Keep these tips in mind as you begin investing.
Beginning investors face so many questions: When should you start investing? What should you invest in? Whom should you listen to -- or not listen to -- for investing advice? If investing is so important for your financial future, why does it have to be so complicated? Here's some good news: It doesn't need to be. These 10 tips on investing money for beginners are straightforward and to the point, proving you can take the complication out of how to invest for beginners.
The biggest barrier to investing money as a beginner is simply getting started. The answer to when to start investing is today, says Nicholas J. Scheibner, a wealth management advisor at Baron Financial Group. "Don't wait for the 'perfect time' to get in," he says. "Start now and keep adding to it." He also tells new investors to begin that first year assuming your investment will go down. Learn to accept that your investment will lose money some years, and if it does, it doesn't mean you've done anything wrong. In fact, it likely means the opposite: You should add even more to it while it's on sale.
Don't let the media scare you.
The best piece of advice Andrew Langdon, a certified financial planner and founder of FivePoints Financial Planning, would give beginning investors is "to understand that the media and you as an investor have very different agendas." The media's goal is to get views, which they often do by writing sensational headlines. "Your goal as the investor is to grow your money over time, and this is achieved by focusing on factors you can control, such as time horizon, risk, costs and taxes," Langdon says. "Research has shown that the less one tinkers with their portfolio, the better off they will be long term as they don't try and time the market." So when you see headlines declaring the next "Stock Market Armageddon," try to "keep a level head and make decisions based on your investment strategy, not the latest headlines."
Focus on your savings percentage.
Just as with sensationalized headlines, beginning investors can be misled by poor portfolio performance. It's easy to doubt your investment decisions when your portfolio declines, but stock market declines are natural. Instead of focusing on your portfolio's performance, Ben Hockema, a certified financial planner with Illuminate Wealth Management, suggests focusing on your savings percentage. "For long-term investors, the biggest factors for success are staying invested and saving enough," he says. You can't control how your investments perform, but you can control how much you save. "By continually focusing on maintaining or increasing the savings rate, beginners will be positioned for success," Hockema says.
Set investment goals.
The first step to an investing strategy is knowing your investment goal. Rob Williams, Charles Schwab's vice president of financial planning in Denver, says to "lay out your short-, medium- and long-term goals, give them a time frame, and put a dollar figure beside each." For instance, a short-term goal could be a vacation to Greece next year, while a medium-term goal might be a down payment on a house in three to five years. "Having tangible goals is a good motivation to keep saving and investing," he says. "It also helps you understand how to invest for the time frame attached to each goal."
Use goals to determine your time horizon.
"What you're investing for will go a long way in determining your time horizon," says Lamar Watson, a certified financial planner and founder of Dream Financial Planning. Time horizon is how long you have before you plan to use the money you're investing. "This might be the most important factor in how much risk you can take," Watson says. The longer your time horizon, the more risk you can afford to take. If your time horizon is 10 years or longer, you can tilt more heavily toward stocks, he says; between five and 10 years means you should have a solid mix of stock and bonds; less than five years, Watson says you shouldn't have any stock exposure; and if it's within two years, you should have only cash and cash alternatives like certificates of deposit.
Get to know your risk tolerance.
You should only take as much investment risk as your investment goal requires and your stomach can bear. Just because you can afford to take more risk with your investments doesn't mean you should. Your level of risk is determined by your allocation to stocks and bonds; more stocks equals higher risk. The allocation you choose "is similar to how fast you choose to drive your car," says Mike Hennessy, founder and CEO of Harbor Crest Wealth Advisors in Fort Lauderdale, Florida. "While your allocation should remain relatively static -- no one would want to go from 65 mph to 35 mph in a few short seconds -- it should adjust over time as you approach your investment goals," he says.
Start with broad-based investments.
After when to invest, the next big question facing beginning investors is what to invest in. "It's easy to get hung up on choosing investments; there are so many" to choose from, Williams says. "Fortunately, broad-based mutual funds and exchange-traded funds, which pool the money of many investors to purchase a variety of securities, give you a simple way to begin." Start by deciding on the mix of cash, bonds and stock you want, then fill in the details with funds that match your desired allocation.
Keep your costs low.
You can't control how your investments perform, but you can control how much you pay for them. "As a beginning investor, it's very important to pay attention to the costs involved in an investment," says Michael Pappis, founder and CEO at Amity Financial Planning. This generally means using index funds, which average 0.15% expense ratios, according to Morningstar's latest fee study, rather than actively managed funds, which average 0.67% expense ratios and can go much higher. "Over the long term, these higher fees can eat away at the return on your investment," Pappis says.
Don't be afraid to ask for help.
Nowhere is it written that investing need be a solitary sport. "My best investing advice for beginners is if you're not an expert, ask for help," says Stacy J. Miller, partner, vice president and wealth advisor for Bright Investments. A financial advisor can help navigate any uncertainty you have, and advisors are not only for the wealthy. But you need to vet any advisor "like you would someone who will take care of your children," Miller says. Ask prospective advisors if they're a fiduciary and about their certifications. Miller recommends looking for certified financial planners and chartered financial analysts; "they show years of additional education, training and expertise." Verify their record on AdviserInfo.SEC.gov. Then ask how they're compensated and what it'll cost you to work with them.
Automate as much as you can.
Once you're set up, automate as much of your investing process as you can, Williams says. Set up automatic savings deposits, retirement contributions, even automatic monthly investments into your nonretirement investment portfolio. "The less you have to do, the less overwhelming it will be, and the more likely you are to stick with it," he says. "That said, you do want to stay involved." He advises checking your portfolio at least once a year to make sure your investments and allocation are still in line with your goals. "If your goal is long term, you mindset should be as well," he says. "Try to stay focused on the long term and not overreact or change plans because of short-term volatility alone."
The 10 best tips for beginning investors:
-- Start now.
-- Don't let the media scare you.
-- Focus on your savings percentage, not your portfolio performance.
-- Set investing goals.
-- Use your investing goals to determine your time horizon.
-- Get to know your risk tolerance.
-- Start with broad-based investments.
-- Keep costs low.
-- Don't be afraid to ask for help.
-- Automate as much as you can.
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