How to invest as a beginner is one of the more exciting questions you can ask. Why? Opportunity, wealth creation and a long-term plan for your future are all goals of investing, and taking small steps to improve your options is an exciting area to start exploring.
Remember: everyone was a beginner at some point. Investment is not something that is taught in most settings, although some beginner tips for investing certainly help.
Disclaimer: This article is for informational purposes only. It is not intended to be investment advice. Seek a properly licensed investment advice professional.
Basic investments for beginners
For beginners for investments who want to start somewhere, part of the problem is that the financial world has come up with many ways to invest (and jargon to follow). There are more opportunities than you could ever count on to put your money to work. These include:
- Joint Investments : Shares and ETFs (exchange traded funds), real estate, fixed rate, 401 (k), IRAs, Roths, bonds, mutual funds, gold, sustainable investments, gold.  More advanced investments : Peer-to-peer lending, futures, options, exchange rates and more. These will not be dealt with here.
The question of how to invest as a beginner can be answered in different ways, and we will go through important starting points for beginners to explore:
- Basic Investment Tips : useful things to understand.
- A closer look at equities, ETFs and passive investments some of the more popular investments and methods, including exactly what ETFs are all about.
- Investment Resources : books to consider reading, podcasts, useful places to go on Reddit, apps and more. These are resources we also use and can be useful to you.
Just remember that you don't have to do everything at once. Feeling overwhelmed is natural. Take small steps first: get to know the basics, make a plan and know that you need to train more to make an investment later. Everyone who is an investor continues to learn every day as new ways of looking at money emerge.
Take small steps first: knowing the basics, making a plan, and continuing to educate yourself.
How to invest as a beginner: Where to start
True investment is not just putting your money somewhere and hoping for the best. Investment involves planning, goal setting and regular checks and adjustments on your trip. To succeed with investments, you also need to understand risk, balance risk against reward and take a long-term view with your money, while ideally creating a balanced portfolio.
Expert advice varies in proposed investments, but rarely does it deviate from some common truths: balance your risks with stable investments, try to minimize fees that can eat away at any profit, not try time in the market and consider taxes.
You might want to start investing with the help of a financial advisor, an accountant or through your own research and discovery, that's what we're focusing on here. But knowing as much as you can even when engaging a professional is helpful to better understand the process.
Let's look at each element mentioned above.
Balance risk: Growth vs return, time and asset allocation
A key point: Risk in investment terms relates to the likelihood that an investment's profits will differ from an expected result. Specifically, the higher the risk, the higher the chance of an investment going.
How much risk you are prepared to take is related to your age, portfolio size and your appetite for risk. Quite literally, if you invest in stocks or assets that keep you awake at night, it is not healthy for you.
By and large, younger people should feel more comfortable taking very long-term growth prospects for stocks, as broad averages play out over decades. The ups and downs occur, but taking a long view means that the weather and storms are storming and enjoying good years together. Time is your friend.
Growth investment may involve investments in companies that have good long-term prospects, but right now it has not succeeded. Examples include growth stocks or ETFs in the technology sector, or investing in housing in areas that hope to improve but are not there yet.
How much risk you are willing to take is related to your age, portfolio size and your appetite for risk.
Older people closer to retirement will be more worried about their investments in the short to medium term. A single downturn can suffice to wipe out large portions of their investments, with limited time to recover. Most older people will seek safer games, with diversified alternatives that generate returns or income, such as bonds, defensive stocks or ETFs with dividends, rental returns from real estate or fixed interest rates.
Another consideration: passive versus active investment. Passive investing generally involves limited purchases and sales. Most passive players do not change their investments. Active investors may not buy and hold for long periods and prefer to move their money around. In general, active investments are seen as more risky.
Minimize costs, fees and avoid fraud
Good news! It's quite easy to put your money on investment. Bad news: it can easily cause problems. Lots of investments are not good ideas: too expensive, too many fees or direct fraud.
Each individual asset group has at least some schemers who hope you will fall for their bait. Everyone wants to get rich quick, many people can be tempted to overlook red flags due to smooth tactics and greed.
Investing is not a fast-rich scheme and investment should never play. It is sometimes a fine line, but gambling is usually a bet on a profit / loss scenario, while investments are long-term, strategic and considered.
But what some new investors do not realize is how important it is to avoid fees, fees and unnecessary taxes. More on taxes later.
Fees: Fees and costs for investments and management are extremely important to check. Many companies, accountants and advisors who run funds or manage portfolios charge fees as a percentage of assets, along with administrative costs. Fees must be stated as expense ratios, but the amounts of money are often hidden.
