Investing can seem daunting to some, but it’s an essential part of building wealth for retirement and many of life’s financial goals.
There’s always going to be some risk involved with investing, but determining your risk tolerance and your time horizon can help you better plan for the future. To decide the best ways to invest your money, find an investment style and establish a set of goals that you want to work towards.
Determine what a successful investment portfolio looks like for you and follow this guide to learn about the best ways to get started investing in 2019.
What is investing and why invest?
When you invest, you allocate your capital, or money, into stocks, bonds, funds, real estate or other types of investments with the expectation that it will grow over time.
That growth is vital to ensuring your money maintains spending power by outpacing forces like inflation. If all your capital simply sits in a checking or savings account for 40 years, it’ll have much less value when you take it out than it did going in.
The tradeoff of that growth is risk. Generally, the more growth potential your investments have, the riskier they are. Every investor must balance risk vs. reward.
But if you choose your investment strategy wisely, historical data shows your likelihood of seeing gainful returns is high.
How investing can grow your wealth
When is a good time to start investing? The short answer is now.
The long answer: If you’re not already investing, you’re potentially missing out on thousands of dollars in compound interest that could be earned over time.
Using Bankrate’s 401(k) calculator, consider an investor who contributes 3 percent of their $50,000 annual salary into a 401(k) beginning at age 25. Assuming an average rate of return of 7 percent, a full employer match up to 3 percent and average annual pay raise of 3.1 percent, that person could retire at age 65 with nearly $1 million.
The longer you wait, the less time your interest has to compound, meaning you’ll earn less over time. If the same person waited just five more years and began investing at age 30, their total retirement savings would be reduced to just over $600,000 by age 65.
There is always a risk of loss, but the potential gains make investing a smart choice for even the most cautious consumers.
If you’re ready to begin investing this year, start by thinking about your investment goals and risk tolerance.
Consider your time horizon
The most common reason people invest is to save for retirement, but everyone has a different goal. You may even want to invest for multiple goals at once by taking on multiple investment accounts. You can invest in a retirement account while also working to save for a down payment on a home or a college fund for your kids.
Determining your investment goals can help you decide how to allocate your assets based on your predicted time horizon.
If you’re interested in investing for a long-term goal like retirement, you can likely afford to take on more risk with a stock-heavy portfolio.
The stock market will inevitably go through downturns over time, but historical data shows that compound annual returns have averaged about 10 percent since 1928. While the market fluctuates each year, 40 years of investing for your retirement can bring significant positive returns.
For those who start saving for retirement later in life or have goals about a decade away, a diverse portfolio can help ensure returns while mitigating risk. Investing in a mix of assets through a low-cost mutual fund or exchange-traded fund (ETF) can help you see the best returns at a risk level you might be more comfortable with.
As you draw closer to the end of your intermediate time horizon, you can switch the riskier stocks in your portfolio to safer investments. A target date fund will do this automatically. This type of investment, often held in a mutual fund, automatically adjusts your asset mix to lessen risk as you approach the set target date.
If you have a short-term investing goal, like saving for a down payment on a home or a big vacation in a couple years, you should be a bit more cautious with your investing strategy. Safer investment strategies for short-term investors often include money market accounts and CDs.
While they likely won’t earn as much as mutual funds or ETFs, they’re a great way to grow your money while ensuring it stays safe.
Determine your risk tolerance
Figuring out your investment horizon will also help inform your risk tolerance.
Investors focusing on short-term goals will likely have a lower risk tolerance than someone investing for their retirement 40 years in the future.
To mitigate your risk, and as general best practice, don’t put all your eggs in one basket. If your portfolio is heavy in stocks, diversify across different companies and industries. That way, one sector’s downturn won’t leave you at too much of a loss. A mutual fund is an easy way to diversify.
You can also mitigate risk with different types of investments. Holding a healthy mix of stocks and bonds and readjusting the ratio of each, or rebalancing, as you approach retirement or your goal date can ensure your portfolio remains healthy.
What to invest in
For most people, the easiest way to begin investing is through a retirement account. Depending on how you’re employed and how much you want to invest, there are several retirement options. You should also consider the fees associated with retirement accounts and the types of funds or assets you want each to hold.
