If you want to make headway on building wealth, simply saving money might not be enough. To optimize your savings, you should start investing.
Investing is an important building block for a sound financial future — and it can help you get higher returns on your money than you’d get from a savings account or certificate of deposit. Learn the ins and outs of investing 101 with these essential tips from experienced financial professionals.
Here are the best investing tips for beginners:
1. Set the Stage for Sound Investing
Before putting a dime in any investment markets, set the stage for sound investing.
“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,” wrote Mark Morelli, a professional financial writer. “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,” recommends 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 agent at a brokerage firm. Representatives will answer questions and [walk] you through the process. Generally, they won’t give specific investment advice, but can point you to tools that guide your investing decisions.”
3. Keep Things Simple
Mike Piper, certified public accountant and ObliviousInvestor.com, 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. 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,” said Piper.
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 beginner investing: “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 employer match — 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. This disciplined approach 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 on a regular basis, 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 — so 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 and no 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 as low as $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, suggests keeping expenses low when you’re learning how to invest. Even if you have great investment returns one year, high expense ratios can slash your returns. Here’s how Guglielmetti suggests 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 with others in its class. Over time, those fees can make a huge difference in the value of your portfolio.”
8. Don’t Use the TV as Your Investment Guide
So many investors believe that 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 beginning investing shouldn’t involve TV. Short-term thinking doesn’t go well with a long-term investment horizon.
9. Use Social Data for Investment Ideas
Peter Lynch described the methods behind social data trading in his book “One Up on Wall Street.” Essentially, if you see a popular product or understand public sentiment toward a company, you can use that information to drum up investment ideas for beginners.
For example, there have recently been multiple shootings involving police officers. In the wake of these tragedies, people on Twitter talked about how the police should be required to wear cameras. Because the publicly traded company Digital Ally manufactures police body cameras, it might be a company worth an investment investigation.
Check Out: How to Invest in the 9 Best Index Funds
10. Invest in Stocks for Free
Ordinarily, investment tips for beginners don’t include individual stock investing. But if you’re investing with little money and want to take a stab at researching and buying individual stocks, several pros suggest investing using the Robinhood app.
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 you invest, choose an asset allocation that reflects your risk tolerance and risk capacity. If you’re younger, you might hold higher-risk and higher-return stocks and fewer bonds.
This riskier portfolio will likely be compounding with higher returns over time. 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.”
Investment Advice Recap
The best investment advice for beginners is to understand what you’re investing in and why. Whenever you invest your money, make sure to do your due diligence.
Only invest in the stock market funds that you will not need within the next five to seven years. Finally, remember that investment markets are too volatile for short-term money.