If you’re a first-time investor, we’re here to help you get started. Make your money work for you. Before you put your hard-earned cash into an investment vehicle, you’ll need a basic understanding of how to invest your money the right way. There’s no one-size-fits-all answer here. To figure it out, consider your investing style, budget, and risk tolerance.
Active investing means taking time to research investments yourself and constructing and maintaining your portfolio on your own. To successfully be an active investor, you’ll need three things: Time: Active investing requires lots of homework. You’ll need to research investment opportunities, conduct some basic analysis, and keep up with your investments after you buy them. Desire: Successful active investors are masters of self-education and have a passion for financial markets and the tools that can help them deliver higher returns than average. Resources: You’ll need access to capital markets and the internet; most people have this access but it may be time consuming to get started if you don’t have any experience with investing or aren’t familiar with how different assets work or how stock exchanges operate
Passive investing is a strategy where you put your money to work in investment vehicles where someone else is doing the hard work. The underlying principle to passive investing is simple: You can’t consistently outperform the market unless you have some type of edge over other investors. Passive indexing focuses on investing in a group of stocks or bonds that match an index, or benchmark, such as the S&P 500® Index. The movement of the stock market is driven by thousands of individual investors buying and selling stocks, which influences their prices. Passive investors believe they can’t beat the market on their own, so they simply invest in it instead—passively!
The amount of money you’re starting with isn’t the most important thing — it’s making sure you’re financially ready to invest and that you’re investing money frequently over time. One important step to take before investing is to establish an emergency fund. This is cash set aside in a form that makes it available for quick withdrawal. All investments, whether stocks, mutual funds, or real estate, have some level of risk, and you never want to find yourself forced to divest (or sell) these investments in a time of need. The emergency fund is your safety net to avoid this.
The purpose of an emergency fund is to have enough money set aside that you never need to sell your investments in order to pay for unexpected expenses. It’s also a smart idea to get rid of any high-interest debt (like credit cards) before starting to invest. Think of it this way — the stock market has historically produced returns of 9%-10% annually over long periods. If you invest your money at these types of returns and simultaneously pay 16%, 18%, or higher APRs to your creditors, you’re putting yourself in a position to lose money over the long run.
Your risk tolerance is how much financial risk are you willing to take on. It’s important to find a balance between maximizing the returns on your money and finding a risk level you are comfortable with. For example, bonds offer predictable returns with very low risk, but they also yield relatively low returns of around 2-3%. By contrast, stock returns can vary widely depending on the company and time frame, but the whole stock market on average returns almost 10% per year.
For beginners, one good way to start investing is by creating a portfolio with the help of a robo-advisor. Robo-advisors are services offered by a brokerage that will construct and maintain an investment plan that meets your risk tolerance and financial goals. In a nutshell, it’s like hiring an investment advisor to build your portfolio but at a fraction of the cost.
At the end of the day, you need to consider your investment goals and choose an asset allocation that suits them best. You also need to determine how much risk you’re willing to take. If you want higher returns but are worried about losing it all, a conservative portfolio is probably best for you. If you’re younger and have many years to go before retirement, your portfolio could afford more risk than someone who’s nearing retirement age.
Passive investing is a way to invest your money that can be a smart choice. If you don’t want to spend hours of your time working on your portfolio, it can be the right choice. And if you really want to take a hands-off approach, a robo-advisor could be right for you