So you want to start investing. But when you’re bombarded with a plethora of investment platforms, it can be difficult to figure out which type is right for you.
Don’t worry. I’ll help you figure out which approach to take based on your financial situation, investment goals, and risk appetite.
But one after anonther.
Make sure you’re ready to start investing
Before you start investing, make sure you have a manageable budget and a reliable emergency fund. Most financial advisors recommend that you set aside enough to cover at least six months of expenses to cover the unexpected.
You should also make sure you’ve eliminated high-interest credit card debt. If you’re only making the minimum payments on your credit card balance, it might be tempting to use your disposable income to invest in the stock market.
Despite the occasional market slump that S&P500 — viewed as a benchmark for the entire stock market — an average return of 10% over the long term. That dwarfs the average interest rate on savings accounts, which is less than 2%.
But consider this: the average APR on credit cards is 15%. So work to get past that hurdle, and then your invested dollars can really take the lead.
Know your investment opportunities
The investment universe is huge and growing. But there are a few ways that may work for beginners:
Stocks: Stocks represent shares in a company. Depending on the overall performance of that company, the stock price can go up or down throughout the day. Stock prices can range from pennies to hundreds of thousands of dollars. Because of the inherent volatility, investing heavily in stocks is generally recommended for investors who have the risk capacity to weather the lows and the time horizon to absorb the losses.
Bind: Buying a bond basically means you lend your money to a company or government that promises to pay you back plus interest. Bonds are generally low-risk investments. So if you’re investing short-term, investing a reasonable proportion of your portfolio in bonds can help. But remember: low risk usually means low returns.
Exchange Traded Funds (ETFs): An ETF is a basket of different stocks or bonds. You can buy shares of an ETF like you would buy a single stock. ETFs are known for instant diversification, low fees, and low costs.
Investment funds: Like ETFs, mutual funds invest in a variety of stocks, bonds, and other securities. But they don’t trade like stocks and ETFs. Most require a minimum investment, which can be around $1,000 or more.
Index funds: An index fund is a type of mutual fund that aims to track the performance of a stock market index, such as the S&P 500 or S&P 500 Nasdaq. This strategy is called passive management. Because index fund managers aim to match, rather than outperform, a benchmark’s performance, index funds tend to have lower fees than their actively managed counterparts.
Now that you know a little bit about what’s out there, you can start looking for the right brokerage account.
Online investing apps
If you are a beginner, one of the easiest ways to start investing is to download a discount investing app. Most require no minimum investment.
If you’re saving for retirement, you can open an Individual Retirement Account (IRA) or Roth IRA. But if you’re saving short-term, you can also open a taxable brokerage account. You can withdraw funds from these accounts at any time, free of charge. But you might owe capital gains taxes.
Most of today’s popular investment platforms allow you to invest commission-free in a variety of stocks, ETFs, and options. So if you want to build and manage your own portfolio, online brokers offer an inexpensive way to do it.
Being patient and investing for the long term is usually best for most people. But if you’re trying to be successful at day trading (and few people actually succeed at it), you need to know what you’re doing. Learn how to research stocks using techniques like fundamental analysis and technical analysis.
Digital tools can help you with this. This is where some online brokers fail. Many don’t offer robust tools and platforms that can help you review stocks and ETFs.
Established brokerage firms may offer better solutions to your investment needs. Some money management companies do not require a minimum investment to open a taxable brokerage account. And all the bells and whistles, like advanced stock screeners and analysis tools, are free.
But if you don’t have the time to look at charts and track price movements all day, you can still invest successfully. In fact, day trading is one of the most difficult ways to make money in the stock market.
A robo-advisor is an investment management service that uses an algorithm to build and manage a diversified portfolio for you.
How it works: You answer an online questionnaire about your financial situation, your investment goals and your risk tolerance. The robo-advisor then recommends a portfolio typically made up of low-cost ETFs.
Because you don’t do any legwork, the company offering the robo-advisor may charge a wealth management fee. But these are usually competitive at around 0.25%. Some brokerage firms may waive the fee if your balance is below a certain threshold.
In addition, many robo advisors offer special features such as automatic rebalancing. This means you don’t have to review your portfolio to make necessary changes to your asset allocation. The robo advisor does that for you.
Another common feature of robo-advisers is tax loss collection services. However, the disadvantage of robo-advisors is that you cannot choose your own securities. You are usually limited to a model portfolio built with ETFs or mutual funds.
The final result
Before you start investing, make sure you have a manageable budget, an emergency fund, and little to no high-interest debt. Once that is settled, you have many options. If you want to analyze and choose your own stocks, you should consider an online investing app.
If you’re a set-it-and-forget-it investor, a robo-advisor might come in handy. It builds and manages a portfolio for you for a small fee. Online investing apps and robo-advisers can help the inexperienced investor build long-term wealth.
The $18,984 Social Security bonus is completely overlooked by most retirees
If you’re like most Americans, you’re several years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help boost your retirement income. For example: A simple trick could earn you up to $18,984 more…every year! Once you learn how to maximize your Social Security benefits, we believe you can step into the retirement we all seek with peace of mind. Just click here to learn how to learn more about these strategies.
The Motley Fool has a disclosure policy.