The first thing you need to know: better late than never, but even better early. In a little more detail, any investing is good investing. But, the sooner you start, the more money you will make, pretty much regardless of your investing decisions.
To clarify further, take a Roth IRA for example (something we will explain in more detail later). Assume you invest $6,000 annually, the maximum available contribution, and make an average of a 6% return every year, starting at age 20. By 65, with a 3% inflation rate, you will have a balance of $1,276,461. In layman’s terms: you will be a millionaire.
Of course, we can’t guarantee investing success. However, we can guarantee that there are a few steps that will help you get started.
Get Started Early
We have already mentioned the first of these, which is to get started investing as early as possible. Doing this is one of the best ways to start accumulating money, be that in a savings account, in retail investments, in retirement accounts, or in the stock market. While there will always be good and bad times for the stock market, investing early allows you to ride these out. Rather than having to worry about day-to-day changes, you are worried about long term gain. From 1991 to 2020 (about 30 years) the stock market has grown 8.3% adjusted for inflation.
Effectively this means that whether you invested in good, bad, or decent stocks, you are likely to have made money. The key? Investing your money in the first place.
Decide How Much to Invest
In order to do that, you have to decide how much to invest to begin with, and how much you are willing to invest in the future.
Personally, as a young adult, I invest $150 a month into an ETrade stock portfolio. I split this money among three different stocks. While that may not sound diversified, I am focussing on dividends. Dividend is typically defined as a sum of money paid regularly by a company to its shareholders out of its profits or reserves. The great thing about dividends is it guarantees that you will make money. Even if the stock price has gone down, typically companies continue to pay out money to shareholders and other investors.
While I am investing less because I am just getting started, most financial planners advise saving between 10 and 15% of your annual income. If that isn’t attainable, start off with 5%, and then raise that value as you see fit.
Decide Where to Invest
Once you have decided how much to invest, you want to find a brokerage service to use. Previously mentioned, ETrade is one great option. Some other great options include Charles Schwab, Fidelity, and TD Ameritrade.
Regardless of where you invest, make sure to pay attention to the terms of your investing account agreement. Look at things like fees for transactions, if there is a minimum account balance, and if it is easy to transfer money from other financial institutions.
A great way to make sure you stay consistent with investing is setting up part of your paycheck to automatically transfer into your investment account. You can do this through your company, or through your bank by setting an automatic transfer monthly, weekly, or quarterly.
Open An Investment Account
Of course, once you have figured out what brokerage you want to use, you have to decide on an investment account to open.
There are three main types of investment accounts we are going to cover:
A Standard Brokerage Account
A standard brokerage account is fairly standard – this is where you are likely to begin your investing journey. Typically, this account will allow you to buy investments with the money that you are planning to deposit into your account.
Once you have opened a standard brokerage account, you can invest in stocks. A stock is the capital raised by a business or corporation through the issue and trading of shares. This is what is traded between investors that allows you to spend and make money on the stock market.
A Retirement Account
A retirement account is exactly what it sounds like – an account meant to save money for retirement. There are a few different types, including a regular IRA and a Roth IRA. The primary difference between these is when you are taxed.
With a regular IRA, you are taxed when you withdraw money at (or after) the age of 65. It is best to use this account if you expect to be in a lower income bracket when you retire.
Contrarily, a Roth IRA is taxed when you put money into it. This is good to use if you are getting started early. Maybe you are a college student working at a restaurant in your spare time. Maybe you are starting your first job and expect to get later promotions and pay raises.
The advantage to a Roth IRA is that when you retire, you get your money back tax-free.
There are a number of other options, including a 401(k), something typically offered through your job.
An Education Account
Finally, an education savings account. Education savings accounts are great if you have (or are planning to have) children. Typically the best time to start is before, or when, your child is born. That way, by the time they are off to college you have a healthy fund set aside to help pay for educational expenses.
One of the most popular options is a 529 savings plan. This allows you to invest money and take out any education expenses that are needed, from the time your child enters elementary school.
To find out a little more about this, check out NerdWallet.
Pick Your Stocks
Now that you have an account, it is time to pick your stocks!
This great graphic from tradingacademy.com for a quick guide to understanding stocks and how to pick them:
Like they say, you should understand the risk level you are comfortable with. While that is a personal decision there are a few things to consider. Generally, bonds are less risky than stocks. As far as stocks go, do your research ahead of time.
Lots of brokers have educational platforms in addition to their investment services, and you can find information about the market in general, groups of stocks, and individual stocks.
Some stocks can be riskier than others, with technology market stocks (and newer company stocks) generally being on the more risky side.
Many brokerage services also analyze your risk for you, examining your portfolio and allowing you to rebalance and assess your risk levels as you age, as your lifestyle changes, and as you get more or less money.
To assess that, it is important to know yourself and pick stocks according to your interests and what you are comfortable with.
While you can start by focusing on one stock it is frequently better to diversify a little more. Pick 3-5 stocks to start off with, and then expand your portfolio to 10-20 stocks. Statistically speaking, a range of 10-15 stocks will maximize your diversification benefits.
In order to analyze stocks and understand how to balance risk in your portfolio, you should learn how the stock market works and understand general trends and movement. Of course, if stock prices are going up, and you’ve already bought in, you’re making money. But, it can be more complex than that, and that is why you should focus on analyzing your stocks and understanding how they move!
Finally, be disciplined and stick to your plan. It is best to start off investing with an idea of what your plan is and what you want to accomplish. Once you’ve decided that, be sure to stick to your plan and frequently reassess and analyze your progress!
Once you have done all of the above steps, you are off to a great start to setting up your portfolio! While it is important to get started investing early, starting at any point is better than not at all. Plus, it is a learning experience. Don’t be worried or afraid if something goes wrong in the beginning. It is all part of the process, so you, and your investing tactics, will improve as time goes on.
What to Do
For a more concise list of what to focus on while beginning to invest, check out the list below:
- Get started early
- Decide how much to invest
- Decide where to invest
- Open an investment account
- Pick your stocks
- Understand your risk adversity
- Know yourself
- Start by focusing on a few stocks
- Learn how the stock market works
- Stick to your plan
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