever.”
Whenever you invest your money, make sure to do your due diligence. Understand what you are investing in and why; don’t just pick different types of investments simply for the sake of trying to diversify. Only invest in the stock market funds that you will not need within the next five to seven years. Investment markets are too volatile for short-term money.
13. Invest in the S&P 500
The first investment every beginner should make is an index fund that tracks Standard & Poor’s 500 index, according to David Weliver, founder of Money Under 30, a source of financial advice for young professionals. Several funds are commonly available through any brokers. Weliver’s favorite funds include:
- Vanguard 500 index fund
- SPDR S&P 500 index fund
- iShares S&P 500 index fund
The S&P 500 stock market index tracks 500 of the largest stocks traded on the New York Stock Exchange and Nasdaq stock exchange. “These stocks are large, stable and represent a cross-section of the United States economy,” Weliver said. “By investing in the S&P 500 — as opposed to, say, the entire stock market — you eliminate some risk and volatility that comes from the stocks of smaller, less established companies.”
Weliver advised that a beginning investor should invest for the long-term — at least 10 years or more. You shouldn’t buy a stock you’re not comfortable holding if the stock market should shut down for five or 10 years, Warren Buffet said, according to Forbes.
“Over a long time period, an S&P 500 index fund should deliver strong returns equal or greater to those of most actively-managed mutual funds and much less risk than trying to pick individual stocks, which you shouldn’t try to do,” Weliver said. “Combine that with very low expenses ratios, and these funds make the perfect first investment for beginners.”