Starting to invest is one of the smartest decisions one can make in their entire life. It is a great opportunity to set yourself up for the future and save for retirement.
Not everyone wants to work forever but investing wisely can help you make sure that does not happen.
Investing from the outside might seem intimidating, and you may not know where to start. It is easy to get overwhelmed with all the different opinions out there and the chaos you might see in the news.
Being able to invest is such a valuable skill to have, but you do have to put the time and effort in.
To be a successful investor, ideally, you want to start early as possible. Starting early allows your investments to build interest for longer making you more money.
Another key is being disciplined and patient – this is especially important in 2022. The stock market over the past few years has done really well.
In 2019 the S&P 500 was up 28.88%, in 2020 it was up 16.26%, and in 2021 it was up 26.89%. However, so far in 2022, the S&P 500 is down around 20%.
During times of turmoil in the economy, it is easy to lose track of your investing strategy and panic sell. That is why having discipline and patience with your investments is so crucial.
In this article, we will cover some factors to consider when just starting and how to make your money work for you.
What age would you like to retire at? What do you want your life to look like in the future? How fast do you want to see results? There are so many factors to consider when determining your investment strategy.
Investing for the First Time – Budget
First, you need to figure out your investing budget. One of the biggest misconceptions is you need a lot of money to start investing when you do not.
You actually need to make sure you are financially stable to invest and able to invest often.
Financial advisors highly suggest creating an emergency fund. This fund prepares you for any unsuspecting costs life may throw at you.
In times of need, the last thing you want to do is sell your investments to cover your expenses.
All investments have risks associated with them and returns are not guaranteed. Sometimes your investments will be doing poorly, and you will need money.
Having an emergency fund gives you the money needed and keeps your investments growing. Financial experts recommend putting 3 to 6 months of expenses aside.
Investing for the First Time – Risk
Know your risk tolerance and how you feel when your investments are in the red. Every investment has risk, and you have to be content with potentially losing money.
People often say they have a high-risk tolerance until there is volatility and they panic sell.
It is important to find the balance between returns and the risk that comes with the investment. Looking at stocks and bonds, stocks tend to have higher returns, but higher risk.
Bonds have lower returns with less risk. There are ways to counteract risk like diversifying a portfolio.
Investing for the First Time – Strategy
What type of investor are you? Passive and active are two ways to go about investing. A passive investor thinks long-term and is not as involved.
The returns may take a while to come, but they will in the future. Usually, there is less risk involved and the effort is lower.
Long-term investors will invest in mutual funds that do the work for you. People saving for retirement usually take a more passive approach.
Being an active investor takes more time and research. You will need to conduct an analysis and be up to date with your holdings once purchased. There is more risk involved with actively managing, but the returns are much greater.
In terms of actual strategy, dollar cost averaging and lump-sum are two simple ways to go about it. A lump sum is where you invest a large amount at one time. The risk is higher, but you could see a quicker return on your investment.
Dollar-cost averaging is when you buy an asset regardless of price at specific time intervals. This can help eliminate risk. A combination of both strategies can lead to success as well.
Where to invest?
Once you are ready to start you have to decide who is managing your money. Investing yourself is very common with all the resources available in 2022; all you have to do is set up an online account.
You are responsible for your own choices, so you do have to spend time researching everything.
If you are not confident in yourself, there are financial advisors and Robo-advisors. An advisor keeps your goals in check and already has all the knowledge to make decisions. Make sure the advisor is fee-only and does not take commissions.
A Robo-advisor uses algorithms to make choices for you. They are cheaper than a real advisor but limited in overall wealth knowledge. To learn more about a robo-advisor, click here.
If you are saving for retirement, you likely have a 401(k) through your employer or a Traditional or Roth IRA. These accounts have tax benefits that allow your investments to grow tax-free for a long time.
For the regular investor, a taxable brokerage account can be open. Taxes are taken out for gains and withdrawals.
Once you figure out what type of account to open, what are you going to invest in? Let us take a look at some popular investment options.
When done properly, investing in stocks is one of the most effective ways to build your wealth. A stock is a portion of ownership in a company.
There are so many different types of stocks out there varying in price, risk, company size, and potential. Individual stocks require a good amount of due diligence before being purchased.
Bonds are a way for a company to raise money. You lend them your money now and they will pay you back after a certain number of years. They will pay you interest on your investment.
Bonds are less risky because you know how much you will be paid back. The returns are lower than stocks and should not be the only thing you invest in.
Mutual funds are a mixture of investments under one roof. They do the research for you by picking what stocks and bonds will be in the fund. Mutual funds are diverse and less risky than individual stocks.
Those saving for retirement often chose to invest in mutual funds due to the stability and quality long-term returns. Mutual funds are managed by professionals.
Index funds follow the performance of major stock indexes like the Dow Jones or S&P 500. For example, the S&P 500 is made up of major corporations like Amazon, Apple, Google, and many more. So, you are buying a stake in all these major companies without having to buy shares of each individual stock.
ETFs are similar to mutual funds but can be traded actively like a stock. Mutuals usually require a minimum investment whereas ETFs are purchased through shares.
ETFs are a viable option for those who want to diversify their portfolio with a smaller budget.
Investing in 2022 has never been easier. All the tools are in front of you, be responsible and start investing.
Investing is exciting, but you have to make sure you are financially ready and educated. It is so easy to make poor decisions and potentially lose everything. To avoid as many losses as possible try to follow these tips.
Be consistent: Invest at regular intervals and check in on your investments somewhat often. Do not watch your investments too actively because that can lead to getting caught up in the yo-yo.
Think Long Term: Watching your investments go up and down can lead to stress which is never what you want. Think long-term and know that down spells have happened in the past. Do not panic and stick to your investment plan.
Diversify: Diversification is one of the easiest ways to limit risk and volatility in your portfolio. When the stock market is not doing well like in 2022 so far, diversifying protects you because you are invested in a range of assets. This will help alleviate losses and maximize long-term returns.
Do not chase leads: The news and internet are full of stock tips and the next thing that is going to blow up. Sometimes they can be viable, but do not blindly follow them. Do your own research and make a decision that’s best for your portfolio.
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