Are you a beginner interested in investing? This article would enlighten you to the ultimate guide for beginner investing. Come on! Let’s get started.
You are here because you want to get into investing but don’t know how to start. Investing is not something you get into without prior guidelines from an expert with experiences in investing.
Some time ago, I asked a friend why he isn’t investing; ‘I don’t think I want to get into investing now’ was his reply. Then, again I still asked why; he said, ‘I don’t know how to go about it, I don’t want to face any risk’. I just smiled and told him it is because he hasn’t been guided on how to invest and where to invest.
Well, if you are here and you are like my friend with the same thoughts in mind, worry no more, because I will be teaching you or rather giving you guidelines to investing for beginners and others alike.
Everyone wants to get the most of their money whether it’s splurging on a holiday or a new car, planning for retirement, or just for the sole purpose of upgrading our lifestyles. Figuring out and where to start with investing can be quite challenging especially as a beginner. It might get overwhelming, just looking at the numbers over the long term and with so many options to consider. Truth be told, it is important to consider investing as early as possible, because just keeping your capital in a bank idly wouldn’t help you save in the long run. This is because knowing how you can use your money today to earn more is a great way in ensuring a financially secure future.
Before we get all coupled up on the ultimate guide for beginner investing, let us know what investing is and why you should invest.
What Is Investing?
To simply put, investing is putting your money into an asset with the objective of the asset appreciating or generating income.
Why Should You Invest?
More often than not, you hear questions like; why invest at all? I would say it is to build your wealth. You earn a higher return than the rate of inflation when you invest. This means that the money you invest increases at a higher rate as the cost of living.
Getting right into the main idea for this article which is the guide for beginner investing; this article should help you;
- Know how to choose a target asset allocation
- Know how to open an investment account
- Lastly, it should help you know how to and when to monitor your investment choices
Let’s swim right into it;
Our investment game plan would start with creating an investment plan;
Create An Investment Plan
As a beginner or a new investor, the first and very important thing you need to do is to determine your desired asset allocation of bonds and stocks. This means that knowing where your money goes is a necessary decision but it is critical digging into details on how each asset class is divided.
There are so many ways you can invest in stocks, but I will be showing you a few of the biggest decisions by comparing some different types of funds you will see. Below are some of them:
International vs. the U.S.
Some funds invest only in international stocks and funds that invest only in U.S. based stocks. There are so many options within each category for you to pick a fund that would match what you are looking for but, one thing to consider is that a lot of U.S. based companies invest and do business in international markets. So, you can invest in an international fund that focuses on smaller growing companies or in a large-cap U.S. stock fund or emerging markets.
This is what they entail:
This tells you how small or large the companies that fund invests in. Look at market capitalization for better understanding. For example, if Company A has a share price of $10, and they have $100,000,000 share outstanding, their market capitalization would be $1,000,000,000 i.e (10 x 100,000,000).
A company and fund are categorized by their corresponding market capitalization:
Small-cap: $250 million – $2 billion
Mid cap: $2 billion – $10 billion
Large-cap: $10 billion – $100 billion…all in market capitalization. This is to say, if you want to invest in companies like Company A, which has a market capitalization of $1 billion, you would focus on a small-cap fund.
Just like the cap funds, emerging markets have a place in an investment portfolio. While others operate very well on companies in a developed country, emerging market fund focus and operates on companies that are in emerging or developing countries. They tend to move away from agricultural industries and focus more on corporate businesses and improving the quality of life of their residents. Though, they are less mature and volatile, they tend to offer a quick rate of growth and higher returns compared to more developed countries’ stocks. However, it comes with higher risks which can be balanced with rewards by adding some emerging market funds into your portfolio.
Compared with stock allocation, a bond has been known to give lower returns, but offers lower risk and is also a key part of any investment portfolio. There are many types of bond funds, but we recommend investing in just a single U.S. government bond fund. Though, if you are still fairly far away from retirement, keep it at about 10% of your total portfolio allocation.
Aside from the above; stocks and bonds you might run into other types of asset classes. The most common are:
REITs–Real Estate Investment Trusts
If you want to get yourself into the real estate market without getting out all the money for an actual property then REIT funds are a better fit. This is because REIT funds invest in companies that invest in income-producing real estate. You might want to consider putting some money into REITs as it adds exposure to your portfolio and a further level of balance.
Now that you have known how to create an investment and develop your asset allocation plan next is;
Decide On Account Types
This is deciding where you will invest your money. If you are employed and your company probably offers a 401(k), you need to take into account the year’s contribution limits to your 401(k) and max out a 401(k). This is necessary to know the amount you are setting aside and the fact that you are reducing your taxable income.
We recommend opening an IRA which can either be Roth or Traditional depending on your personal preference after maxing out a 401(k). You can contribute up to $5,500 in an IRA per year if you are below 50 years old and $6,500 if you are over 50 years. After, adding money to your 401(k) and IRA you can now decide on taxable investments.
Now that you have determined your asset to and opened an account somewhere, it is time to pick or select those investments. While keeping a broad mix of investments is very nice, I recommend that you do what best suits your investment plan because your options will be limited with a 401(k). But, you want to look out for the following :
- The expense ratio- e if there is a cheaper and similar option
- The type of fund- large-cap, small-cap, etc…
- Historical performance- Although there is no proof that this is an indicator of future performances, it would be better to choose the fund with a better historical performance.
Monitor Your Investments
The last step right after selecting investments is to monitor these investments; never set it and forget it. Check-in on your investments at least once a month and rebalance your overall portfolio at least once a year. It is easy to choose an index or mutual fund and forget about it but this is a big mistake for new investors, so I would advise you to keep an eye on your money while it works for you.
Every good investor of today once had their beginning stages of trials and errors but, with the help of a guide like this, you would not have to go through this. Sometimes, I wish I had access to this kind of information before getting into investing. But, whatever be the case, I hope this helps you achieve your long-term investment goals.
Please, kindly leave a comment on the commentary section, concerning your thoughts about the ultimate guide for beginner investing.