Four Tips For New Investors
Investing can be easier and less expensive than you think. We’ll show you the ropes so that you can start making the most of your money today.
Children often start saving in piggy banks. They gleefully stash away any spare cash, which might come from an allowance, odd jobs, the tooth fairy, and those holiday cards from grandparents with a check inside. Eventually, with persistence, those piggy banks are filled to the brim, and may have enough coins to pay for a coveted toy. Some piggy banks don’t have a hole in the bottom, which encourages good savings behavior by forcing children to keep their hands off the money until they really want to use it.
You may be surprised to learn that many of the principles and behaviors learned from saving in a piggy bank—such as starting young, making small consistent deposits, being patient, and setting goals—are all applicable to good investing behavior in adulthood.
Four Tips For Any New Investor
We know that some may find the world of investing to be intimidating and full of unfamiliar jargon, so we’ve compiled four tips that will help any beginner start investing.
- Time is on your side—starting early can help in the long run.
- Make your investments personal with a goal-based investing strategy.
- Learn the basics—at the end of the day, it’s your money.
- Be patient—it’s a marathon, not a sprint.
Our hope is that these four tips help you feel empowered as a new investor, rather than confused. Investing is easier and less expensive than you might think, and we want to help guide new investors while they learn the ropes.
Always remember that investing involves risk. There is always the potential of losing money when you invest in securities.
1. Time is on your side—starting early can help in the long run.
Start as soon as possible. This is the most important investment tip that we could give you. Before you get started, though, be aware of a few prerequisites to investing. These include paying off high interest debt such as student loans and credit cards, and building a safety net fund. Once you have satisfied those requirements, you should focus on investing your savings as soon as soon as you can.
The younger you start the better. Time is one of the most powerful tools in growing your investments. Due to a process known as compound interest, the sooner you start investing, the better off you will be. If you invest $1,000 today get a 6% return each year, you can expect your investment to be worth $1,060 at the end of the year, and worth over $2,396 in 15 years. You could have more than doubled your portfolio without having to save a penny more.
Imagine two investors make the same $1,000 investment, but one invests at age 20 and the other waits and invests at age 30. By the time they are both 40 years old, the investor who started early will have earned $1,470 more than the investor who waited. They both chose the same investment, and they both made the same dollar deposit. The difference in earnings is created by the number of years in the market.
It’s common to feel like you are barely getting by during your first few years out of school, but we strongly encourage people to start investing in their 20s to get the most out of their investments—even if it’s a very small monthly amount. An easy place to start is in your 401(k) or other retirement plan through your employer if it’s available to you, since your contributions will also help reduce your taxable income, which is a win-win.
Think back to the piggy bank example. The small coins added up over time, and every little bit helped fill up the bank.
2. Make your investments personal with a goal-based investing strategy.
We recommend thinking through what you are actually saving and investing for. Defining the end goal will help you determine how much to save, as well as how risky the investment mix in your portfolio should be. Separating your investments into different buckets based on the desired outcome is called goal-based investing. Defining specific goals can help motivate you to maintain your investments over time, even after the initial excitement wears off.
Examples of goals include retirement, purchasing a home, and saving for your child’s education. Once you have determined what you are aiming to do with the money you’ve saved and invested, you can determine how you want to prioritize your various goals if your cash flow is too tight to save for everything at once.
Learn more about how to get your goals set up properly. At Betterment, we can help you set up all of your goals in one place. Using online tools like ours can help make getting started and prioritizing goals quick and easy.
3. Learn the basics—at the end of the day, it’s your money.
There is a whole universe of investment options out there. The good news is that you do not need to choose your own portfolio, or become an expert yourself. However, you should have a basic understanding of the different investment options available.
- Stocks: Securities that represent fractional ownership in a particular company. Stocks are also known as equity investments.
- Bonds: Investments where the investors act as lenders and the company or government is the borrower. Bonds are also known as fixed income instruments, and are typically more stable than stocks.
- Exchange-Traded Funds (ETFs): These are baskets of stocks and/or bonds that are packaged together and track an underlying index (section of the economy), such as the S&P 500. Investors can buy shares of an ETF and have exposure to thousands of stocks or bonds within each ETF.
ETFs are a great tool for investors, particularly when just starting out, because they are well-diversified, easily accessible, and can be inexpensive. If you are tight on cash and want to start investing, you may not be able to buy shares of enough different individual stocks to create a well-diversified portfolio.
Let’s say you want to invest in some large U.S. companies, and you have $1,500 to invest. One share of Google stock costs over $1,200 currently. Your portfolio’s success or failure would hinge on how well that one share of that one company does.
Alternatively, you could buy an ETF that tracks an index comprised of hundreds of large U.S. companies (including Google), such as SPY, which currently costs under $300 per share. Buying SPY instead of one single share of Google stock gives you exposure to over 500 different companies, rather than just one.
Following the old adage, ‘don’t put all your eggs in one basket’, investing in ETFs is like spreading your eggs across hundreds or thousands of different baskets. ETFs are a great option for building a well-diversified portfolio at a reasonable cost.
In addition to a well-diversified portfolio, you should keep in mind the fees that you are paying for your investments. Hiring a personal financial advisor, or using an online investment manager like Betterment, can be a great way to help ensure your portfolio is diversified, and that your risk level is appropriate. Watch out for the fees you are paying, because outsourcing investment management to an expert can be expensive if you are not careful.
Try to look for an advisor who changes less than 1% per year, in order to keep more of your returns in your own pocket. Thankfully, there are several low-cost, high quality advisors out there. For example, we only charge 0.25% per year to manage your investments.
4. Be patient—it’s a marathon, not a sprint.
When you begin investing, it can feel like a slow process. But, be patient, and you will most likely reap the rewards. Slow and steady wins the race.
It can be frustrating to start depositing a small amount into your investment account each week, and still see little or no progress when you check your performance a month later. Many new investors think this is a sign of a bad investment strategy and end up selling out of their investments. This is one of the worst things you can do. A long-term investment strategy is constructed to go up in value over several years. Because markets are volatile by nature, in order to see meaningful growth, you are going to have to face volatility, including prolonged periods of lackluster returns or even negative returns.
By keeping your investments intact, you increase your chances of turning losses into gains. In order to instill good investing behavior off the bat, we recommend checking your performance no more than quarterly. We know that this advice can be hard to follow, so consider reading more about how checking on your investments too frequently can hurt your long term progress here.
Accomplish Your Financial Goals
Making the most of your cash through investing can help you accomplish your financial goals. Hopefully these tips will help you feel empowered to get started. Investing your savings is such a powerful way to make your money work for you. It can seem complicated at first, but just like a child learning to save, following these four tips can go a long way to help secure your financial future.
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