Investing money has proven to be an effective means of growing wealth over time. But if you consider yourself pretty clueless about investing, then you may feel too intimidated to get started.
Recent data from Webster Bank found that 36% of Americans "just don't know where to start" in the context of investing. If you feel similarly, here are some quick tips to get you on the right path.
1. Choose the right account
Maybe your goal is to invest for the next 10 years and see how it goes. If you're in your 20s or 30s, you may, in that case, decide to stick to a regular, taxable brokerage account. That way, your money won't be restricted in any way.
On the other hand, your goal may be to start investing for retirement. If that's the case, then sticking to an IRA or 401(k) plan through your employer (if one is available to you) makes a lot of sense.
With a traditional IRA or 401(k), you get a tax break on your contributions up to an annual IRS limit, which can change from one year to the next. This year, IRAs max out at $7,000 for savers under 50, while 401(k)s max out at $23,000 for savers in that same age group. For those 50 and over, the IRA limit is $8,000, and it's $30,500 for 401(k)s.
So, let's say you know you want to invest specifically for retirement. If you put $5,000 into a brokerage account, you won't reap any tax benefits. But if you put that same $5,000 into an IRA, you won't pay taxes on $5,000 of your income. If you fall into the 22% tax bracket, that translates into $1,110 of tax savings this year.
Now that said, with an IRA or 401(k), you risk a 10% early withdrawal penalty if you take funds out of your account before age 59 1/2. So if you think you're likely to need your money at a younger age, a regular brokerage account is probably your better bet despite the lack of tax breaks.
2. Consider your investment horizon
It's important to not just consider what you're investing for, but also, how much time you have between now and when you want to meet that goal. That way, you know how much risk to take on.
If your investment horizon is five years or less, you may want to go a bit lighter on stocks due to the potential for market volatility. If you're investing for a milestone like retirement that happens to be 30 years away, putting the bulk of your assets into stocks could be a smart move, since you have time to ride out market fluctuations that work against you. You can also benefit from the strong returns stocks have historically been known to generate.
3. Diversify
Whether you're investing over a shorter period or a longer one, it's important to have a diverse portfolio. Owning a wide range of stocks could help you minimize losses during periods of market volatility. And it could also lead to stronger returns.
You can go about diversifying in a couple of ways. First, you could research a whole bunch of different stocks and build a portfolio that consists of shares across a range of industries. Or, load your portfolio with broad market ETFs, or exchange-traded funds. The nice thing there is you basically get instant diversification without having to research a whole bunch of different stocks, which can be time-consuming.
If you're new to investing and aren't sure how to begin, you're not alone. These tips should help you get the ball rolling. But there are plenty of more in-depth investing guides available online that won't cost you a dime. Read through them to familiarize yourself with different concepts and terms so you can feel more confident building your portfolio.
