Starting to Invest
When developing your investment strategy, it is important to select an asset allocation plan. As an example, it might be smart to split your savings into portions and to invest a portion every month, as opposed to investing it all at once. By steadily adding investments over time rather than investing everything at one specific point you can avoid timing risk (i.e. buying when the market is at the highs for example or during a particularly volatile environment).
While this strategy will change as your needs and risks change, you should have a broad sense of how much money you want to put into stocks, bonds or alternative investments like gold, real estate, etc. It may sound basic but the first step is to think about what you would like to achieve with your investing. For example, if you would like to save for your retirement and not be as involved in the investment process, you could explore options like mutual funds that adjust investments overtime based on your age, risk profile and retirement expectations.
If you are retiring in 50 years, you might want to include more equity focused investments in your investment mix, since you are able to take more risks as you will not be needing capital back immediately. On the other hand, if you are retiring in 10 years, it might be wiser to invest in safer assets like bonds since you will be looking to liquidate your investments in a relatively shorter time frame. A general rule to keep in mind: if you are looking to invest money for a short period of time (typically less than 5 years), you are better served by remaining in less-risky instruments like a savings account, bonds or treasuries. If you have more time before you would need the money you are investing, you may be able to take on more risk by investing in stocks.
In addition to your specific investment goals and requirements, be sure to also take into account the transaction costs and tax effects of your personal investments.
How do I get started?
You can buy assets through various investment vehicles, which we can broadly classify as an investment advisor, a broker (online or a full-service one), or a mutual fund. These options all differ in how much of a role you play in choosing your investments.
You can also invest through an Individual Retirement Account (IRA), or through your 401k with your company.
Traditional IRAs are open to anyone with an income (even if it is a summer job or part-time position). The contribution is tax-deductible and grows tax-deferred until retirement.
In Roth IRAs you put money in that you already paid taxes on, so the investment grows tax-free and is accessible to you without any fees at all times.
401Ks are employer-sponsored retirement accounts where you contribute from your paycheck. You can discuss with your employer the rate of the rate as well as various investment options that are available.
Monitor your Performance
It is important to monitor your investments from time-to-time and to make sure that they still align with your overall goals. As mentioned before, the risks you might be willing to take now will continue to change in 5, 10, and 20 years. There are also tax differences between short-term and long-term holdings that should be considered. Whenever you decide to change your allocation of investments, be aware of the transaction costs as well as tax considerations to realizing any gains or losses on investments. These can impact your returns as well as the overall efficiency of your investment strategy so decide wisely.