Investing: Where, When, and How to Start
26 November, 2021
According to a recent Gallup poll, 56% of Americans report owning stock in 2021. And it’s no surprise with the way you see old high school friends brag about their crypto holdings on Twitter or Facebook. But even though investing is a common conversation in the average American household, catching up can be overwhelming. Sometimes it feels like people are just born with that knowledge. You don’t have to panic, though.
Finding out the basics of investing is simpler than you think. And learning where you fit into that world depends on you and your financial goals. So, here is an introductory overview on investing and how it might suit you.
What Type of Investor Am I?
There are a million and one ways you can invest your money. But before you can put your funds into anything, you need to examine yourself. What kind of investor are you?
Maybe you want to have an active role in how your money grows. In that case, you may be more of an active investor. On the other hand, you might want to let your money build on its own. That would make you a more passive investor.
But other factors contribute to the type of investor you will be as well. In particular, your goals will determine your investing style.
You may only want to slowly and carefully grow your money. You can’t afford to lose much, meaning you have a low risk tolerance. Other investors, though, can handle a little extra loss if it means they might earn more money in the end. That would give them a higher risk tolerance.
Additionally, you’re investing for a reason, whether it’s to create a retirement fund or pay for something in the upcoming year. Whatever goal you are saving for impacts your time horizon, or how long you hold an investment until you sell it. Someone with a long-term time horizon, like retirement, can handle greater risk since their goal is far off. Meanwhile, someone with a short-term time horizon needs to be more careful since they can’t afford to lose any funds.
Like this, various traits impact the type of investor you can be.
Where Can I Start Investing?
For every investor and their unique needs, there’s an equally unique investment product. It’s all a matter of researching to find the right one for you. Here are some common options to get your search started.
Most people borrow money at some point in their life, whether they need a mortgage for their home or a loan for college. At the very least, you probably bummed a few dollars from a friend once. Well, companies, municipalities, and government entities also borrow money, and they do this using bonds.
Essentially, the corporation takes a loan out. But instead of going to a lender or bank like you would, they sell bonds to investors. In exchange, the entity promises to pay you back the amount you lent them plus interest for a set amount of time.
Investors typically make money from bonds in two ways. One, they resell them for a higher price. Or, two, they wait until the bond matures and collect the interest payments.
ETFs, or exchange traded funds, are a collection of securities bundled together. You can buy or sell them on a stock exchange or through a brokerage, like stock. For the most part, though, they’re hands-off.
Additionally, unlike individual stock, they provide a safety net since they’re made up of multiple assets. That gives you instant diversification, lowering your risk of loss. They mimic a market index’s performance, although most don’t track the whole index. Many only track a component of the index.
Index funds are a form of mutual funds or ETFs with a twist. They come as a portfolio that tracks a financial market index, like the Standard & Poor’s 500 Index (S&P 500). It’s a type of passive investing since you don’t do the brunt of the work. A fund manager builds the portfolio with the intent to match an index’s success.
Some of the benefits of an index fund include lower investment risk, lower costs, tax efficiency, and exposure to a range of investments.
Stocks are one of the leading asset classes. When you purchase stock from a company, you essentially buy a share of ownership in it. There are mainly two kinds: common and preferred.
Common stock gives you the right to vote at shareholder meetings and receive dividend payments. In comparison, preferred stock pays you dividends before common stockholders. You also get priority if the company goes under and must liquidate its assets.
Stocks generally offer the most potential for growth in the long run. But they’re also risky and subject to changes in the market. You can’t guarantee that a company you buy stock in will continue to do well.
What Should I Invest In?
Every investor works differently and so will you. It’s up to you to find the best way to put your money to work. With that in mind, consider these factors to narrow down your search.
The amount of money you have to work with can affect your decision. If you don’t have enough saved to start, you may not be financially ready to take on the risk of investing. You also need a sufficient amount to invest regularly over time.
Because every investment comes with some potential for loss, it’s good to give yourself some cushion. Creating an emergency fund and paying down high-interest debt to start can help. Debt will drain away at your funds, which investing may not be able to fight quick enough. And an emergency fund should equal around six months’ worth of expenses.
Investors go either one of two ways: passive investing or active investing.
Passive investing is sort of like Envel’s Autopilot saving mode. Where we automatically create a budget for you based on your income settings and envelopes. Essentially, your money goes to work while you focus on other things. A robo-advisor through an online brokerage is one way to do this. It generally offers more predictability and stability.
In contrast, an active investing strategy means you’re in the driver’s seat. You research the investments and construct your portfolio on your own. This requires a significant amount of time on your part as well as knowledge and self-motivation. But it gives you the potential for greater reward and flexibility at the cost of increased risk.
