Whether you are new to investing or a seasoned veteran, there are many aspects to consider before putting your money to work. With investing, your options are near limitless, which can make it slightly intimidating. Certainly, there are financial professionals that can assist you and each with their own opinion, but the reality is you are more than able to learn for yourself. At the very least, this will give you the ability to understand what your investments are and what they should be doing. This article gives you a brief overview of investing basics and what to consider before putting your money to work.
How to Invest
First, there are several ways to invest and understanding the benefits to each can help you make an informed decision. We’ll start with one of the most popular, and that is a 401k plan. This type of retirement plan is offered through your employer and utilizes pre-tax dollars to invest in a pre-selected group of assets. You have the freedom to select how your money is invested, but your selection is limited to what the plan has provided their participants.
The next option is to utilize an IRA, which is an account everyone can obtain and is not strictly offered through an employer. While it still utilizes pre-tax dollars, you have the ability to invest in essentially anything, as long as it can be invested in an IRA. One thing to keep in mind is there are contribution limits and once those are met, you’ll have to wait until the next tax year before you can contribute again.
Lastly, you can open a traditional brokerage account through any of the mainstream providers out there. However, the main difference between a brokerage account and the two previously mentioned is this utilizes post-tax dollars and is subject to capital gains taxes and long-term capital gains. Depending on your situation, this may not be the most effective method, but does offer the most options out of the three.
Stocks, Mutual Funds and ETF’s
Once you’ve selected your investment vehicle, it is now time to decide what you want to invest in. First off are stocks, which include popular companies such as Apple or Amazon. The benefits to stocks are you can increase your returns, but risks are slightly higher as you are subject to company-specific risks and sector risks. Also, you’ll need to complete the proper due diligence to ensure your investment is the right one for your investment objectives.
Next and arguably the most popular include mutual funds. These are effective ways to put your money to work long term, allowing you to passively earn returns on your investment. Mutual funds are a basket of assets that attempt to achieve a return that mimics an index. The most popular include those that track the S&P 500 or the Dow Jones Industrial average. Also, mutual funds are monitored by a fund manager that ensures the fund is obtaining its investment objectives. Even though the fund manager is ensuring the fund is operating efficiently, it is up to you to complete the proper due diligence.
Lastly are ETF’s, which stand for exchange-traded funds. These work similar to mutual funds, but can be traded on the market, whereas with mutual funds you may have restrictions.
Lastly, as an investor, you need to have a well-defined investment objective. It varies person to person, but you need to identify when you plan on retiring, how much you’ll need to withdraw on monthly basis to live, and how much you’ll need to earn to achieve your goal. Understanding these objectives will help dictate how you invest your money and how much risk you can afford to take.
Other things to consider are a diversified portfolio, which simply ensures all of your investments are not in one basket. Also, finding the balance between risk and reward will help build a solid portfolio. Investing can be intimidating but by taking the appropriate steps, you’ll be able to build a well-balanced portfolio that should begin allowing your money to grow and work for you.