While investing is an important part of most financial plans, it can also be a daunting subject when you’re new to it. Essentially, investing is a way to set aside money for the future and ideally, reap the benefits of a diversified and optimized portfolio. While many people automatically think of risky stocks when they think of investing, there are actually many types of investment vehicles that range from short-term to long-term and high risk to low risk. Given the breadth of the investment options, there is likely an investment vehicle that will work for you, whatever your risk profile.
Some things to consider as you get started with investing:
What are your investment goals?
To start, it’s important to consider why you’re investing. What are your goals for your investments and what is the time frame associated with them? Are you looking to play the market or use investments as the foundation for a long-term growth strategy? Figuring out your underlying goals will help to determine which direction you take with your investments as well as how much time and energy you’ll need to put into maintaining your investments.
What is your risk tolerance?
Similarly, identifying your risk profile upfront is key to building a successful investment strategy. As mentioned above, there are investment vehicles created that will appeal to nearly every investor, but identifying what type you are will save you the heartache of putting your money in the wrong place.
What investment assets do you already have — and are they optimized for your goals and risk tolerance?
While you may feel like you’re new to investing, there may already be investment vehicles in your portfolio. If you have a 401k or similar retirement plan, it’s likely being managed by a financial firm that is investing your assets to give you a higher return. When considering your investment strategy, take a moment to make sure that you know where you’re already investing and align those accounts with your personal needs.
Are you familiar with your investment options?
There are a number of ways to get started with investments, so it can be helpful to take a moment and familiarize yourself with different types of investments and their pros and cons. Here are a few common types of investments to consider:
Stocks allow you to own a small amount of a company. They offer a high return but also bring a high amount of risk.
Bonds are a type of loan, often offered by the government. They are relatively low risk.
ETFs, or exchange-traded funds, are groups of securities that are traded on an open market and provide investors with a low cost way to access different markets. You can often select an ETF based on a market sector or industry.
- Mutual Funds
Mutual funds are a collection of investments that trade as a single unit. Mutual funds are by their nature diversified, and you can buy funds at various risk and return levels.
- Real Estate
Real estate as an investment is highly variable depending on your location and market. It can also have a high cost of entry.
Real estate investment trusts, or REITs, allow investors a way to invest in commercial real estate without ownership. REITs are often used to diversify a portfolio but they do come with unique risks.
Commodities are raw materials. You can invest in commodities by purchasing physical products, but most investors use futures or options contracts to invest in commodities. These investments are often high risk, high return based on the volatile nature of commodities themselves.
The good news is that even if you are new to investing, you can get started with a relatively low investment and little risk. Deciding on what type of investor you want to be and what type of tools you will utilize is key to kicking off your investment strategy.