Your Risk Tolerance
Investing is risky, no matter which option you go with. Some just come with more than others. But that risk often ties to the level of return you can expect. Investors need to find the right balance between profit and risk they are willing to accept.
For instance, bonds are usually very safe investments. But, simultaneously, they offer relatively low returns. On the other hand, stocks are more likely to offer you a greater return but with a higher level of risk.
Overall, you can think of your risk tolerance as how much loss you can take in your portfolio. Certain factors may increase or lower your risk tolerance, such as your age, income, and investment goals. A young, aggressive investor is willing to risk greater loss for potentially better returns. An older, conservative investor may accept less.
When Is The Best Time To Start Investing?
You’ll hear a consistent piece of advice: the earlier, the better. That’s because investing for a long time comes with financial benefits.
For instance, recall that the market is volatile. As a result, short-term ups and downs happen, which can impact how well your investment does. But the longer you invest, the less influence those fluctuations will have on your overall return.
In addition, investing sooner allows you to take advantage of compound interest. You probably know something about interest, like the kind tacked on to your mortgage or auto loan. That is called “simple interest,” and it’s based on the principal amount of the loan, or the original amount you borrow. In comparison, compound interest essentially builds interest on interest.
Suppose you invest $2,000 at 5% interest. At the end of the first year, you receive an interest payment of $100. Rather than pocketing it, you reinvest it at the same rate. So, you now invest $2,100 during the second year. Interest made on that comes to $105. You then add that back o to your investment amount and continue to do that. Ultimately, your principal grow regularly, and you make more money over time.
While there are these benefits, you may base your investing around your goals.
What Should I Consider Before Selecting an Investment?
If investing were simple, you would just pick one with a high return and sit back. But, in reality, you have to consider various factors before investing. Without them, you may end up losing more money than you make. Here are some things to think about before choosing an investment.
Fees and Commissions
Most investments require you to pay some form of fee. It’s one of the ways institutions like banks make money and continue to offer their services. Even a savings account charges you a fee if you don’t have a minimum balance put away. And anyone with a 401(k) probably knows about administrative costs, although you may be lucky enough to have your employer pay for it.
Fees come in a wide range of forms when you invest. For instance, when you work with a broker, you may face annual fees, inactivity fees, and account closing fees. It’s also common to pay a trade commission, or stock trading fee, when you buy or sell an investment through a brokerage.
You obviously need to put money into your investment. But how much you put in is not always left up to you. In some situations, you can only invest in a financial product if you put a minimum amount into it.
One example of this comes into play with mutual funds. They require a certain level of money because they need sufficient assets under management (AUM). Without that, they can’t cover overhead costs (indirect business expenses) or accomplish the mutual fund’s investment goals.
It’s important to research the minimum contribution required by any investments you’re interested in. In particular, you need to know these amounts if you intend to transfer capital from one type of fund or investment to another. If you don’t transfer enough, you may be declined.
Look for Diversification
It’s simply not a good strategy to put all your funds into one investment. Let’s say you invest every dollar into a single stock. If that stock takes a hit, you will lose all that money.
As a result, it’s safer to divide your money up and invest each portion into a different asset. This is what professionals call “diversification.” It’s an investing strategy that reduces the risk of your overall investing. While it doesn’t maximize your returns, a diversified portfolio will likely outperform a non-diversified one in the long run.
Investors find different ways to diversify depending on their strategy. For example, you may have an investor focused on stocks. But they purchase stock from companies located in very different locations, across different sizes and industries. Or, you may have an investor that invests in varying asset classes, like real estate, cryptocurrency, and commodities.
Sure, you can put a lot of energy into researching. But the world of investing is large and constantly changing. That’s why many investors turn to professional guidance, whether they’re beginners or seasoned pros.
It’s up to each investor, though. You can hire a broker, financial planner, or investment adviser to help you build your investment portfolio. In addition, some financial institutions, like brokerages or mutual fund companies, offer investment advice or educational materials. Services like this come at a price, but oftentimes you save money in the end. Learning from a professional and following their input can help you avoid costly mistakes.
Investing is complicated, no doubt. But with the right work ethic and readiness to learn, you can carve a place for yourself in the field. It all depends on what you want to make of it.
Every investment, no matter how passive, requires some thought and research. Try to figure out yourself as an investor before you tackle it. Once you know your financial goals, time horizon, and risk level, you’ll be able to match your investments to your needs. Plus, with professional guidance, you can mitigate potential loss. In this way, giving yourself the right tools will help you become the best investor you can be.
And, make sure to keep an eye out for Envel's upcoming fractional platform. This investment platform will let you invest in stocks of places that you shop at regularly. Fractional investing is a great way to start building your portfolio.
Ashley KilroyRead more from Ashley Kilroy