Many people consider investing a necessity to ensure they have enough money to retire or to continue growing their wealth. Simply placing money in a savings account is not going to make your money grow like it would if you were to invest it wisely. With investing, you can take advantage of compound interest, which can help you grow your wealth significantly faster. Below are some investment tips for beginners you can follow to get started.
- Decide on which types of assets you want to include in your investment portfolio.
- Decide the process by which you wish to own those assets.
- Determine how you want your assets to be held.
How to Invest for Beginners
Getting started in investing might seem daunting at first, but by following investment advice for beginners, you can get on the right track to enjoy future investment success.
1. Determine Which Types of Assets You Want to Own
The goal of investing is to put out money now in the hopes you will gain significantly more back in the future. You must maintain a satisfactory annual growth rate for an investment to be considered good. To help create a better investment portfolio, you need to choose the right grouping of assets that can provide you with the growth rate you are looking for.
2. Decide How You Want to Own Those Assets
After determining the types of assets you wish to own, you must address how you plan to own them. When owning stocks, which are small amounts of equity in a company, you need to decide whether you prefer outright ownership or a pooled ownership.
- Outright Ownership: If you decide you want outright ownership, you will be buying individual shares of companies directly. This requires basic stock and trading knowledge and the ability to research stocks properly. You should look at the requested price as well as the company’s risk-adjusted cash flow so you can determine whether the stock will be a sound investment.
- Pooled Ownership: You might choose to avoid investing in stocks directly and pool your ownership instead. Pooled mechanisms such as mutual funds or exchange-traded funds will combine your money with other investors’ and purchase shares of stock in a number of companies. For wealthy investors, hedge funds might be the best pooled ownership option. The benefit is you can have a well-diversified portfolio at a cheaper rate. The drawback is you give up most of the control over how your money is invested.
3. Determine Where You Wish to Hold Your Assets
After deciding how to acquire your assets, you need to determine where to hold them. This is a crucial decision because it can often affect how your assets get taxed.
With taxable accounts, you pay taxes along the way with few restrictions on when or how you spend those assets. You can cash in when you want and contribute as much as you want each year as long as you pay the required taxes.
You can also choose a tax shelter, such as 401(k)s and Roth IRAs. These offer more tax breaks, such as the ability to defer taxation until you withdraw the money in the future. This can allow for faster growth year over year. Some accounts are even tax-free, so if you fund them with after-tax dollars, you’ll never have to pay taxes on the profits or later withdrawals.
Some retirement plans offer added protection, such as unlimited bankruptcy protection. This means if you suffer a catastrophic event that could cause you to file for bankruptcy, your retirement funds remain secure.
Another option when investing your money is to place it in stocks or other asset protection mechanisms. This provides you with beneficial asset protection and allows you more control over how the capital is used.
Types of Assets to Invest In
When choosing which types of assets to invest in, you should first understand the pros and cons of each. All assets have their own quirks, tax rules, and legal tradition. Below are some top investments for beginners to choose from.
When you hear someone discuss investing in stock, they are most likely discussing an investment in what is referred to as common stock. Common stock is buying a small portion of ownership or equity in a company. This means you are entitled to a portion of a company’s profits and losses based on the amount of equity you own. Stocks are often the most popular option for those looking to build their wealth over time without a significant amount of leverage.
When deciding which type of stock to choose, determine whether you want to buy stock from a privately held business or a publicly held one.
- Stock from privately held businesses: A privately held business does not have a public market on which to sell its shares. This type of investment can be high-risk but extremely rewarding if it pans out.
- Stock from publicly traded businesses: Some private businesses will sell off a portion of themselves to outside investors in a process called an Initial Public Offering. This allows anyone to buy shares to become an owner.
Fixed Income Securities
When you decide to invest in fixed income security, you are essentially lending the money to the bond issuer for an interest income payment. You can choose from a variety of fixed income securities, including corporate bonds, money markets, certificates of deposits, and savings bonds.
Most often, you buy fixed income securities through a brokerage account, and you have to decide whether you want the discount or full-service model. Minimum investments for these accounts vary, with the average opening amount being $500 to $1,000.
These types of investments can be very appealing and usually make up some portion of an investor’s portfolio. They come with very few risks, except that their flat rate does not account for inflation. Even though raining interest rates can cause bonds to fall, you won’t lose any value as long as you purchased the bonds when the prices were higher.
Exchange-Traded Funds and Mutual Funds
A mutual fund is a company that pools the funds of multiple investors who share an investment strategy. Some mutual funds follow certain types of stocks or bonds, and others follow indexes.
Exchange-traded funds (ETFs) trade in a similar manner as stocks, which makes them an easy option to add to an investment portfolio. There is no minimum investment, but the strategies can vary widely. Some follow well-known indexes such as the S&P 500 or Dow Jones, while others focus on stocks in specific industries such as health care, technology, or materials.
Real estate investing is one of the oldest forms of investing, as you can make money off real estate transactions in a variety of ways. In essence, all real estate transactions come down to one of two things: They involve either developing and selling real estate for a profit or owning something and letting others use it for a fee, such as rental properties.
Real estate has often been a stepping stone to great wealth for many investors because it lends itself easily to using leverage. While this can result in a heavy loss in the event of a bad investment, a sound investment can result in high profits.
Some investors might not realize they can also trade real estate like stock, which requires signficantly less capital than purchasing and developing real estate on their own. Stock trading typically involves trading through a real estate investment trust, also known as an REIT. Types of REITs you can invest in include:
- Retail REITs: Here you can profit off the collection of rent payments from stores and shopping centers.
- Office REITs: Profits for these funds are based on rent collected from corporate properties.
- Residential REITs: These trusts own apartment buildings and mobile home communities and collect rent on them.
- Health care REITs: These trusts include doctor’s offices, hospitals, assisted living facilities, and retirement homes that pay rent or lease properties.
Getting started in investing does not have to be daunting. By following these tips for beginning an investment plan, you can be ready to tackle the market and build your portfolio. Are you looking for more information to get started? Sign up for one of our online webinars, or download our free e-book today.