The idea of investing can be intimidating if you’re just starting out, but it’s an important part of saving for various financial goals and building wealth. You’ll encounter many different market environments throughout your investing life, so don’t get too caught up in whether or not now is the perfect time to get started.
But before making any investment, it’s important for new investors to know what their tolerance is for risk. Certain investments carry more risk than others and you don’t want to be surprised after you’ve made the investment. Think about how long you can do without the money you’ll be investing and whether you’re comfortable not accessing it for a few years or longer.
Here are some top investment ideas for those just starting out.
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Best investments for beginners
1. High-yield savings accounts
This can be one of the simplest ways to boost the return on your money above what you’re earning in a typical checking account. High-yield savings accounts, which are often opened through an online bank, tend to pay higher interest on average than standard savings accounts while still giving customers regular access to their money.
This can be a great place to park money you’re saving for a purchase in the next couple years or just holding in case of an emergency.
2. Certificates of deposit (CDs)
CDs are another way to earn additional interest on your savings, but they will tie up your money for longer than a high-yield savings account. You can purchase a CD for different time periods such as six months, one year or even five years, but you typically can’t access the money before the CD matures without paying a penalty.
These are considered extremely safe and if you purchase one through a federally insured bank, you’re covered up to $250,000 per depositor, per ownership category.
3. 401(k) or another workplace retirement plan
This can be one of the simplest ways to get started in investing and comes with some major incentives that could benefit you now and in the future. Most employers offer to match a portion of what you agree to save for retirement out of your regular paycheck. If your employer offers a match and you don’t participate in the plan, you are turning down free money.
In a traditional 401(k), the contributions are made prior to being taxed and grow tax-free until retirement age. Some employers offer Roth 401(k)s, which allow contributions to be made after taxes. If you select this option, you won’t pay taxes on withdrawals during retirement.
These workplace retirement plans are great savings tools because they’re automatic once you’ve made your initial selections, and allow you to consistently invest over time. Often, you can even choose to invest in target-date mutual funds, which manage their portfolios based on a specific retirement date. As you get closer to the target date, the fund’s allocation will shift away from riskier assets to account for a shorter investment horizon.
4. Mutual funds
Mutual funds give investors the opportunity to invest in a basket of stocks or bonds (or other assets) that they might not be able to easily build on their own.
The most popular mutual funds track indexes such as the , which is comprised of around 500 of the largest companies in the U.S. Index funds usually come with very low fees for the funds’ investors, and occasionally no fee at all. These low costs help investors keep more of the funds’ returns for themselves and can be a great way to build wealth over time.
5. ETFs
Exchange-traded funds, or ETFs, are similar to mutual funds in that they hold a basket of securities, but they trade throughout the day in the same way a stock would. ETFs do not come with the same minimum investment requirements as mutual funds, which typically come in at a few thousand dollars. ETFs can be purchased for the cost of one share plus any fees or commissions associated with the purchase, though you can get started with even less if your broker allows fractional share investing.
Both ETFs and mutual funds are ideal assets to hold in tax-advantaged accounts like 401(k)s and IRAs.
6. Individual stocks
Buying stocks in individual companies is the riskiest investment option discussed here, but it can also be one of the most rewarding. But before you start making trades, you should consider whether buying a stock makes sense for you. Ask yourself if you are investing for the long-term, which generally means at least five years, and whether you understand the business you are investing in. Stocks are priced every second of the trading day and because of that, people often get drawn into the short-term trading mentality when they own individual stocks.
But a stock is a partial ownership stake in a real business and over time your fortune will rise with that of the underlying company you invested in. If you don’t feel you have the expertise or stomach to ride it out with individual stocks, consider taking the more diversified approach offered by mutual funds or ETFs instead.
Why should you start investing?
Investing is crucial if you want to maintain the purchasing power of your savings and reach long-term financial goals like retirement or building wealth. If you let your savings sit in a traditional bank account earning little or no interest, eventually inflation will decrease the value of your hard-earned cash. By investing in assets like stocks and bonds, you can make sure your savings keeps up with inflation or even outpaces it.
Short-term investments like high-yield savings accounts or money market mutual funds can help you earn more on your savings while you work towards a big purchase such as a car or a down payment on a house. Stocks and ETFs are considered better for long-term goals like retirement because they are more likely to earn better returns over time, but they carry additional risk.
Important considerations for new investors
- Risk tolerance: Before you start investing, you’ll want to understand your own tolerance for risk. Volatile investments such as stocks can make some people very uncomfortable when they decline, which can cause you to sell at the worst possible time. Knowing your risk tolerance will help you choose which investments are best suited for you.
- Financial goals: Establish both short- and long-term goals that you want to achieve through saving and investing. Understanding your investment goals will help you develop a solid plan.
- Active or passive: You’ll also need to decide if you’d like to be a passive investor or an active one. A passive investor typically owns an asset like diversified mutual funds or ETFs that charge low fees, while an active investor might choose individual investments or mutual funds that aim to outperform the market. Studies have shown that passive investing tends to outperform active investing over time.
- Do-it-yourself or hire someone: You can also choose to manage your own investments through an online broker, or hire a financial advisor (or robo-advisor) to help you out. You’ll likely incur lower costs if you do it yourself, but an advisor can be helpful for those just starting out.
- Taxes: If you own investments in an individual or joint account, you’ll likely need to pay taxes on the interest, dividends and capital gains you earn. You can avoid these taxes by owning investments in tax-advantaged retirement accounts such as an IRA.
