There are few words more intimidating than “investing”—but don’t let that stop you from taking action. Check out these investment tips for an idea of where to get started.
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There are few words more intimidating than “investing”—but don’t let that stop you from taking action. There’s a reason why so many money experts proclaim investing as the key to building wealth.
Unfortunately, for an investing beginner, it’s hard to know where to start. The advice coming from your grandparents might sound different from the tips coming from your more financially savvy friends, and though well-intended, it can all be confusing.
Fortunately, more and more financial resources are available for your disposal. Here’s how to begin investing, according to the professionals in personal finance.
1. Don’t be intimidated
Part of what stops people from investing is the intimidation factor. But the hardest part may just be getting started, as investing isn’t nearly as complicated as it seems.
“The biggest thing for beginners to avoid is thinking that investing is complex and only for the wealthy. Investing is not about picking stocks and timing markets,” says Derek Hagen, financial health advisor and behavior coach at Money Health Solutions.
Instead, think of investing as how Hagen puts it:
“It’s boring. It’s about lending your money to the global economy and letting it work for you for decades.”
2. The earlier you start investing, the better
Kayse Kress, CFP at Physician Wealth Services, encourages beginner investors to start investing right away. She points out, “The growth of your portfolio depends upon three interdependent factors: the capital you invest, the amount of net annual earnings on your capital, and the number of years (or period) of your investment.”
Emphasizing the last factor, getting a headstart on investing can benefit you in three major ways:
- Having more time on your side will give you the flexibility to take risks on more volatile investments, so you’ll have more time to recover than if you were to invest later on in life.
- By investing early on, your potential earnings through compound interest (interest earned on interest) are much greater. That means more financial gains in the long run!
- Chances are, investing early will help you develop budgeting skills and better habits when it comes to managing your finances.
Travis Gatzemeier, founder of Kinetix Financial Planning, sums it up best by saying, “Let time do the heavy lifting, and don’t worry about short-term events.”
3. Get educated
“My number one tip for someone that is just starting to invest is to learn, but don’t overwhelm yourself to the point of inaction,” Brandon Renfro, financial advisor and assistant professor of finance at East Texas Baptist University, suggests.
“There’s a lot of information out there about investing, but you don’t need to absorb all of it. With that in mind, it can be hard to know what to pay attention to and what to shelve.”
- The Four Pillars of Investing by William Bernstein
- Your Money and Your Brain by Jason Zweig
- Buffettology by Mary Buffett
- The Intelligent Investor, Rev. Ed by Benjamin Graham, Jason Zweig, and Warren Buffett
- The Simple Path to Wealth by J.L. Collins
4. Prioritize tax-advantaged accounts
“One big mistake I find is that new investors invest in taxable accounts, instead of taking advantage of tax-advantaged accounts like 401(k)s and IRAs,” says R.J. Weiss, CFP and personal finance blogger at The Ways to Wealth. “This is often due to certain apps not having the option to invest in something like an IRA.”
What exactly are tax-advantaged accounts? These financial accounts and savings plans can be defined as those that are:
- exempt from taxation,
- tax-deferred, or
- provide some other tax benefits.
By investing through these accounts, you can maximize your tax savings for more money in the long run. There are restrictions, though, such as annual contribution limits, when exactly you can withdraw, and who’s eligible to participate.
However, if you have the option to participate—like with an employer-sponsored 401(k)—put it at the top of your investment to-do list. As Weiss points out, “When it comes to tax-advantaged accounts, you only get so many years to contribute, and once you miss your contribution for a year, there is no way to make up for it.”
5. Determine your goals and level of interest in managing investments
Target-date mutual funds, ETFs, and index funds—to anyone new to investing, the choices can seem overwhelming.
When asked about how to decide between all of the different options, Mike Henzes, CFP and owner of Open Wealth Network, suggests, “Take some time to think about your goals, the timeframe for each, the amount and frequency of your investments, and your level of interest and available time in managing your investments.”
