Investing 101: How to Start Investing
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When you hear the word “investing”, what do you think of? You might instantly think of The Wolf of Wall Street or think of men in suits or terms that seem like another language. Let’s face it, everything about investing can seem confusing and like it is for “them” and not “us.” But here’s the thing. Investing is for everyone and is one of the few surefire ways to build wealth and beat the cost of inflation. But if you don’t know much about investing or how to get started, it can prevent you from taking action. No more excuses! Here’s your beginner’s guide on how to start investing.
Know your risk tolerance
Do you love rollercoasters? Or would you rather be caught dead on one, preferring the safety of watching from the sidelines? Knowing where you stand in this situation is similar to knowing your risk tolerance with investing.
Your risk tolerance refers to how much risk you are comfortable with taking on. Though investing is a great way to build wealth, it comes with a certain level of risk. However, some securities like stocks are riskier than other types of investing vehicles, like ETFs and mutual funds. There may be a chance for a greater return, but also more risk. When you think about investing your money, what is your gut reaction to potentially losing it?
According to Investor.gov, “An aggressive investor, or one with a high risk tolerance, is willing to risk losing money to get potentially better results. A conservative investor, or one with a low risk tolerance, favors investments that maintain his or her original investment.”
Aside from how much risk you feel you can take on comfortably, also consider your life circumstances too. If you’re single, have no debt and low expenses, you may be able to take on more risk than someone who is married, with kids, and a mortgage. You can take this risk tolerance assessment to get an idea of where you stand.
Choose your asset allocation
Once you’ve assessed your risk tolerance, it’s time to choose your asset allocation. Investor.gov states that “Asset allocation involves dividing your investments among different assets, such as stocks, bonds, and cash. The asset allocation decision is a personal one. The allocation that works best for you changes at different times in your life, depending on how long you have to invest and your ability to tolerate risk.”
In other words, asset allocation is all about diversification. You don’t want to put all of your eggs in one basket, so you have different percentages of stocks, bonds and cash.
You’ll want to consider your risk tolerance as well as your time horizon. Your time horizon refers to when you think you’ll be needing the money you invest. If you have a long time horizon — say 30+ years — you may feel more comfortable taking on more aggressive and riskier investments now. That way you’d have plenty of time to recover if the value goes down. You can take this asset allocation questionnaire to help you decide.
Pick a brokerage account
When you invest, you typically invest with a brokerage firm and invest through a brokerage account. When you deposit money into your brokerage account, you can start investing in various types of securities.
The key is to choose the right account for you. Look at the fees, any minimum opening requirements, and choose something that will fit your lifestyle.
Set a budget
Once you know your risk tolerance, chosen your asset allocation and picked a brokerage account, it’s time to invest! But first, how much can you afford to invest? You want to look at your budget. After you pay bills and pay down debt, how much money do you have left over?
It might seem like you can’t afford to invest but even investing a small amount now can help you build wealth. Compound interest can help your deposits grow over time without doing any extra work. So set a budget for your investments based on your time horizon and what you can afford.
Set up systems
To get the most out of investing, you want to set up systems for your success. Consider setting up auto-withdrawals once a month after payday. Have a money date with your investments once a month and review your accounts.
Make any trades or purchases that you need to. Rebalance your accounts once a year. Rebalancing is getting your asset allocation back to center, as your assets may shift in percentages based on the market. For example, if you had 70 percent invested in stocks, it could go up to 80 percent due to market shifts. Rebalancing could mean selling off some investments or buying other investments to ensure your asset allocation goes back to your desired percentages.
You want to have systems in place so you can keep your investments going. But don’t check on them too often, especially if your risk tolerance is low and you’ll trigger a freak out. Remember, you won’t be touching that money for a long time!
How to start investing
If you want to know how to start investing, take these steps to begin your wealth building journey. It can be a bit of trial and error but starting now is the best time. Have any more questions? One of our Certified Financial Trainers can help. Schedule a free 20-minute consult call to get started investing!
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