If you’re committed to finding extra savings in your budget or you’ve come into some extra money, investing might seem like a good addition to your financial plan.
But with so many options, where do you begin, and who can you trust with your cash? Our guide covers what investing is, ways to get started and types of investments that may work well for you.
What is investing?
Investing is a way of saving and growing your money for the future.
You do so expecting to receive your money back with a profit or interest over time. Ideally, as you stay invested, your interest begins earning interest. This is known as the power of compounding, and positive returns can make your investments grow substantially over time.
You also take on a level of risk by investing, hence the saying, “There is no such thing as a free lunch.” Generally, the higher the potential return of an investment, the higher the risk of losing your investment. For example, stocks are considered riskier than bonds but offer historically higher returns. If someone promises high returns with little or no risk, that is likely too good to be true. Learn how to spot and avoid investment scams.
Why consider investing?
When it comes to managing your finances, there are a couple of options to consider — investing and saving.
Investing is often seen as a way to combat inflation — the increase in prices over time — and grow your money. While investing can potentially offer higher returns over the long term, it comes with risk, and may not be the right choice for everyone.
On the other hand, saving money in a traditional savings account may not provide high returns, but it can offer peace of mind for individuals who prioritize stability and quick access to their cash.
Ultimately, the decision between investing and saving comes down to personal circ*mstances and financial goals. It's important to assess your own financial situation before making any investment decisions.
What makes a great investment?
It depends on you and your situation. Creating an investment plan focuses your investing on what’s right for you, and doing this at the beginning may prevent costly mistakes.
Some things to consider …
Set your goals and timing
What are your money goals? A house, retirement, kids’ college?
List all your goals and the time frames you hope to achieve them. Generally speaking, the longer your investment time frame, the more risk you can afford to take. This is because you have more time to recover from any potential losses and can benefit from the potential for higher returns over the long term. However, as your investment time frame shortens, you may want to consider lower-risk investment options or savings. If the market experiences significant losses, you don’t want to be forced to sell your investments at the bottom of the market and incur steep losses.
This brings us to the next point …
Establish an emergency fund
It’s wise to have an emergency fund to tap into when an unexpected expense or change of employment arises.
Having a cash cushion of a few months’ worth of expenses ready for these times will further protect you from having to sell investments at the wrong times and potentially lock in investment losses.
Plenty of personal finance apps can help you find savings in your budget to establish a fund.
How much risk can you take?
Risk is necessary, as returns are necessary to achieve gains to hit your financial targets. But the market can be volatile — moving up and down, year over year — and you want to be sure you can tolerate the volatility with your investments. Your risk tolerance has two parts:
1. Your willingness to take risk
If your investments lost 30% in one year, how would you feel about it? Do you have the stomach to weather the storm until the markets recover? Determine whether you are a risk-taker or value more stability.
2. Your ability to take risk
Considerations affecting appropriate risk level include where you are in your career (early or nearing retirement), whether you have dependents or are in a single- versus dual-income household.
Focus on variety
Are you comfortable putting all your eggs in one basket, or would you rather spread your investments over different investment types and business sectors?
It’s generally considered risky to rely on just one stock or even all stocks, as this leaves you vulnerable to major losses in a single market or industry event. Instead, diversifying your portfolio by investing in different types of investments can help buffer you from these risks. However, there's no one-size-fits-all formula for diversification.
How to start investing?
Where you start investing depends on what level of service you desire — and want to pay — for investment help. Here’s a look at the three different types of investment brokers, from white glove to do-it-yourself service:
Financial advisor and planner
This professional creates and manages your investment plan and portfolio for you. They can tailor investments to your desires and charge higher fees (up to 1% of assets or hourly fees) for this full service. Some also require account minimums.
This option may be suitable for beginners looking to invest a large amount of money, who need more hand-holding and support or who prefer to delegate their investment decisions to an expert.
You can look up reviews of a specific advisor on Trustpilot or reviews for investments and wealth companies to get a feel from others on how they work.
Check out how to find a financial advisor.
Robo-advisor
A robo-advisor is an online platform that uses questionnaires to create an investment plan and manage a suitable portfolio of diversified investments for you. Robo-advisors charge fees (.25%–.5% of your invested assets), but here are 4 reasons a robo-advisor may be worth the fee for some people. Some robo-advisors even specialize in different types of investors, like female investors or investors starting with little money.
This option may suit beginner investors who have less money to invest, who like using technology to develop a preset investment plan and who are not interested in owning individual stocks.
Because there is less human interaction, it’s a good idea to read reviews from others to get an idea about a robo-advisor’s customer service.
Discount broker (do-it-yourself)
Discount brokers like E*Trade and Schwab allow you to directly buy and sell stocks, bonds, mutual funds and options. They typically charge no monthly fees and $0 commission on many trades. They also offer a wide variety of stocks, bonds and funds. However, there is no investment planning provided by discount brokers. You are left to determine whether buying or selling an investment is appropriate for you.
