Hey $avvy readers we have an awesome guest post today from Andrew Altman over at Slick Bucks. He helps folks learn to manage money cleverly to build wealth. If you are a millennial and have not started an investment account yet, stop putting in off. Starting to invest at a young age provides you with the biggest advantage there is “time in the market”. These beginning investors tips should have you feeling much more confident to start investing today! Enjoy! – T$C
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Whether you are 25 or 65, it’s always a good time to start investing! In this article, we are going to look at five tips that will help you get started investing and will help you to succeed once you do.
Tip #1: Know Your Time Horizon As Beginning Investors
Before determining what types of investments you are going to put your money in, you will need to know how long you have until you need that money back. We call this your “time horizon“.
Generally speaking, the longer your time horizon the more things you find you will be able to invest in. Also, it is generally true that investments are able to take more time to grow are more likely to have higher rates of return.
For instance, let’s say there is a person who has $20,000 with which to invest. This person, we will call him Joe, needs $15,000 of the $20,000 back out in two years in order to pay for a down payment on a house. As a result, he can only invest $5,000 in an unrestrained fashion.
Why can’t he invest the full $20,000 into the stock market? Well, the stock market has basically never lost in periods greater than 10 years. However, there is a pretty reasonable chance Joe could lose money over a two-year period. This is because the economy is prone to short-term declines that can affect the value of most stocks.
As a result, although Joe could freely invest his $5,000 of unrestrained money into an exchange-traded fund or mutual fund (i.e. an investment that purchases a large group of stocks), his $15,000 is very restrained by time.
In order to preserve his investment to have the money he needs when he needs it, he may consider putting the $15,000 into a bank certificate of deposit or a government bond with a two-year maturity. This sort of investment would guarantee his initial investment and make him a little bit in interest too.
Tip #2: Know Your Risk Tolerance
When it comes to investing, it is really important that you develop a fundamental understanding of what your personal “risk tolerance” is. This simply means how much risk you are willing to stomach with your investments.
For instance, let’s say there is a stock that costs $20. On any given week, the stock fluctuates in price between $10 and $30. To one person, buying that stock seems like the opportunity of a lifetime to make a quick $10 per share (since the stock can go up to $30 in such a short time period). To another person, that stock would make them sick and unable to sleep at night because it can drop in value so quickly.
One’s thrill is another person’s misery. This is what we call “risk tolerance”. There is a relationship between how much risk you take on and how much return you should expect to receive called the risk-reward ratio. Riskier stocks will often return more, but safer stocks will have a more sure return.
Deciding your risk tolerance will prove critical to determining what types of investments you make. Thankfully, most Robo-advisors and stock brokers have a questionnaire form that can help you discover what type of risk you are willing to shoulder with your investment account.
T$C Note: Our absolute favorite Robo-advisor out on the market is Betterment. Betterment is the smarter automated investing service that aims to provide optimized investment returns for individual, IRA, 401k, and rollover accounts. If you are a millennial struggling to figure out how to start investing we highly recommend you give Betterment a chance.
Tip #3: Choose the Right Type of Account
There are basically three types of investment accounts that an investor can choose from Traditional Retirement, Roth Retirement, and Traditional Brokerage.
A traditional retirement account allows you to make pre-tax contributions towards investments that will be allowed to grow tax-deferred. Money cannot be withdrawn from a traditional retirement account penalty-free until an individual turns age 59.5. This type of account is best for a person who is saving for retirement and believes that their tax bracket will be lower when they reach retirement.
A Roth retirement account allows an individual to make contributions towards a retirement account using dollars that have already been taxed. As a result, when a person reaches retirement age and withdraws money from this type of account, they are not required to pay taxes on their investment earnings. This type of account is best for a person saving for retirement who believes they will have a higher tax bracket at retirement.
A traditional brokerage account is a regular taxable account that allows an individual to buy and sell investments and withdraw funds from the account at any time. However, any money made above the original investment is taxed in the year that the investment is sold.
For instance, if a person buys one share of a $10 stock and sells it for $20 in the same year, he will be taxed on the $10 gained from the investment in that tax year.
If you need to have access to your money at any time, it is better to invest using a traditional brokerage account. However, if you can afford to put away some money into a retirement account (either a Roth or a traditional), the undeterred earnings potential and tax benefits could prove far more beneficial for you.
Tip #4: Choose a Good Broker As Beginning Investors
When investing, you will want to make sure that you are using the best broker available to you. A broker is a company that initiates the transactions to buy or sell stocks as you request using official channels. The household names that individuals tend to know for brokers include companies like Schwab, Fidelity, TD Ameritrade, and others.
What makes a good broker? There are a couple of things that you should look for:
Low-Commission Trades–>the less that you have to pay to make stock purchases or sales, the more money that you get to keep for yourself. Always look for a broker that charges low commission fees for your transactions.
Educational Materials and Services–>As you attempt to learn more about investing and becoming better at buying and selling stocks, the best brokers will come alongside you and provide you with solid educational materials that help you to learn.
Good Research Database–>It is very important to stay up-to-date on any news and data for any companies that you are interested in investing in. The best brokers will have great research databases at your disposal to help you as you seek to learn more about companies you like.
There are plenty of great online stock brokerages to choose from these days, so it is just a matter of doing a little research to find the broker that suits your needs.
Tip #5: Get a Financial Advisor That You Trust
The world of investing is very complex and it changes pretty frequently. As a result, a wise investor will seek to get as much help as he or she can in an effort to do well. Plus, let’s face it, most of us do not have the time or the patience to sit and learn about investing all day.
That is why it is incredibly important to get a financial advisor that you trust on your side who can recommend investments and guide you towards your objectives as you begin to invest. This person can help you to determine your time horizon for your money, define your risk tolerance, and choose the right type of accounts to use for various situations.
Furthermore, a financial advisor can even invest money on your behalf if you don’t feel well equipped to do so on your own. They can help you define what it is that you want your money to do and develop a plan to help you reach your end goals. That is why it is absolutely critical to get a financial advisor on your side.
If you follow the tips listed above and seek to diligently learn about investing over time, there is a very good chance that you will be successful in your attempts!
T$C Note: once you get set up with your investment accounts you are going to want a place to keep track of all your finances. Personal Capital makes managing your assets and investments easy! Sign up today to get objective advice and strategies for your long term financial goals.
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