Investing isn’t just for people who have money. You now have the opportunity to grow small amounts of money, and there is no excuse to skip out. It is a way to grow your wealth without doing physical work–and who wouldn’t want that? Investing also helps you save for long term goals and combat inflation. Your money is able to grow through investing because of compound earning–the returns you make are reinvested to make more returns.
Before investing, however, you are going to want to plan and do some research. Here are some things to consider:
1. What is your goal? How much time do you have to reach that goal?
In order to get a more immediate return, investing in stocks might be the better way to go. If your goal, however, is more long-term, mutual funds might be a better choice.
2. Consider the risk and level of diversification.
All investments are going to have risks–that is unavoidable as the market is never stagnant. You have to ask yourself, based on your personal financial footing and personality–how much risk are you willing to handle? If one has more long-term goals, mutual funds might be the safer bet as they consist of a diverse array of stocks and bonds. Even if one does invest in separate stocks or bonds, it is important to remember to invest in multiple. Having all of your eggs in one basket does more harm than good.
Here are some different options to consider to start you off on your investment path:
These are similar to mutual funds, but track a market index, unlike mutual funds who have a person managing the portfolio of investments. A market index is a group of investments that represent a sector of the market. An S&P 500 index fund tracks the performance of the S&P 500 because the index fund buys the stocks that the S&P 500 consists of. These index funds also have lower expense ratios, unlike many mutual funds. Ideally, however, you’re going to want to look for funds that have no fees. There might be a minimum investment requirement for some, but for the most part, index funds are a safe bet.
If you have a retirement plan such as a 401k through your employer, you should first invest your money in this, especially if your employer matches any of what you put in. This is basically free and guaranteed money, and many people don’t realize this. There typically is no minimum, but it is a good idea to try to put in the maximum of what your employer will match.
If you have money you want to invest, but aren’t interested in trying to learn the ins and outs of investing, robo-advisors might be a good option. They manage your investments by computer algorithms, and thus charge much lower fees than actual people who manage your investments. They usually cost around 0.25% to 0.50% of your account balance every year, but most of the time, you can open an account and there is no minimum. Some even offer information to help you learn more about investing.
Mutual funds with a target-date
These funds are most often used in retirement plans and are automatically invested with your retirement date in mind. Because many people have years to go until retirement, these funds usually will hold stocks to start off. These returns will also be higher over a longer period of time. After a while, these funds will put more money in bonds because less risk is advisable as one gets closer to retiring.
These apps will invest in a portfolio of exchange-traded funds (ETFs) and essentially manage the portfolio for you. The fees are usually very low and could be a good option for beginner investors.
Exchange-traded funds (ETFs)
The funds are similar to index funds in that the track a market index and have lower fees than mutual funds. However, ETFs are traded throughout the day and the price–like stocks–can change. Because these funds are traded like stocks, there used to be a fee, but many brokers have now changed the cost to $0.