According to Henzes, target-date or target-risk portfolios are ideal for those who prefer a more hands-off approach, while individual funds are best for those who prefer to have more control.
6. Know your risk tolerance
While investing may seem like a numbers game, there’s certainly more to it. Thanks to human emotion and irrationality, conventional investing wisdom like “buy low, sell high” is a lot easier said than done.
To mitigate these challenges, CFP Kayse Kress emphasizes the value of knowing your risk tolerance.
Your risk tolerance describes the amount of financial risk you’re prepared to handle in the market. The higher your risk tolerance, the greater your potential returns and losses. Of course, this concept changes over time, varying based on an investor’s age, goals, and income, among other factors.
This matters because, according to Kress:
“By understanding your risk tolerance, you can avoid investments that make you anxious or sell out of the market during times of volatility. Instead, you can handle your emotions by making decisions based on logic and long-term thinking. Your savings and investing behaviors are far more important than how much you will earn in your stocks and bonds over the long-run.”
7. Consider a robo-advisor
As a new investor, you may want to consider getting your feet wet with a robo-advisor. Robo-advisors provide an automated investment solution with generally lower fees and starting balances.
After signing up, investors complete a questionnaire that assesses their risk tolerance and time horizon. Then, using an algorithm, the robo-advisor determines the best investment portfolio and asset allocation for users based on these answers.
Among the better known platforms out there are:
But while robo-advisors serve as the perfect middle ground between DIY investing and hiring a financial advisor, they have their limits.
Daniel Kopp, founder of Wise Stewardship Financial Planning, reminds new investors, “What a robo-advisor cannot do is help you work through the what-ifs of life or ensure that your financial goals are actually in line with your values.”
In other words, don’t expect personalized guidance from a robo-advisor. Think of these services instead as purely investment management. As Kopp says, “A robo-advisor can be a tool that helps with delegation, but should never allow an investor to abdicate control of their finances.”
8. Take advantage of investment apps—but be aware of fees
Investment apps are nothing new, and make it easier than ever to get started investing. Among these include “spare change” apps, which automatically round up your purchases to the nearest dollar and invest the difference. Other apps offer free trades from the convenience of a smartphone.
Popular apps include:
Before deciding on an investment app, however, be sure to read the fine print and know what you’re getting into in terms of fees. CFP R.J. Weiss cautions, “Some investing apps carry a monthly fee, and for smaller investors, this can really eat into returns.”
9. Don’t get caught up in hype
Jeff Rose, CFP and personal finance blogger at Good Financial Cents, advises being wary of new investment opportunities that sound too good to be true.
“Cryptocurrency, for example, has been all the craze for the past few years and there’s no doubt that some people have made money from buying cryptocurrencies like Bitcoin at the very beginning,” says Rose. “But many investors got caught up in FOMO and started buying in when it was already overvalued and have since lost almost everything they put in.”
Rose isn’t exaggerating—those who joined the Bitcoin bandwagon late faced devastating losses. But these investment risks aren’t only reserved for cryptocurrencies; media buzz, rumors, and speculation can affect any other trending product or company.
With that in mind, Rose recommends:
“Before diving into any investment, make sure you understand what it is. A good rule of thumb is: if you can’t explain how an investment works or how it makes money to a family member, like your grandmother, then you shouldn’t bother messing with it.”
10. Should you get a financial advisor?
The availability of personal finance apps, tools, and resources online and in libraries makes investing (and learning about it) far more accessible than ever.
As a result, Sharif Muhammad, CFP and founder of Unlimited Financial Services, notes, “It’s hard to say if a young professional needs to speak with an advisor.”
That said, he adds, an advisor can still be helpful in “putting it all together to meet certain goals—like getting out of student loan debt, purchasing a first home, and so on.” Moreover, when it comes to special circumstances like receiving an inheritance or other cash windfall, a beginner investor should definitely seek out a credentialed financial professional.