Many people focus on saving cash while neglecting to invest their money. Without investing this money, they miss out on the power of compound interest and the ability to make their money work for them.
Beginners may want to invest but don’t know where to start. Lee Fondiller, a seasoned entrepreneur from Eldersburg, MD, discusses the best investment opportunities for beginners and how they can help them achieve prosperity and long-term financial health.
Determine Your Tolerance for Risk
Before making any investments, it is a good idea to think about your risk tolerance. Beginners are generally advised to start with less-risky investments, but you may want to be more daring if you have a little more experience in the market.
Diversify
No matter what your tolerance for risk may be, it is necessary to diversify your investments. This means avoiding putting all of your money into one type of investment and spreading your leverage around. For example, you may want to put some into your employer-matched 401(k) and some into a high-yield savings account.
Here are some of the best ways for beginners to get involved in the market:
High-Yield Savings Accounts
A high-yield savings account, generally available through online banks, provides you with a better interest rate than you will normally get from a local bank account. These accounts are easy to access, making them the perfect place to stash money for an emergency fund or a near-term purchase.
Certificates of Deposit (CDs)
Certificates of Deposit are FDIC insured up to $250,000, so they make great investments for beginners. With a stress-free form of investment like this one, you will not need to worry about what is happening to your money if the economy goes into a downturn.
401(k)s and Workplace Retirement Plans
If your employer offers matching funds for a 401(k) and you don’t have one, you turn down free money. 401(k)s tend to perform at about the same rate as the stock market as a whole, so over time, they produce returns between 5 and 8 percent. This beats high-rate savings accounts and CDs by a significant amount. Just be aware that 401(k)s are not risk-free, and if you are close to retirement, you may wish to put your money in a more stable investment vehicle.
ETFs (Exchange-Traded Funds)
An ETF is a collection of securities traded throughout the day, similar to a stock. They do not have minimum investment requirements, unlike mutual funds, and can be bought for the price of one share, similar to a mutual fund.
Mutual Funds
Mutual funds are a great way for novice stock investors to get started. While they have a minimum investment of a few thousand dollars, they have very low fees and sometimes no fees.
The most popular mutual funds track indexes like the S&P 500 or the Dow Jones Industrial Average. There are also industry-specific mutual funds in energy stocks, construction, and technology, to name a few.
Real Estate
Real estate can be a highly profitable form of investment. However, Lee Fondiller warns that it carries more risk than most other investments in this article. Over time, real estate tends to appreciate at about 4 to 8 percent per year. In some cases, this can beat the stock market.
If you are in the market for a longer period of time and can afford a larger investment, a home or office property may be the way to go. However, if you don’t have enough capital to invest in the entire property, you can look into REITs or Real Estate Investment Trusts. Like mutual funds, these trusts enable a buyer to purchase a fractional share of investment and trade it with the same liquidity as a stock.
Individual Stocks
Individual stocks are also riskier than trading mutual funds or similar investments. Decide whether you are investing in the long- or short-term. Short-term investing in individual stocks is not recommended for beginners. Don’t let yourself get swept into gaming the market with your stocks. Always look at the rate of return over time and the general growth of the economy. Price gains and drops in an individual stock can be capricious, and following the bandwagon can lead to lost opportunities.
The Bottom Line
When you begin your investment journey, take a hard look at your tolerance for risk and your financial goals. Before you commit money to an investment, make sure that you are fully educated on its risks and rewards. It is good to move gradually from low-risk investments like CDs and progress up to investments like individual stocks.
Lee Fondiller reminds all new investors to consider long-term investments since the market’s overall growth is likely to be positive over a longer period of time. Constantly trying to game the market can lead to lost money and a smaller portfolio.
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