Investing money into the stock market can seem overwhelming and even be seen as a gamble. However, investing your money in something that earns a return on investment (ROI) over time has historically been one of the best ways to grow wealth. Whether you’re thinking about the long term or just trying to learn how you can put your money to work, investing is a great way to consider. Additionally, starting early allows you to benefit from the power of compounding- the snowball effect of earnings on your initial investment. The idea is the earlier you start investing, the more time your money has to compound and grow, increasing your wealth over time. Despite the common misconception that only the wealthy can afford to invest, anyone can start investing with as little as $50 or less. In this article, we discuss how to start investing regardless of your current financial situation.
Set a Goal
Before diving into the world of investing, it’s essential to determine what your financial goals are. Setting a specific investment goal helps you focus better.
Here are some things to consider when setting a financial goal:
- Is this investment goal for the short-term, medium-term or long-term?
- How much do you want to save?
- When do you want to achieve this goal?
- What is your risk tolerance?
In answering these questions, you will establish an appropriate time horizon, investment amount, and risk exposure within your investment strategy.
Apps and websites such as Personal Capital, Mint, and Betterment offer investment planning tools to help simplify the process and provide a more informed decision regarding investment goal setting.
How do you set an investment goal?
Here are a few simple steps to set your investment goal:
- Define your financial objectives: Decide how much money you would like to invest and your desired outcome within a specific timeline.
- Assess your risk tolerance: Decide on the amount of investment risk you are comfortable taking; you may want to consider using an online risk assessment tool.
- Determine your investment timeframe: Set a specific length of time for achieving your financial objectives.
- Create an investment plan: Develop a plan by selecting specific investments that align with your goals, risk tolerance, and investment timeframe.
- Track your progress: Monitor your portfolio performance, measure success, and adjust your plan if necessary as you move closer to your investment goal.
If you need help with creating an investment plan, you may want to consider using online investment tools such as Personal Capital or Betterment.
Determine the Amount to Invest
Now that you have defined your investment goal, it is time to figure out how much money to put into your investment portfolio.
Keep in mind that the amount you invest will depend on many factors including your income, spending habits, and financial obligations. Here are some tips to help determine the amount to invest:
- Make sure to review your budget and expenses to find out how much you can afford to invest on a regular basis.
- Consider starting small and gradually increasing the investment amount over time.
- Try to maximize contributions to tax-advantaged accounts such as an Individual Retirement Account (IRA) or 401(k) if your employer offers one.
- Consider the power of compounding interest over a long period when deciding how much to invest.
Examples of How Much to Invest Monthly:
| Monthly Investment | Years Invested | Estimated Future Value* |
|---|---|---|
| $50 | 20 | $30,553 |
| $100 | 20 | $61,106 |
| $200 | 20 | $122,211 |
*Assuming an annual return of 7% and monthly compounding.
Tools such as the Vanguard Investment Calculator or Personal Capital’s Investment Fee Analyzer can provide estimates of potential returns and future value based on various investment amounts.
How do I decide how much to invest?
Deciding how much to invest is a personal decision that depends on a few key factors. Here are some things to consider:
- Your financial goals: Determine what you want to achieve with your investments, whether it’s long-term growth, generating income or saving for a particular goal like retirement or a down payment on a home.
- Your risk tolerance: Think about how much risk you’re willing to take on. Investments with high potential returns often come with higher volatility or risk of loss.
- Your current financial situation: Consider your current income, expenses, debts and emergency savings. It’s important to have a solid financial foundation before investing.
- Diversification: Spreading your investments across different asset classes and sectors can help manage risk.
A financial advisor can help you develop a personalized investment plan based on your unique situation. Additionally, there are many online investment platforms available that can provide guidance and support to help you determine the right investment strategy for you.
Types of Investments
When it comes to investing, there are various types of investment vehicles that offer different levels of risk and potential returns. Here are some of the most common types of investments:
Stocks
- Investing in stocks means buying shares of ownership in a company.
- Stocks may be attractive for long-term investment goals as they tend to yield higher returns than other investment options.
- However, stocks also carry a higher level of risk due to market volatility and fluctuations.
Bonds
- Bonds are essentially loans to companies or governments in exchange for regular interest payments.
- Investing in bonds can offer a lower level of risk as they tend to be less volatile than stocks.
- The potential returns on investment are generally lower than stocks, but there is a greater degree of certainty over the expected returns.
Mutual Funds
- Mutual funds are professionally managed investment portfolios that pool money from multiple investors to purchase a variety of stocks, bonds, and other securities.
