Investing in markets — stock, bond, and others — is a useful part of a long-term savings strategy. Deciding how and where to invest your money isn't difficult, but beginning investors should take the time to understand the different types of markets, the variety of accounts available and some essential investing principles before you get started. Investing in markets is best for longer term goals. That’s because markets fluctuate in the short term while over a period of years — or decades — they have proven themselves to be reliable generators of wealth.

So, if you want to add an investment portfolio to your savings strategy, it's a good idea to start investing as soon as you're comfortable. That way you'll have the longest time frame for your investments to grow.

Read our investing for beginners guide below to learn about investment decisions, types of accounts, types of investments and more.

1. Understand your financial goals

Why do you want to start investing? The answer to this simple question will help guide how much money you invest and how you invest it. Experts generally recommend investing for longer-term goals, at least five years out. A shorter time frame exposes you to a higher risk of not making any money when you sell your investment. Knowing why you’re investing can also help you answer other questions — such as how much risk you’re comfortable with and what assets to include in your portfolio to achieve your goals.

2. Determine how much money to invest

You can start with only a few dollars in many accounts. Starting small will give you some experience and protect you from significant losses if you make a mistake. You can increase your investments over time. One easy way to get started is to carve out part of your paycheck and put it into an employer-sponsored retirement account such as a 401(k). Most employer-sponsored programs offer several mutual funds for you to choose from. You can research the company’s offerings on a financial information site before choosing. It's also important to consider having an emergency fund for your personal finances.

Read more:

• How much money should I have saved by 30?

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• How much money should I have saved by 50?

3. Research your investment options

Research is an essential part of the investment process. You should make every effort to understand your investments before you put your money to work. For instance, if you plan to invest in mutual funds, take the time to understand how these funds work, learn what assets are in any funds you invest in, and be sure you know how to track the funds’ performance. Other common securities you can consider include stocks in the stock market, bonds, mutual funds, and exchange-traded funds (ETFs).

4. Decide on long- or short-term investment strategies

Your investing strategy may be influenced by your time horizon (how long until you need the money) and your risk tolerance. If you want to reach a financial goal in five years, you may want to put your money in a low-risk account where you can earn a decent return — like a high-yield savings account or a certificate of deposit.

For goals between five and 20 years, you may want to add in some low-risk securities, such as index funds that track a group of stocks. If you’re saving for retirement or another goal that’s at least 20 years away, you may want to add more risk to your investment strategy by mixing asset types between low- and high-risk investments.

5. Open an investment account

There are three main types of retirement investment accounts, and their appeal will likely depend on your situation. These accounts are:

401(k): Best for workplace retirement contributions

A 401(k) plan is an employer-sponsored plan in which you can set aside a certain percentage of your paycheck toward retirement. After signing up and agreeing to the contribution — or specifying your contribution level — that amount is automatically deducted from your paycheck each pay period. Contributions can be made before taxes, in the case of a traditional 401(k), or with after-tax dollars, in the case of a Roth 401(k). Your employer may kick in some additional contributions — typically a dollar-for-dollar match or a 50% match up to a certain percentage of your pay — as part of your benefits package.

You’ll be offered several types of investments to choose from, and the specific funds will vary depending on the financial services company that oversees your company’s 401(k) program. An annual contribution limit for both employers and employees is set by the IRS each year and is currently $23,000 for 2024.

Read more: How much can you contribute to your 401(k) in 2024?

IRA: Best for saving for retirement on your own

An IRA, or individual retirement account, can help you save more than 401(k) contribution limits and offer you a chance to save pre-tax dollars if your employer doesn’t offer a retirement savings program. There are two types of IRAs — traditional and Roth — and the difference boils down to when you’re taxed (more on that below). You could face a tax penalty with either type of account if you withdraw before the age of 59½, though there may be some exceptions. Here’s how the two types of accounts compare:

Roth IRA vs. traditional IRA

A Roth IRA allows you to contribute money you’ve already paid taxes on, and any investment gains in your account are tax-free. With a traditional IRA, your contributions are made before you pay taxes on them and investment gains are not taxed until you make withdrawals.

With either type of account, you can contribute a certain amount each year — for 2023, the IRA contribution limit is $6,500 and goes up to $7,000 for 2024, while people 50 and up can save an additional $1,000.

Read more: These are the new traditional and Roth IRA limits in 2024

Taxable brokerage account: Best for investing on your own

Taxable brokerage accounts use after-tax dollars that you put aside to invest. They offer you full autonomy to decide what kind of assets to buy, when to buy them, and when to sell. You’ll pay taxes on any investment gains you make. The amount of tax you owe will depend on factors such as your income, filing status, and how long you've owned the securities before selling.

6. Choose from different types of investments

To choose an investment strategy, you may want to decide between the following types of investments, which offer different risk profiles, customization options and initial investment amounts.

Stocks

A stock represents a part or fractional ownership of the company issuing the share. Investing in stocks can come with high risks and potentially high returns. Experts generally recommend owning a minimum of 25 to 30 individual stocks to be diversified. The idea is to spread your risk and smooth out the ups and downs in your portfolio.

Bonds

Bonds are issued by governments, agencies, and corporations to raise money. You, the investor, are purchasing a type of debt security that pays interest. Bonds aren’t publicly traded like stocks. You can purchase them through a brokerage or directly from the government, in the case of Treasury or savings bonds. U.S. government bonds, in particular, are considered among the safest investments. Minimum investment amounts can vary widely.

Mutual funds

A mutual fund is a pool of money gathered from multiple investors that a brokerage or other financial services company manages. They invest in money markets, stocks, bonds, or a combination of different assets. Each type of fund has its own risks and management fees. Many mutual funds require a minimum investment of at least several hundred dollars.

Exchange-traded funds (ETFs)

ETFs are similar to mutual funds. They are pools of money invested in market assets and managed by financial companies. The biggest difference between ETFs and mutual funds is that investors can buy and sell shares in ETFs during the market day as prices change, while mutual funds can only be sold or bought once a day. Minimum amounts will depend on the fund.

Commodities futures contracts

Commodities futures contracts are an agreement to purchase or sell a certain amount of a commodity at a predetermined price at a future date. Commodities you can trade include metals, grains, and currencies. These are risky investments that must be closely monitored and many investment advisers suggest novice investors steer clear of them. There is no required minimum amount to trade commodities; it depends on whether you invest in them directly or through products like mutual funds and ETFs.

Real estate

There are many avenues to invest in real estate, including lending money to real estate developers, investing via crowdfunding platforms, or purchasing investment properties. The appeal of real estate is the potential for diversification and, in some cases, passive income.

7. Maintain your investment portfolio

An investment portfolio is the collection of all the securities and investment products you own. For example, your investment portfolio could have a mix of ETFs, mutual funds, individual stocks, and real estate holdings. After you start investing, you’ll need to think holistically about your portfolio and manage it over time.

Focus on diversification

Your portfolio should be diversified, which means you should not hold only one kind of stock fund, say tech stocks, or one geographical area, for instance, the U.S. It should also be allocated across different kinds of assets such as stocks, bonds, real estate, and cash.

A diversified portfolio allocated to a variety of assets helps you lower your risk. If you own only tech stocks, for example, and an event causes tech stocks to fall, your losses could be high. If, however, you have a variety of stock holdings spread around other sectors, as well as bonds and some cash, your losses would be lower.