Sa2)Investment Strategies for Beginners: How to Start Investing Wisely"

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How to start investing 

On a high level, investing is the process of determining where you want to go on your financial journey and matching those goals to the right investments to help you get there. This includes understanding your relationship with risk and managing it over time.  

Once you understand what you want, you just have to jump in. You can decide to invest on your own or with the professional guidance of a financial planner. Below we discuss in detail each of the key steps to help you get started with investing. 

1: Decide your investment goals 

Before you decide to open an account and begin comparing your investment options, you should first consider your overarching goals. Are you looking to invest for the long term, or do you want your portfolio to generate income? Knowing this will narrow down the number of investment options available and simplify the investing process.  

“Consider what your ultimate goal is for this money—is it for retirement, a down payment on a house in the next five years, or something else?” says Lauren Niestradt, CFP, CFA, and portfolio manager at Truepoint Wealth Counsel.

Understanding your goals and their timelines will help determine the amount of risk you can afford to take and which investing accounts should be prioritized. 

For example, if your goal is to invest your money for retirement, you’ll want to choose a tax-advantaged vehicle like an individual retirement account (IRA) or a 401(k), if your employer offers one. But you may not want to put all your money earmarked for investing into a 401(k), because you can’t access that money until you turn 59 ½, or you will get hit with penalty fees (with a few exceptions). 

2: Select investment vehicle(s) 

After determining your goal(s), you need to decide which investment vehicles—sometimes referred to as investing accounts—to use. Keep in mind that multiple accounts can work together to accomplish a single objective.  

If you’re looking to take a more hands-on approach to building your portfolio, a brokerage account is the place to start. Brokerage accounts give you the ability to buy and sell stocks, mutual funds, and ETFs. They offer a lot of flexibility, as there’s no income limit or cap on how much you can invest and no rules about when you can withdraw the funds. The drawback is that you do not have the same tax advantages as retirement accounts.  

Several financial firms offer brokerage accounts like Charles Schwab, Fidelity, Vanguard, and TD Ameritrade. Working with a traditional brokerage usually comes with the benefits of having more account types to choose from, such as IRAs or custodial accounts for minors, and the option to speak with someone on the phone and, in some cases, in person if you have questions.  

But there are disadvantages: Some traditional brokerages may be a bit slower to incorporate new features or niche investment options like cryptocurrencies. For example, fintech companies like Robinhood and M1 Finance offered fractional shares to investors years before traditional brokerages did.  

3: Calculate how much money you want to invest 

As you decide which investment accounts you want to open, you should also consider the amount of money you’ll be investing in each account type.  

How much you put into each account will be determined by your investment goal outlined in the first step—as well as the amount of time you have until you plan to reach that goal. This is known as the time horizon. There may also be limits on how much you can invest in certain accounts. 

Decide on a percentage of your income that you can dedicate to building your portfolio. The general rule of thumb for retirement goals is to invest 15% of your income each year, but if you started investing later in your career or want to retire early you may want to consider investing a higher percentage. Keep in mind that 15% also accounts for any matches you receive from your employer. This means that you could contribute 10% of your W2 income with a 5% match from your employer to reach a total of 15% to hit this benchmark. 

If you live paycheck to paycheck, 15% might seem like a crazy amount to invest. Don’t panic: It’s OK to start small, even just 1%. The important thing is to get started so your money will grow over time. 

Plan how you’d like to invest your money. A common question that arises is whether you should invest your money all at once—or in equal amounts over time, more commonly known as dollar cost averaging (DCA). Both options have their advantages and disadvantages.  

4: Measure your risk tolerance 

Risk tolerance describes the level of risk an investor is willing to take for the potential of a higher return. Your risk tolerance is one of the most important factors that will affect which assets you add to your portfolio.  

“Before deciding on what level of portfolio risk an investor wants to target, they first need to assess the comfort level with risk, or volatility,” says Niestradt. “Does it make them nervous to invest when they see the S&P 500 drop over 24% as it has this year?” she adds. These questions are important because certain assets tend to be more volatile than others.  

As you are evaluating your risk tolerance keep in mind that it is different from risk capacity. Your risk tolerance measures your willingness to accept risk for a higher return. It is essentially an estimate of how you would react emotionally to losses and volatility. Risk capacity, on the other hand, is defined as the amount of risk you’re able to afford to take.  

5: Consider what kind of investor you want to be 

There is no one-size-fits-all approach to investing. The type of investor you want to be is directly tied to your risk tolerance and capacity as some strategies may require a more aggressive approach. It is also tied to your investing goals and time horizon. There are two major categories that investors fall into: short-term investing (also referred to as trading) and long-term investing.  

The lure of short-term investing is the potential to replace your current income with revenue made through buying and selling your investments. The drawback is it can be both difficult and risky to see profits consistently because of how quickly the market can move and how unexpected news and announcements can impact an investment in the short term. 

Thank you for joining us on this journey of financial empowerment here at Spark Your Finance!

We hope today's insights have sparked your curiosity and fueled your determination to embark on your investing journey wisely. Remember, the path to financial freedom is paved with knowledge, discipline, and smart decisions.

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