These are a few of the most common retirement offerings:
- 401(k): A 401(k) is an employer-sponsored retirement plan. You may allocate a percentage of each paycheck into your 401(k) that will grow tax-deferred until you withdraw from it in retirement. Many employers also offer contribution matches up to a certain percentage.In 2019, the maximum amount you can contribute to your 401(k) is $19,000. If you’re 50 or older, you may contribute an additional $6,000 through catch-up contributions.
- Traditional IRA: Like a 401(k), your contributions to a traditional IRA go into the account pre-tax and are taxed with earnings upon distribution. IRAs are not employer-sponsored. Even if you already participate in an employer’s retirement plan, you can still contribute up to $6,000 to a traditional IRA in 2019. If you’re 50 or older, you can contribute up to $7,000.
- Roth IRA: Unlike a 401(k) or traditional IRA, contributions you make to a Roth IRA are taxed upfront, meaning they grow tax-free and qualified distributions are not taxed upon withdrawal. Like a traditional IRA, you may hold a Roth IRA in addition to your employer-sponsored retirement plan and contribute up to $6,000 in 2019 or up to $7,000 if eligible for catch-up contributions. Contribution limits are combined limits for both types of IRAs, meaning you cannot contribute the maximum amount to both.
Bankrate’s guide can help you determine if a traditional or Roth IRA is best for you.
After maxing out your chosen retirement accounts, or if you’re looking for more short-term options, a brokerage account is another great way to invest your money.
While you may choose to actively manage your funds, a passive index fund can provide returns while offering hands-off management and lower fees. Look into different accounts with a management style and performance that works best for you.
Here are a few to consider:
- Mutual fund: A mutual fund is a managed portfolio that allocates investors’ capital into a diversified mix of investments, consisting of stocks, bonds and more. They may differ based on risk, performance, fees and investment strategies. Mutual funds are often popular vehicles for retirement accounts.
- ETF: Like mutual funds, ETFs allow you to invest in a range of stocks and bonds across companies and sectors. ETFs are easily traded like individual stocks but give investors the diversification of mutual funds. ETFs are generally considered more tax-efficient than mutual funds and often come with lower minimums and fewer costs, making them great options for beginner investors.
- Money market fund: Money market funds are types of mutual funds that are made up of low-risk investments like CDs and short-term bonds. Money market funds are considered safe investments and their liquidity makes them a great option for short-term investments of five years or less.
Choosing a broker
In today’s world, new investors can get open an account simply by downloading an app or logging onto a website. Familiarizing yourself with the type of investments that you’re looking for can help you choose the right broker or advisor.
- Robo-advisors: You’ve probably heard of popular robo-advisors like Acorns, Wealthfront and Betterment, which are great resources for beginners and advanced investors alike. Robo-advisors are convenient, offer low fees and usually have lower minimums than traditional brokers. While each robo-advisor varies, many allow you to simply choose your time horizon and risk tolerance, then create a portfolio for you that you can re-balance as your target date approaches.
- Online brokers: Online brokers, like E-Trade, Ally Invest and TD Ameritrade are easily accessible options for investors that want fewer costs than traditional advisors but are more hands-on than robo-advisors often allow. Depending on what you’re looking for in an online broker — whether you value convenience, educational tools, agreeable minimums or low costs — Bankrate’s 2019 Brokerage Reviews can help you find the best online broker for your needs.
- Financial advisor: If you have a more complicated portfolio or you simply want face-to-face interaction, a traditional financial advisor may be the best option. While you’ll likely pay higher fees for an advisor, they can provide in-depth management advice and guidance and even help you establish a more comprehensive overall financial plan.
Any new investor should look to begin by preparing for retirement in a tax-advantaged account, whether through an employer-sponsored plan or an individual retirement fund. Individual brokerage accounts can also be a great way for new investors to grow their money over time with the help of an advisor or online broker.
Stock and bond funds aren’t the only ways to invest — you may choose to invest in individual stocks, real estate, peer-to-peer lending, crowdfunding or even gold.
Whichever mix of investments you choose, your chances of success can be improved by diversifying your portfolio and aligning the investments you select with both your own risk tolerance and the time horizon of your goals.
- Best online stock brokers for beginners 2019
- Stock market basics for beginners
- How to invest like a pro with index funds
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.