What this means: An expense ratio of 0.7% per year means that 0.7% of the Fund's total assets each year will be used to cover expenses. Less than 1% doesn't sound like much, but if you make a $ 50,000 investment, that amount equals $ 350 a year. A typical year in safe investments may only get a profit of 5% before tax. Then take out taxes and fees, and your return may be below 4% or less.
Thank goodness this is 2020! There are extremely sophisticated, inexpensive alternatives for investing in most asset classes, as well as financing your pension. Good advice is easier and cheaper to get than ever, including robo-advisors that base investment decisions on algorithms that adapt to your age, investment size, pension expectations and risk appetite.
Tax: Know How It Works
Depending on your state and territory , or country of residence, the taxman may be interested in the profits you make from your successful investments. Your local laws are worth knowing. The key is not to avoid taxes, which will only spell trouble, but to avoid paying unnecessary taxes and learning about government-led systems that provide useful savings.
Some investments may allow investors to lower taxes when saving for retirement, for example through the IRA and Roth IRA. Many tax cuts exist to support investments that benefit people when they plan for retirement, which reduces the burden on social insurance.
Tax does not only apply to capital gains. Fortunately, if you make a loss on an investment, the IRS will generally consider that loss in the years to come, and you can offset any gain with the loss to avoid paying taxes. It is not as good as just making a successful investment, but it is fair.
Beginner's investment options: ETFs and stocks explained
Remember I said this is 2020? A modern way of investing is through index funds, also known as exchange-traded funds, or ETFs. ETFs are an extremely hot topic for investors, partly because of their low fees and partly because of how they work and their affordability. ETFs have created easy exposure to a large number of markets and investment types.
Exchange-traded funds (ETFs) or index funds explained:
- Index funds or ETFs are equity portfolios managed by a company designed for one purpose: to track a stock index, such as the S&P 500, or NASDAQ- 100, or global stock markets, or the oil price, or a combination of indexes. Each ETF is approved before being placed on the market and has a specific tracking method.
- A number of ETFs can be listed on a market. You can buy a share in an ETF, which then tracks a certain market index.
- The old method was to invest in funds by giving the funds money. With an ETF, you essentially buy the fund in the market, which provides much better liquidity and much more visible pricing.
- How are ETFs used? For example, buying a share in a broad index S&P 500 ETF means that you actually buy 500 shares in one. As the index moves up and down through each trading day, so does the ETF, and therefore your portfolio value.
- Why ETFs? A sad truth is that most money managers for whom you pay fees cannot beat the market. By using an index fund to invest, you get the market return minus fees. ETFs are so popular and have low costs to maintain that they generally send very low fees. Warren Buffett has made great investments as passive investments beat active investments, and ETFs are often considered useful for passive investments. This makes ETFs attractive to ordinary people and big finances as well.
- While in previous decades, funds and money managers may charge 1% or more of your portfolio in fees each year, ETFs may charge between 0.1-0.2% or less, or even zero percent in some cases.
What are the disadvantages of the ETF? The number and size of ETFs has increased dramatically, with more than a trillion dollars now invested in ETFs in the US market alone. Some critics say they are too big and cause market problems during unstable periods. Some ETFs are also more risky, have higher fees and or may be more difficult to sell when needed. Large, popular ETFs generally avoid these problems.
To provide a guide, we asked Lauren Wybar, a senior financial advisor with Vanguard Personal Advisor Services, to explain an example of one of the Vanguard ETF series that meets the super low fee, low cost of entry requirements:
" With ETFs, the minimum requirement is just the cost of a single share. For example, the Vanguard Total Stock Market ETF (VTI) is currently trading at $ 141 and the cost ratio is only 0.03%, ”Wybar said via email. "There are no assignments to trade on Vanguard's brokerage platform and the fee for account services is waived by registering for e-delivery."
Wikipedia has a list of all US exchange traded funds authorized by the SEC. The SEC also has a PDF explorer about ETFs.
Where am I going next? More for beginners
Next tip: Educate yourself. Here are some resources to keep in mind. These are some useful highlights; if only one or two options appeal to you to find out more information or to read regularly, that's enough! (Remember that you do not need to know everything at once.)
- r / staff finance – a big, busy subreddit that covers everything from budgeting to investment. Personally but always interesting. Tip: Using this filter will restrict substances to investment topics only.
- r / investment – a focused subreddit but with investment news and views as well. This list of frequently asked questions is a good point to start and come back to.
- r / bogleheads – a small subreddit devoted to longtime, passive investment champion John Bogle, who founded Vanguard.
If you have any recommendations on good places to start investing for beginners, feel free to leave them in the comments. Or, if you have any beginner questions (we can't provide investment advice) about what something means or jargon, let us know below.