Whether you're a beginner of investing or not, investing in stocks can often be a complicated and intimidating process. However, investing is actually a great strategy for building long-term wealth and can be worthwhile if done well, even if you have little money to start with.
Let's say you're someone who's new to the world of stocks and doesn't know the first thing about how to make a good investment, much less what to invest your money in. Or maybe you're someone who might know a little bit about stocks, but you want to learn more about how to invest well for the greatest benefit.
No matter where you lie on the spectrum - whether you're a stock investment novice or seasoned guru or anything in between - everyone can benefit from investment advice. To help, we've put together some of the most important things you should think about before you invest your money.
1) First thing's first. While the stock market is a great place to start making investments, it's not the only place you can invest your money. There are many other options for where you can invest your money, including through mutual funds, index funds, and brokerage accounts.
Each of these options have different functions and capabilities, so choosing one depends mostly on how much money you have to invest, what your investment goals are, and the level of risk you're willing to take.
2) Speaking of risk, here's the second thing you need to know about investing your money - There is definitely risk involved. For the most part, you can manage how much risk you want to take with the money you invest, but balancing risk and reward before taking the plunge and making an investment is a good idea. If you're facing an investment with high risk, you want to be sure that you’ll also have a reasonable chance of a higher return.
Here are some of the risks of investing:
- A great rate of return usually means there's also a high risk rate as well. Placing too much money in one place presents the possibility of losing it all if something goes wrong.
- The liquidity of your assets can vary greatly, especially in the time frame in which they can be sold, where some can be sold quickly while others may apply penalties for selling too early.
- Some companies can have little to no stock history, making it difficult to determine any semblance of a pattern that might exist.
3) Which brings us to the third point: Take care when choosing to invest in companies with little history or limited information. These types of companies can be larger investment risks than companies with proven track records. At the same time, remember that a track record does not necessarily indicate that a company's stock pattern will be predictable or similar to its past performance. Be sure to research your potential investment opportunities well to minimize your risk. If we can guarantee one thing about stocks, it’s that there are no guarantees.
4) Divvy up your money. Dividing up your money, or asset allocation, across different investment streams is a good way to minimize your risk. By allocating your money into different investments, you can reduce the chances of getting hit hard if one of your investments were to take a sharp downturn.
Some options of where you could allocate your assets include:
- Mutual funds - A mutual fund is essentially a collection of investments that typically function with little parameters and pools money from investors to buy stocks, bonds, or other kinds of securities.
- Index funds - An index fund is a type of mutual fund that matches a stock market index, like the S&P 500. Index funds also allow you to take on a more passive investment strategy than that of performing active individual research, and often have lower costs for management and maintenance.
- Money market funds - Money market funds are another type of mutual fund that present low risk and invest in short-term debt securities. They are typically safer and more accessible than other investments because of large minimum purchase requirements that money market securities have.
- Savings accounts - If you're wanting to take a more traditional route with no risk, you can invest your money in a savings account, which is a bank account that bears interest. Savings accounts can help your money earn monthly interest while keeping it safe for later usage.
5) Decide how you want to invest. If you're working with a tight budget or you just want to make the most of your money, you'll want to choose the best and smartest methods for your preferences. There are plenty of ways you can invest, including through:
- Individual Stocks - If you have the time and dedication to put towards researching and monitoring the stocks you're interested in, managing individual stocks may be a good option for you. This method does require consistent evaluation in order to maximize your efforts.
- Brokerage accounts - Brokerage accounts are commonly used to trade assets like stocks, bonds, and mutual funds while giving its users access to the stock market. These types of accounts do require its users to create and fund an account and prior to making investments. Charles Schwab is an example of a household brokerage account.
- Robo-advisors: Robo-advisors are algorithm-driven digital platforms that can manage your investments based on certain characteristics such as your age and investment goals. The automated process is capable of not only choosing sound investments based on the criteria you present, but can also implement changes to optimize your tax efficiency as well.
6) Finally, monitor your progress. A great place to start is to ensure your trades went through at your instructed prices and commissions. You'll want to keep a robust paper trail of all of your transactions in case something goes wrong or goes missing.
Overall, it's best practice to keep an eye on your investments and make adjustments where necessary. If you find that you need external advice or help, you can always consult with a financial advisor and determine your best options to optimize your long term financial goals.
At Sorge CPA, our professionals are here to help you with all your investment needs, whether you have an extensive or brand-new investment portfolio. Our expertise will provide you with the counsel you need to make the most of your investments and target your money well. Start a conversation with us today to get started on building your investment goals.