Are you a new investor, eager to to put some of your hard-earned money to work to grow your wealth over time? Well, there’s no time like the present.
As legendary investor Warren Buffett once said, “Someone’s sitting in the shade today because someone planted a tree a long time ago.” In other words, the sooner you start investing, the better off you’ll be in the long run.
And while there are no hard-and-fast rules about how someone should invest their money, the good news is that it’s easier than ever to get started.
Here are eight great ways to start investing right now.
1. Stock market investments
Historically, investing in stocks is one of the fastest, most efficient and most effective ways to grow wealth over the long haul.
“If a new investor is able to handle risk and does not need the funds any time soon, their portfolio should likely be heavily weighted in stocks, (also known as equities),” said Emily Cozad, portfolio manager and research analyst at Buckingham Advisors.
The data bear that sentiment out. From the start of the Great Depression in 1930 through 2023, stocks averaged an annual return of 5.8%, according to officialdata.org. Issued by corporations to fund operations or expansion, stocks are securities that represent an individual’s ownership interest in a company.
“If you’re a newbie investor, it’s most likely you are in the wealth accumulation phase of life, rather than wealth preservation,” said James Beckett, a financial coach and investment analyst at MoneyStocker.com. “If this is true, you should be 100% in stocks.”
Although stocks are occasionally volatile, they offer greater financial rewards compared to other investments. “As a new investor, the volatility is less important as you likely have the time (even decades) to ride out any bumps in the market,” Beckett noted.
Diversify your portfolio
New investors shouldn’t only invest in one asset class, however. Once a new investor has created an up-and-running investment portfolio, it’s a good idea to ensure that it is insulated from investment risk.
Diversifying your portfolio can get that job done for you. New investors may consider investing in an index fund that provides diversification across many different companies.
“This spreads out the risk to hundreds of holdings and removes the risk of one company causing dramatic losses in an investment portfolio,” said Aaron Ritsema, senior portfolio manager at the private wealth management firm LaFleur & Godfrey in Grand Rapids, Michigan.
If you’re committed to owning individual companies, try a “core & explore” approach that uses an index fund as the core holding and a defined amount to “explore” with by buying individual stocks.
“A reasonable place to start is having 80% to 90% of the portfolio in a core index fund and using 10% to 20% to invest in individual stocks,” Ritsema noted. “Keep in mind it’s important to do your own research and know what you’re buying, whether it’s an index fund or an individual stock.”
2. Real estate investments
Investing in real estate is expensive, but the potential returns are enticing.
According to the National Association of Realtors, the median US home sale crested $400,000 for the first time in 2022. That represented a year-over-year increase of 14.2%.
“Investing in real estate can be effective for a beginning investor,” said Steve Davis, CEO of Total Wealth Academy, a real estate advisory firm in Houston. “The barriers to entry are very low, and the returns are much higher than speculating with stocks and such.”
Every dollar you have in real estate makes you money in four ways: cash flow, equity build-up, equity capture and appreciation.
“Speculating in the stock market only makes money one way, appreciation, and you lose that in a crash,” Davis said. “With real estate, you may lose value, but you don’t lose cash flow or equity build-up.”
One caveat with real estate investing is it takes a lot of educational know-how, which requires time and guidance. “Find a mentor or group of investors and take whatever classes they have before you ever put one dollar in a real estate deal,” Davis added.
3. Mutual funds and ETFs
When investing in stocks, the last thing a new investor should do is put all of their eggs in one basket. That’s where mutual funds and exchange-traded funds (ETFs) can help.
Mutual funds are investment companies that pool money from investors to purchase securities, such as stocks or bonds, and are overseen by professional fund managers. ETFs are also pooled investments, but they are priced and traded on stock exchanges and typically track index funds or other asset classes.
Such funds enable new investors to spread their money across hundreds of different securities so they don’t have to rely on the performance of a single stock to make money. Both types of funds are professionally managed by experienced fund managers who charge a regular fee for the service.
“New investors, along with having no experience, often have little knowledge about individual stocks and bonds and/or a smaller portfolio as they are starting out,” Cozad said. “To spread the risk out, mutual funds or ETFs might be the best option for a new investor.”
Choosing between mutual funds and ETFs isn’t always easy, but the former may be more beneficial to starting investors.
“If an investor makes small or regular contributions, it might be more beneficial to invest in mutual funds to invest the entire deposit down to the dollar. Mutual funds trade by the dollar rather than by the share,” Cozad said. “Additionally, if an investor is more interested in an actively managed fund, it may be more beneficial to purchase mutual funds.”
If an investor is looking for a low-cost option to invest in the entire market or different asset classes, an ETF might make more sense. “If the account is a typical taxable brokerage account, it might be more beneficial to invest in ETFs rather than mutual funds,” Cozad adds.
4. Bonds and fixed-income investments
Government and corporate bonds, also known as fixed-income investments, tend to be conservative investments that can help curb risk within an investment portfolio.
