12 Steps to Financial Wellness Series Step 11: Start Investing
The world of investing can be vast and confusing, especially for a first-timer. There are many decisions to make, and each one carries the risk of loss or the promise of growth for your money. No worries, though; I can help! Here’s how to start investing in five easy steps.
Step 1: Define your tolerance for risk
If you’re investing, you’ll need to be prepared for the reality of potential losses. There is no such thing as a “sure thing.” But how much loss can you take?
Determining your risk tolerance is important to ensure you’re entirely comfortable with your investment path. Your risk tolerance will likely vary according to your age and the time horizon you’re working toward; your risk capital, or the amount of money you can afford to lose; and your investment objectives, or what you hope to gain through your investments.
2: Define your investment goals
Why are you investing this money? Do you hope to save enough money for a down payment? Are you trying to fund your retirement? Do you plan to use this money to pay for your child’s college education? Or are you looking for a way to grow your money without any real plans for its ultimate use?
Identifying your investment goals will help you choose your investment vehicles and the amount of money you’re comfortable investing.
3: Determine your investing style
Next, you’ll need to find an investing style that suits your personality and investing goals. Here are your basic choices:
Active management–personally managing your investments. This can be a great choice for an investor who is confident in their knowledge of the market and can make decisions they won’t regret. It’s generally not a choice that’s recommended to new investors.
Broker/financial advisor–allowing an outsider to manage your investments. You can choose several kinds of brokers: Full-service brokers will charge a higher fee, but they will also manage every aspect of your investments, including estate planning, retirement planning, financial advice, and more. Discount brokers will have lower fees but offer fewer services. A financial advisor will make investment decisions, monitor your portfolio, and make changes as deemed necessary according to your indicated risk tolerance.
Robo-advisor–an automated option that typically costs less than a traditional broker and works with your goals, risk tolerance level, and other personal details.
4. Choose your investment account
You’re ready to choose your investments! Here are some options to choose from:
Bonds–a loan to a company or government entity that agrees to pay you back in a specified amount of years. You’ll receive modest dividends until the bond matures. Bonds are low-risk but tend to offer lower long-term returns.
Exchange-traded funds (ETFs)–individual investments that are bundled together and traded throughout the day, like a stock. Share prices are relatively low, making ETFs a great choice for small budgets.
Mutual funds–professionally managed pools of investor funds that focus their investments in different markets. Mutual funds are inherently diversified and can be a good choice for beginner investors.
Stocks–a single share or a few shares in a specific company. If you are putting all your eggs in one basket, be sure to research your chosen company carefully.
5. Learn to diversify and reduce risk
Once you’ve started investing, you’ll need to monitor and adjust your portfolio regularly for optimal performance. Most importantly, you’ll want to ensure your portfolio is diversified or that your funds are divided across different investments and classes. Diversifying helps reduce your risk of loss by ensuring that one poorly performing investment won’t bring down your entire portfolio.
Getting your feet wet in the world of investing can be super-exciting but daunting. Follow the steps outlined here to get started.