Most people have probably heard this Chinese proverb: the best time to plant a tree was yesterday. The second best time is now. Investing is no different – the sooner you start, the better. But how do you start investing (especially when you feel like there’s so much information floating around with no clear-cut direction)? Thankfully, wading into the world of investing isn’t as scary as you might think. Mutual funds and exchange-traded funds are great options for the new investor and they don’t take a finance degree to figure out. Read on to learn how you can go from being a green investor to a grizzled veteran.
Know Your Why
The first thing to lock down is your reason for investing. Do you want to fund a nest egg for your retirement? Are you trying to save for your child’s education? Or are you thinking about creating wealth to last for generations? Having a clear reason will help determine what you invest in, what your timeline is, and how much money you need.
Your why is completely unique to you – and that’s what makes it so exciting! You get to decide why you’re pursuing investing, and what kinds of results you’re looking to achieve. Keeping your “why” in mind with every decision you make can help you to avoid emotional selling decisions during a market downturn, or say “no” to short-term investment opportunities if you’re invested with long-term goals in mind.
Are Your Investments Diversified?
Don’t carry all of your eggs in one basket! Make sure you’re diversifying your investments.
Investors should aim to have a diverse portfolio, made up of national and international companies and small and large firms. Some companies provide more growth while others yield income for the investor. A mix of income and growth companies is vital.
Most people hear about the stock market in terms of companies like Apple, Google and General Motors. But a better way to gauge the overall economy is through indexes such as the Dow Jones Industrial Average or the S&P 500. These indexes act as holistic snapshots of the stock market and avoid focusing on specific companies or areas of the market.
Don’t let these indexes intimidate you: They’re not as complicated as they may appear. Like with most investment-related information, learning the basics will make everything else easier to understand.
To diversify between asset categories, you’ll want to choose a certain percentage of each asset according to your goals and your situation. This distribution of stocks, bonds, and cash is called your asset allocation. Consider two important things when making your decision:
First, consider your time horizon. Do you want the money for a house payment in five years? If so, you’ll want more low risk, lower return assets. If the money is meant for retirement, include high return, higher risk stock investments to generate a larger nest egg.
Second, consider your risk tolerance. Will you still be able to sleep at night if your investments drop in value? If so, how much of a drop can you take? Withdrawing money when your investments are down will decimate your investment returns.
Just as it’s important to diversify your investments among different asset classes, it’s also important to diversify within each class. To diversify by location, consider how many international investments you’d like to make. This will help your portfolio continue to grow when the U.S. market is struggling.
For stocks, think about owning companies of different sizes. Stocks are classified according to market capitalization or “market cap.” That’s the total value of the company’s outstanding stock in the market. It’s also important to own a wide variety of sectors, i.e. technology, energy, and more. For bonds, consider buying different types like government bonds, corporate bonds, and high-yield bonds. This will help your portfolio grow during many interest rate environments.
Consider Your Timeline
If you’re investing for a specific purpose, like retirement, you might want to invest according to the amount of time you have before that single goal. In these cases, a target date fund might be worth looking into.
Target date funds are a basket of funds designed for investors who want an easy retirement option. Like their name, these funds are organized by date. Investors can choose which fund they want based on the corresponding year in which they hope to retire.
For example, a 25-year-old may choose a 2055 target-date fund, when they’ll be 65 years old. So how exactly do the funds change over time? Like with most investment strategies, it’s all about intelligently handling market risk. As the investor gets older, the fund automatically rebalances to become more conservative over time.
The fund that a 25-year-old purchases will be allocated towards safer investments when that consumer is 40, and even safer when they’re 60. Many investors who want to save for retirement are unable, uninterested or uncertain of their ability to choose their own funds.
Creating a solid mix of funds can require hours of research, and staying on top of their allocation can be a chore even for the most seasoned financial professional. That’s why target-date funds are so popular; they already have the funds and investment strategy chosen for you.
Too many people choose a target-date fund based on inappropriate considerations. Instead of choosing it based on the date you hope to retire by, consider your tolerance for risk. Some people may be more tolerant and need to invest more aggressively, while others are more conservative.
Don’t assume that you have to stick with the date that works for your age. And as you look at different target-date fund options, be sure to watch out for high fees! These funds are notorious for being on the pricier side, and you want to make sure your investment is getting the most bang for your buck.
When you’re a new investor, the key is to start small and think big. You shouldn’t throw your life savings into the stock market right away; take some time to learn the process and monitor how your funds are performing. Once you’ve mastered the basics, you can start building towards a financial future to look forward to. That’s when investing really starts to get fun.
Want to learn more? I’d love to talk to you! Schedule a consultation today, and we can go over your concerns as you get started on your journey as a new investor.