Reducing risk is important to all investors sooner or later, but that’s especially the case for new investors who could use the money preservation qualities that bonds bring to the table.
“As they typically pay a fixed payment amount over a fixed period of time, bonds are sensitive to interest rates, and rates are much higher these days,” said Bradley Thompson, a money manager at Stamford, Connecticut-based New Canaan Group. That can make many bonds more expensive to own, as demand for fixed-income products rises at a time of high interest rates.
To balance out the risk and keep purchase costs low, fledgling investors may buy into a bond fund to help reduce volatility levels and save on upfront purchase costs.
“Historically, bonds have averaged less than stocks but with less volatility,” said Ritsema. “Consider funds that offer a low-cost way of investing in stocks and bonds and can be used as core holdings in an investment portfolio.”
5. High-yield savings accounts
Even though newer investors tend to be younger and thus have a longer investment horizon, they should still have a reliable place to stash cash for short-term savings needs. That’s where high-yield saving accounts come in handy.
High-yield savings accounts give you all the safety benefits of a traditional bank account (all US bank and credit union deposit account funds are insured up to $250,000 by the US Federal Deposit Insurance Corp.)
High-yield savings accounts are easy to access, as most banks and credit unions offer them. And since interest rates are so high in 2024, high-yield savings accounts are offering historically high returns.
As of March 2024, many banks’ high-yield savings account rates stand at 4% or higher. Compare that to traditional bank savings accounts, which average a return rate of 0.46% in the same period.
6. Peer-to-peer lending
When banks or other financial creditors opt against lending cash to borrowers, peer-to-peer lenders can step into the breach. Through an online loan platform, peer-to-peer lenders lend money to borrowers who may otherwise not be able to land a loan.
Peer-to-peer loans give new investors a way to provide a loan to those borrowers with an agreed-upon interest rate paid to the lender. That gives the borrower the cash they need via a personal loan and gives peer-to-peer lenders a way to generate solid investment returns without having to actively manage the investment.
Peer-to-peer loans can provide new investors with decent income. The average annual percentage rate on a 24-month peer-to-peer loan was 12.4% in November 2023.
As a new investor, it’s advisable to work with an established online peer-to-peer lender that works to keep both borrowers and lenders satisfied with their peer-to-peer loan experience.
7. Start a business or invest in existing ones
The Small Business Administration estimates that 99.9% of active US businesses are small businesses. Additionally, approximately half of all US workers are employed by a small business, according to the SBA.
With an employment market that large, it may make sense for new investors with a great business idea and the commitment to follow through on that idea to invest in an existing business or start a new company.
Advancements in technology have made it much easier to open and run a small business and earn a robust profit doing so. But you’ll still need to research your market and your competitors, hire good people, develop and operate a good business plan and raise the upfront funds needed to launch your new company.
Opening or investing in a small business isn’t for the faint of heart, but being your own boss has its advantages — and its financial rewards. However, be warned that about one in five new businesses fail within the first year, and nearly half fail by their fifth year, according to data from the Bureau of Labor Statistics.
8. Investing in precious metals
Every starter portfolio should have a “hedge” asset that protects them and provides some much-needed portfolio versatility when market conditions decline.
That’s where investing in precious metals, especially gold, can help balance out a new investment portfolio.
Gold offers multiple benefits to investors when markets are roiling and world economies are unstable. For example, gold can act as a hedge against inflation or a declining dollar and is often a haven in times of geopolitical and financial market instability.
Since gold is continually in demand and has a limited global supply, it can provide both safety and growth to a starter portfolio. When economic conditions turn downward, precious metals can provide a “safe haven” for investors. For example, between October 2007 and June 2009, the price of gold rose nearly 24% while stocks lost half their value during the Great Recession.
Gold can also act as a store of value and thus a hedge against runaway inflation. It can also provide portfolio diversification and protect against catastrophic economic events.
The yellow metal also possesses attractive features that make it a unique investment. Most importantly, it’s rare because it’s difficult and expensive to mine. Output rarely exceeds 2% annually, and all of the gold ever dug up plus what we know is still in the ground would fit into a cube that’s about 23 meters wide on every side and weighing about 244,000 metric tons — about the size of an Olympic swimming pool and seven stories high.
Additionally, it’s virtually indestructible. Gold won’t ever diminish in quality or decay structurally. It’s malleable, meaning it can easily be worked into various shapes and sizes, thus increasing its value in the consumer marketplace.
Given these characteristics, gold prices increased in 2023 as the US economy grew more volatile and inflation continued to chew into household budgets. At the start of the year, gold sold for about $1,830 per ounce. By the end of the year, gold prices were up to about $2,060 per ounce.
If the economy falls into recession, as some economists predict, precious metals could be a valuable defensive addition to a beginner’s portfolio.
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Expert tips for beginner investors
The best path forward for new investors is one that includes a sharp plan to maximize their stock- and fund-picking experience. Market experts advise taking these tips to the table when formulating that plan.