- Mutual funds offer a diversified investment approach with lower risk, making them a good starting point for novice investors.
- Management fees may apply and can affect the total returns on investment.
One way to get started with investing is to consider using investment apps such as Acorns, Robinhood or Stash, that allow users to invest in stocks and exchange-traded funds (ETFs) with small amounts of money.
What are the major types of investment vehicles?
There are several types of investment vehicles that individuals and institutions can choose to invest their money in. Here are some of the major types of investment vehicles:
- Stocks
- Bonds
- Mutual Funds
- Exchange-Traded Funds (ETFs)
- Real Estate Investment Trusts (REITs)
- Commodities
- Options
Before making any investment decisions, it’s important to consider your individual financial goals and risk tolerance. It’s also recommended to seek advice from a financial professional.
If you’re looking for more information on investing, websites like Investopedia and The Motley Fool offer a wealth of resources and educational articles. Additionally, products like Robinhood and Vanguard can assist with investing online.
Consider an Investment App or Robo-Advisor
Investing can be overwhelming, especially for those who are new to the game. Luckily, there are plenty of resources available to help simplify the process. Consider using a robo-advisor or investment app:
Robo-Advisors
- Robo-advisors are digital platforms that use algorithms to create and manage investment portfolios for users.
- Robo-advisors offer a hands-off approach to investing, making it a great option for those who are new to investing and unsure where to start.
- Popular robo-advisors include Betterment, Wealthfront and Personal Capital.
Investment Apps
- Investment apps like Robinhood and Stash allow users to invest in stocks, ETFs, and more with small amounts of money.
- These apps offer a user-friendly interface and can be accessed from a mobile device.
- Investment apps are often a good starting point for novice investors who want to dip their toes into the world of investing.
Regardless of which option you choose, research and compare your options to find the best fit for your investment goals and risk tolerance.
Should I invest myself or use robo-advisor?
Whether to invest yourself or go for a robo-advisor depends entirely on your investment goals and preferences. While investing yourself requires more time, research and knowledge, having a robo-advisor can make things easier and efficient. Here are some factors to consider:
- If you have time and expertise, investing yourself may be a better option. But if you have a busy schedule or no experience, let robo-advisor do the work for you.
- Robo-advisors generally require lower fees compared to traditional investment advisors. They follow a modern approach with an entirely automated investing process.
- Investing yourself may be risky as you may make mistakes or overlook important details. With a robo-advisor, it uses complex algorithms that can analyze data quickly and provide you with reliable investment advice.
Before deciding on which one is suitable for you, it’s important that you consider these factors and determine which best suits your investment strategy. Some popular robo-advisory platforms include Wealthfront, Betterment, and Acorns.
Keep Yourself Educated and Informed
Investing is an ever-changing field; keeping yourself informed and up-to-date can help you make smarter investment decisions. Here are a few ways to stay educated:
Online Resources
- There are plenty of online resources available to help educate investors on the basics of investing and market trends.
- Popular resources include Investopedia, The Motley Fool and Seeking Alpha.
- Some online brokerage platforms, like TD Ameritrade and E-Trade, also offer educational resources for their users.
Newsletters and Publications
- Financial newsletters, like The Wall Street Journal and Barron’s, keep investors up-to-date on market trends and provide analysis on investments.
- Investment publications, like StockCharts.com and Morningstar, offer investors technical analysis, data and other investment insights.
By taking advantage of educational resources and staying informed on the latest investment trends, investors can gain a deeper understanding of the market and make more informed decisions.
What is the best resource to learn about investing?
Some of the best resources to learn about investing are:
- Investopedia: This website provides informative articles and tutorials on various aspects of investing and finance.
- Khan Academy: This website offers free courses on finance and investing topics.
- Bogleheads: This website provides a wealth of information on low-cost investing and passive index funds.
These resources can help beginners start their investment journey and also provide valuable information to more experienced investors.
Conclusion
Investing can feel overwhelming, but starting small and educating yourself on investment options and trends can help you build a successful investment portfolio. Remember:
Invest in Yourself First
Before investing, make sure you have created an emergency fund and have paid off high-interest debts like credit cards and loans.
Start Small and Be Consistent
Regular investments, no matter how small, can have a significant impact over time. Stay consistent and increase your investment amount gradually.
Diversify Your Portfolio
Invest in a mix of stocks, bonds, and mutual funds to minimize investment risk.
Stay Informed and Keep Learning
Investing is a lifelong process, and staying informed and educated on the latest investment trends and options can help you make smarter investment decisions.
By following these basic investing principles, you can start investing with confidence and build a successful investment portfolio for your future.
