Every retirement plan started somewhere. For some, it was taking that first job with a 401k matching plan. For others, it meant setting aside a little money each month and building their own stock portfolio. But in each case, it required a first step – and a little research – to know what approach was right for them.
In this article, we’ll explore investing for beginners, including some of the most common products and plans you might consider as you start working towards a healthy retirement fund.
401ks or Other Retirement Plans
If you already have a 401(k) or another retirement plan, this is most likely the best place for you to put your money. This is especially true if your company matches a portion of your contributions; nothing beats free money and compounded interest.
The beauty of a 401(k) is that there isn’t an investment minimum, but you can contribute up to $19,500 to a 401(k) in 2020. You can start with as little as 1% of your paycheck and increase your contributions over time as your salary grows.
Robo-advisors manage your investments for you by using computer algorithms. They have low overhead, so they charge lower fees than human-managed investments (typically 0.25% to 0.50% of your account balance per year). Many robo-advisors allow you to open with no account minimum.
This is an excellent way to get started with investing because most of the work is done for you at a reasonable cost. Some robo-advisors also offer educational content and tools to educate you on how your investment portfolio is constructed and what investments are being used.
Target Date Mutual Fund
A mutual fund is a basket of investments in which investors buy a share in the fund. As a result, they invest in all of the fund’s holdings with a single transaction.
You won’t be charged any taxes on withdrawals used for qualified education expenses.”
A targeted date mutual fund automatically invests with your estimated retirement year in mind. Usually, a fund manager will determine how the fund is invested. Still, there is typically an overarching theme, like a U.S. equity mutual fund that invests only in stocks in the U.S. stock market.
These funds usually hold a mix of stocks and bonds and will take more risk (investing in stocks) if your retirement date is far away. As your retirement date nears, the fund will move to less risky holdings, like bonds.
Index funds are like mutual funds because you are buying a chunk of the market in one transaction. But unlike mutual funds, index funds operate on something akin to autopilot. Instead of having a professional manager that builds and maintains the fund’s portfolio, the index fund tracks a market index.
A market index is a collection of investments representing a specific portion of the market, like the S&P 500, which holds the stocks of about the 500 largest companies in the United States. An S&P 500 index fund would buy stocks in that index. These funds tend to carry lower expense ratios because they are more passive than professional portfolio management.
Exchange Trading Funds
Exchange trading funds (ETFs) operate similarly to index funds. These funds track a market index and take a more passive approach to investing. They differ from index funds in that they do not require a minimum investment. Instead, ETFs are traded throughout the day, and investors buy them for a share price, which can fluctuate in the same way a stock price does.
The share price ranges from under $100 to $300 or more, and the share price acts as the ETF’s investment minimum. Like stocks, ETF brokers charge a commission to buy or sell shares. Some brokers, however, are commission-free.
There are many great investment apps out there that are made to help beginners invest in stocks. They typically offer a combination of automated tools to help users invest, along with investment advice and education to help users learn more about investing.
One such app is Acorns, which rounds up your purchases on linked debit or credit cards to the nearest dollar and uses that change to invest in a diversified portfolio of ETFs. It is essentially a robo-advisor because it manages the portfolio for you.
This app and similar apps typically require no minimum to open an account and allow you to begin investing right away. This low barrier to entry makes these apps a great place to start investing.
Beginner Investment Advice
No matter where and how you decide to start investing, there are few best practices to keep in mind. Here are two things to remember as you expand your financial portfolio.
Understand risk and return
Smart investors have a good understanding of their personal risk tolerance. Certain investments, like stocks, are riskier than others. The riskier options, however, have more potential for a high return.
If you want to earn big, you may be tempted to invest your money only in stocks. If you are anxious and want to have a clear expectation of your return, you may want to stay with safer options like government bonds and certificates of deposit.
The best thing to do is to strike a balance between risk and reward. This means diversifying your portfolio, so you have a combination of both low-risk and higher-risk investments.
Timing is everything
Starting to invest your money can be scary, as you do not always know how much earnings your investments will yield or if you could lose money. What you need to understand before you begin investing is that there is no instant gratification.
Investment accounts need time to grow. Patience is key because long-term investments are more likely to yield higher gains. This is why people are advised to start investing at a young age.
The market is also always changing, and that brings ups and downs. Your investments need time to adjust to these ups and downs, and you need to be patient and not panic when the market is down, but rather trust that it will go up again. If you cave to market fluctuation and pull your investments, you can end up losing out on a lot of long-term earnings. Thus, you need to get used to leaving your investments alone.
Another benefit of being patient with your investments is that eventually, you will see compounding interest, which is when you start earning money on the money that your investments have already earned. You can’t enjoy that benefit if you’re not willing to be patient with your investments.
It is never too early to take your first steps towards an investment strategy. Whether you can afford to contribute a little or a lot, the sooner you start planning for your financial future, the better off you will be in the long run.
And if things go well and you decide to take your investment game to the next level, you can always talk to a financial advisor at your local credit union. Working with someone who knows your financial goals can ensure you're working towards the future you want.
Non-deposit investment products and services are offered through CUSO Financial Services, L.P. ("CFS"), a registered broker-dealer Member FINRA/SIPC and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. The Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2018.