Spread the wealth
Stashing all your investment cash in one basket can be risky. Your new portfolio is in big trouble if its lone stock doesn’t deliver or collapses entirely. That’s where portfolio diversification can help.
“Diversification is a technique of investing in different asset classes, such as technology, energy, oil or Fortune 500 companies, to spread out the risk of a potential downtrend in one or two areas of the market,” said Kris Whipple, partner and financial advisor at Kristopher Curtis Financial in Nashville, Tennessee. “This allows your portfolio to have a balanced approach versus putting all your chips on red.”
It’s OK to think small
Many aspiring investors have trouble getting started at all because they feel like they can’t afford to invest a significant sum of money. That’s not the case.
“It doesn’t feel like it’s worth the effort, but saving $50 or $100 every month without fail can be a big difference maker,” said Matt Hylland, a financial planner at Arnold and Mote Wealth Management in Cedar Rapids, Iowa. “That’s especially the case for young investors who have potentially decades of growth ahead. In that scenario, compounding interest will grow even modest amounts of money significantly over time.”
Let’s say a beginning investor saves $100 per month for 40 years with a growth rate of 8% annually. That sum will grow to about $310,000.
“But saving that same amount for ‘only’ 38 years will result in your final total being just about $264,000,” Hylland noted. “Those two years of added savings of just $100 per month result in nearly $50,000 more at retirement. So don’t be afraid to start today, even with a small amount of money.”
Build an emergency fund
Having a financial cushion when starting out as an investor is no luxury — it’s a necessity. That’s why it’s vital to build a household emergency fund to fall back on if things go awry in the financial markets. Aim for three to six months of living expenses, and be careful where you safeguard the money.
“Emergency fund cash should be held in a high-yield savings or money market,” said Trevor Mann, an investment advisor at Consolidated Planning in Glen Allen, Virginia. “With an emergency fund, you’re defusing the underlying risk here of being forced to sell your stock market positions at inopportune times in case you need the cash for an emergency or opportunity.”
Think long-term
One big error new investors make is trying to time the market versus prioritizing time in the market.
“Beginner investors often try to over-analyze the market in short-term time horizons and select when to enter and exit their investments,” Mann said. “This is because roughly only eight of the best trading days in the market result in 90% of an average stock index’s return for the year.”
A more resilient investment behavior is dollar-cost averaging into the market each month. That means investing a fixed dollar amount every month (or every week, if you can swing it), no matter the share price. Doing so builds regular investment discipline and allows you to take advantage of compound interest over a long period.
Follow five fundamental investment principles
“Way too many people mistakenly think that being a successful investor is simply about ‘buying low and selling high’,” said Lynnette Khalfani-Cox, a personal finance expert and author of “Bounce Back: The Ultimate Guide to Financial Resilience.” “In reality, there are five phases to the investing process.”
According to Khalfani-Cox, these fundamental investment tenets include:
- Strategizing to buy suitable investments that fit your goals, risk tolerance and time horizon
- Buying the right mix of stocks, bonds, mutual funds or other assets
- Holding/monitoring the assets you own to make sure nothing gets out of balance and to avoid duplicating investments
- Selling various investments at the right time, for the right reason, and in a tax-efficient way
- Dealing with financial intermediaries, such as stock brokers, investment advisors or money managers, so you get competent, quality advice
“If you fail to consider any of these five parts of the investment phases, you can get burned in the financial markets,” Khalfani-Cox added.
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Frequently asked questions (FAQs)
One common mistake beginning investors should avoid is not having a plan or, if they have one, not following it.
“Being swept into a hype purchase by the ‘fear of missing out’ or just following the crowd can lead to potentially catastrophic volatility with your portfolio,” Whipple said.
Having a comprehensive, long-term investment plan, ideally built with a trusted financial advisor, can keep you steady and grounded. “Emotions can get the best of us, even for professionals, and buying or selling due to making a reaction versus responding can be devastating,” Whipple added.
For beginners, Robinhood, Acorns and Betterment are excellent investment apps.
“Robinhood offers commission-free trades, making stock, ETF and other security investments more accessible,” said Liam Hunt, director at SophisticatedInvestor.com, a free personal finance education resource. “Acorns’ ‘round-up’ feature automatically invests your spare change, ideal for beginner investors looking to set aside small amounts.”
Hunt’s also a big fan of Betterment, a robo-advisor that tailors portfolio management to your risk tolerance and goals. “That’s just about perfect for a hands-off investment approach,” he said.
While myriad tax code provisions, including capital gains tax implications, impact stock market investing, the best way to mitigate them is through your employer, especially if you’re just starting.
“In today’s political climate and high potential of America raising taxes, beginning investors, and all investors the like, should invest in and max out a Roth IRA or 401(k),” Whipple said. “Investing into these accounts is done with after-tax dollars, meaning you’ve already paid tax on these funds, and they’re allowed to grow tax-free.”
Investors can’t touch the funds until age 59 1/2 to avoid penalties, but creating a source of tax-free money for retirement is crucial for long-term investing success.