How much money is needed to start investing?
The good news is that you don’t need much money to start investing. Most online brokers have no account minimums to get started and some offer fractional share investing for those starting with small dollar amounts. For just a few dollars you can purchase ETFs that allow you to build a diversified portfolio of stocks. Micro-investing platforms will even let you round up purchases made through a debit card as a way to get started with investing.
Bottom line
If you’re just starting out in the investment world, make sure to consider your risk tolerance and what your financial goals are before committing money to an investment. Some investments, like high-yield savings accounts, allow for quick access to money if emergencies come up. Meanwhile stocks should probably be part of a long-term investment plan instead.
Many beginning investors also turn to robo-advisors, where an algorithm automatically selects and manages a diversified portfolio of exchange-traded funds for you, based around your individual financial needs and appetite for risk.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
Introduction
As an expert in investing, I can provide you with valuable information and guidance to help you navigate the world of investments. I have extensive knowledge and experience in various investment concepts and strategies. Let's explore the concepts mentioned in the article you provided and delve deeper into each one.
Risk Tolerance
Before making any investment, it's important to assess your risk tolerance. This refers to your ability and willingness to endure fluctuations in the value of your investments. Understanding your risk tolerance will help you choose investments that align with your comfort level. Some investments carry more risk than others, and it's crucial to be aware of the potential upsides and downsides. Consider how long you can do without the money you'll be investing and whether you're comfortable not accessing it for a few years or longer [[1]].
High-Yield Savings Accounts
High-yield savings accounts are a great option for beginners. They offer higher interest rates compared to standard savings accounts, allowing you to earn more on your money. These accounts are often opened through online banks and provide regular access to your funds. They are ideal for short-term goals or emergency funds. By parking your money in a high-yield savings account, you can boost the return on your savings [[2]].
Certificates of Deposit (CDs)
Certificates of Deposit (CDs) are another investment option for beginners. CDs offer higher interest rates than regular savings accounts, but they require you to lock up your money for a specific period. You can choose different time periods for CDs, such as six months, one year, or even five years. However, accessing the money before the CD matures may result in a penalty. CDs are considered safe investments, especially if purchased through federally insured banks [[3]].
401(k) or Workplace Retirement Plans
A 401(k) or another workplace retirement plan is an excellent way to start investing. Many employers offer matching contributions, which means they will contribute a portion of what you save for retirement. This is essentially free money, so it's wise to take advantage of it. Traditional 401(k) contributions are made before taxes and grow tax-free until retirement age. Some employers also offer Roth 401(k)s, where contributions are made after taxes, and withdrawals during retirement are tax-free. These plans are automatic and allow for consistent investing over time. Target-date mutual funds are often available within these plans, which adjust the asset allocation based on your retirement date [[4]].
Mutual Funds
Mutual funds provide an opportunity to invest in a diversified portfolio of stocks, bonds, or other assets. They are managed by professionals and offer a convenient way to access a variety of investments. Index funds, a type of mutual fund, track specific market indexes and come with low fees. They are a popular choice for investors looking to build wealth over time. Mutual funds are ideal for long-term goals like retirement [[5]].
Exchange-Traded Funds (ETFs)
Exchange-Traded Funds (ETFs) are similar to mutual funds but trade throughout the day like stocks. They hold a basket of securities and can be purchased for the cost of one share. ETFs are a flexible investment option and do not have the same minimum investment requirements as mutual funds. They are suitable for both short-term and long-term goals. ETFs and mutual funds are often held in tax-advantaged accounts like 401(k)s and IRAs [[6]].
Individual Stocks
Investing in individual stocks can be rewarding but also carries more risk. It's important to consider your investment horizon and whether you have the expertise to evaluate individual companies. Stocks represent partial ownership in a real business, and their value can fluctuate daily. If you're investing for the long term and have a good understanding of the business, individual stocks can be a viable option. However, if you prefer a more diversified approach, mutual funds or ETFs may be a better choice [[7]].
Importance of Investing
Investing is crucial for maintaining the purchasing power of your savings and achieving long-term financial goals like retirement or building wealth. By investing in assets like stocks and bonds, you can ensure that your savings keep up with or even outpace inflation. Short-term investments like high-yield savings accounts can help you earn more while working towards specific purchases. Stocks and ETFs are better suited for long-term goals due to their potential for higher returns, although they come with additional risk [[8]].
Important Considerations for New Investors
When starting out as an investor, there are several important considerations to keep in mind:
- Risk Tolerance: Understand your own tolerance for risk and choose investments accordingly.
- Financial Goals: Establish both short-term and long-term goals to guide your investment strategy.
- Passive vs. Active Investing: Decide whether you want to be a passive investor, relying on low-cost index funds, or an active investor, aiming to outperform the market.
- Do-it-yourself or Hire Someone: Choose between managing your own investments through an online broker or seeking the assistance of a financial advisor or robo-advisor.
- Tax Considerations: Be aware of the tax implications of your investments and consider tax-advantaged retirement accounts like IRAs.
- Starting with Small Amounts: You don't need a large sum of money to start investing. Many online brokers have no account minimums, and fractional share investing allows you to get started with even small dollar amounts [[9]].
Conclusion
Investing is a crucial part of building wealth and achieving financial goals. By understanding your risk tolerance, considering different investment options, and aligning your investments with your goals, you can make informed decisions and set yourself up for long-term success. Remember to conduct your own research and seek professional advice when needed. Happy investing!