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It’s good to begin investing as early as possible. Read on for some steps to take if you’re kicking off your investing career this year.
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Investing money you don’t need on hand for near-term purchases or emergencies is a great way to grow it into a larger sum over time. And if this is the first time you’re gearing up to invest, you’ll want to go about it strategically. Here are some moves worth making.
1. Figure out what you’re investing for
Maybe you don’t have a specific goal for investing — you simply want more money. Or maybe you want to invest so you’ll have money on hand for retirement.
It’s a good idea to try to figure out what you’re investing for, as that might help you determine the type of account to use. If you’re trying to build a retirement nest egg, for example, then an IRA could be a smart bet. If you want access to your money for any purpose, then you’ll probably want to stick to a taxable brokerage account, which doesn’t restrict you in any way.
2. Assess your tolerance for risk
Investing in stocks has, historically, been a great way to grow wealth. The market’s average annual return over the past 50 years has been 10%, which means that if you were to invest $10,000 today, in 30 years, it could be worth almost $175,000.
That said, stocks can be very volatile. A stock-heavy portfolio might gain and lose value quickly following different economic and market events. If that’s not something you think you can handle, then you may not want to invest all of your assets in stocks.
Now, it’s worth noting that if you’re trying to save for retirement and that milestone is many years away, going heavy on stocks is recommended. But if you personally can’t handle that, then a mix of stocks and bonds may be a better choice for you, even if it means that you won’t snag as high as return in your portfolio all in.
The purpose of investing is to grow your money and give yourself the peace of mind that you’re working toward your big goals. If a portfolio that’s filled with stocks causes you to lose sleep, then it may not be worth the financial upside.
3. Make sure you’re diversifying from the start
It’s important to build an investment portfolio that consists of different stocks across a range of industries. If you invest all or most of your money in a single sector of the market and there’s a shake-up there, you could end up seeing serious losses in your portfolio.
For example, let’s say that to start off, you buy five different tech stocks for your portfolio, investing a total of $2,000. If, in a few months, the tech sector gets slammed, your $2,000 portfolio might lose 25% of its value, bringing you down to $1,500.
To be fair, that type of loss is only a loss on screen. You don’t officially lose money as an investor until you sell off assets at a price that’s lower than what you paid for them. However, seeing your portfolio lose 25% of its value can be upsetting and unsettling.
That’s why it’s a good idea to invest across a range of industries. In our example, if you bought five different stocks and only one was in a tech company, you might see your portfolio’s value go from $2,000 to $1,900 in the event of a tech sector meltdown. That’s not nearly as harsh a blow.
While you could always diversify your holdings by buying different types of stocks, one easy way to go about the process is to invest in broad market ETFs, or exchange-traded funds. If you buy shares of an S&P 500 ETF, for example, you’re putting your money into the 500 largest publicly traded companies.
Investing could do a lot of great things for your finances. Make these moves when you’re new to it to start off on the right foot.
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