A discount broker may be a good option for beginners who want to learn how to invest independently, research and trade in individual investments, and don’t mind creating their own investment plan elsewhere. Personal finance apps, including Stash and Personal Capital, can assist with investment planning and can be used to supplement investors who opt to trade with discount brokers. Investors can also access financial advisors for a fee at discount brokerages.
When looking for a discount broker, prioritize educational resources for analyzing investments and ease of use. Read customer reviews and walk through demonstrations on the broker’s website to determine the right fit for you.
Investments for beginners
1. A 401(k) plan or other employer retirement plan
If you are investing for retirement, this should be the first place you look. Employers often offer a match to your contributions in a retirement plan. For example, an employer may match 50% of your contribution up to 5% of the salary you contribute. This is nearly as free money as you can get, as long as you stay at your employer until your contributions are fully vested (yours to keep).
Additionally, most 401(k) contributions are made pre-tax and reduce your taxable income. (You will be taxed when you take out the funds in retirement.) Because your current tax bill is lower by making contributions, 401(k)s are known as “tax-deferred” vehicles.
2. Stocks
Stocks are investments that represent a share of ownership in a company.
When you buy a stock, you become a part owner of the company and have the right to vote on important decisions and receive dividends if the company pays them. The price of a stock depends on the supply and demand for it in the market, so that stocks can increase or decrease in value over time. A stock price times the shares outstanding equals the market capitalization, which is the value the market thinks the company is worth.
To learn more, check out our guide on how to invest in stocks.
3. Bonds
Bonds are investments that represent a loan to the issuer, which is usually a company, government or municipality.
Bond investors lend a lump sum of money, called principal, to the bond issuer, which the issuer will repay at bond expiration with additional interest at periodic times. Riskier issuers must pay higher interest rates to get investors to buy their bonds. Outstanding bonds can also be purchased or sold between investors on a “secondary market or at any time.”
The chief risk of bonds is the chance of default. Therefore, rating agencies — Fitch, Moody’s and S&P, mainly — rate bonds based on the creditworthiness of the debt securities and their issuers. You can see the rating when you pull up a bond quote on a broker site.
4. Mutual funds and exchange-traded funds
Mutual funds and exchange-traded funds (ETFs) pool money from many investors to purchase a basket of different investments, such as stocks and bonds.
A professional investor manages the fund, offering low-cost access to asset classes or strategies. These funds can track markets (e.g., total bond market fund), sectors (e.g., banks) or focus on investment strategies (e.g., aggressive growth). Some funds manage a mix of investments tailored to investors wanting to retire on a particular date, known as target-date funds.
New investors and investors with fewer funds to invest, can get instant diversification in a single share with these funds.
5. Real estate
Real estate investing involves property that can generate income, price appreciation, tax benefits and diversification.
How can a beginner invest in real estate besides directly owning a property? On the stock exchanges, you can buy shares of real estate investment trusts (REITs) and real estate mutual funds. Those shares dividend rental income and offer exposure to different real estate types (e.g., student housing or medical offices). You can also access deals previously held for institutional and private investors, such as building a hotel, through what’s known as crowdfunded deals. Online platforms like Fundrise allow you to invest in a crowdfunded deal with little money — $10.
In this guide we explain what crowdfunding is and 7 steps to take before investing in a crowdfund deal.
Frequently asked questions (FAQ)
How much should I invest?
The answer depends on your financial situation, investment goal and when you need to reach it. Given your assumptions, you can use an investment calculator to see how likely you are to reach your investment goal.
A general rule of thumb is to invest 15% of your income each year for retirement. If that sounds unrealistic, you can start small and work up to this amount over time.
How can I invest with little money?
Given the advent of mutual funds, ETFs and fractional shares, you can quickly start building a portfolio with little initial investment. Additionally, sights like Acorn, which round up all of your expenses to the nearest dollar and invest the rest, make it easy to jump-start your investing.
Remember that investing always comes with a level of risk, and it's essential to do your research and make sure you're comfortable with the potential outcomes before jumping in.
The bottom line on investing for beginners
You have different options based on how hands on you want to be with planning and investments. Choose the level of service that feels right for you.
Smart investing includes having an eye on your goals and creating a diverse portfolio of investments. After that, much of the success of investing comes from staying in the market over time. Choosing providers that you have confidence in and comfort with can help you stick with it.
Use Trustpilot to narrow your search for reliable providers to help you on your investment journey. And feel free to pay it forward by leaving your own reviews to help the next person starting their investment journey.
Trustpilot is a review platform that is open to all. The companies and profile pages referenced in this article are provided for informational purposes only and are not recommended, endorsed by, or representative of the views of Trustpilot. The Trustpilot companies linked in this post are expected to abide byTrustpilot’s Guidelines, but have not been reviewed for compliance.
