Starting an investment portfolio can be intimidating. There are dozens of different ways to save your money, and sorting out what is the best way to invest can be confusing. This article will focus on a few basic tips for the beginning investor. I will provide some simple advice that should give you a base of knowledge that can be used to decide where to put your hard earned money.
The first steps in making any investment is to sit down and carefully determine how much money you have to spend, and how much risk you are willing to take. Both of these factors will have a large effect on your investment decisions. Most investors who are young and just starting out are not going to have a lot of extra money. In addition, I suggest that a young investor, who is just getting started, not take too many chances with your money. As you become more experienced and you have more tolerance for loss, you can make your investments riskier. Let’s take a look at some specific investment modalities.
Money Markets and Certificates of Deposit (CDs)
Money Markets are, in some sense, just glorified bank accounts. They will not make you much in return, but they are relatively safe. They are also easy to get you money out of on short notice if your financial situation requires you to get your investment back out. Money Markets can be found at most banks and some other investment companies that also deal in mutual funds. Certificates of Deposit very low risk investments. They are investments that are purchased at a bank for a specific time period at a fixed interest rate. For example, you buy a CD for twelve months at 8%, which means your money is locked in to the CD for twelve months and you will earn an %8 return at the end. They are so low risk however, that they are actually insured by the Federal Government.
Equities
Equities is a broad term that primarily includes stocks and bonds. These are very popular and can offer a great balance between risk and return, although the range here is quite broad.
Buying individual stocks can be quite rewarding, but it carries tremendous risk. Many investors have lost significant amounts of money buying shares of companies that have lost value. For a young investor, I recommend only buying individual stocks if you have a fair amount of money to invest and would not be broke if you lost some or all of your investment.
Many young investors choose to buy Mutual Funds, which are “pools” of investors who all combine their money to buy a large number of different stocks and or bonds. Mutual Funds are managed by a professional, who decides which particular stocks and bonds to buy. The advantage to Mutual Funds over individual stocks is minimization of risk. If one stock looses money, you don’t loose you entire investment.
There are literally hundreds of different mutual funds that invest in different types of stocks. Some will deal only in small companies, or large ones. Some funds mix some stocks and some bonds. There are even mutual funds that deal in only one type of company, such as technology or health care.
Mutual Funds are riskier than money markets and CDs, but in most cases they offer greater rates of return. Also bear in mind that many fund companies require a minimum investment, often $2500-$3000. Although there are some that start as low as $1000 (The Vanguard Star Fund comes to mind). Funds can be bought directly from the mutual fund company, who almost always offer a wide variety of different funds, each focusing on different mixes of stocks and bonds.
Mutual Funds sometimes have fees to buy and sell. These fees are called “loads” and can dig in to your profits if you are not careful. For this reason, I recommend searching for mutual fund companies that offer “no load” investments. Vanguard, Fidelity and Janus are three popular investment companies that offer no load funds, but there are many others. Almost all funds can be bought and sold on demand, so these are good investments if you may need to get your money back within a few days. Beware however, your investment can loose money and you should expect to see swings in value in your investment, especially in the short term. As such, these are better investments if you are looking for a place to put your money for at least a couple years.
Real Estate
Buying property can often be a good way to invest your money. Real estate investment can be highly complex and I don’t have the space in this article to elaborate any of the details. Rather, I will mention a couple of unique advantages to buying a home or condo. The first is obvious it gives you a place to live. Unless you are buying the property to use rent to someone else, of course. The second advantage comes in the tax deduction you are able to take for the interest you pay on the mortgage.
A major disadvantage to buying real estate is that it’s hard to get your money out on short notice. To get the principal investment money back, you have to sell the property. Depending on the local housing market, this can take time.
So there you are a few basic ideas on how to get started as a young investor. As I mentioned previously, the key to good investing is to plan, plan and do some more planning. Know before you make any decisions how much you have to invest and how much risk you are willing to take. Once you know these two things, you can begin to look at specific investments. If at all possible, spread your money around in to a couple different places. This serves to lower risk, even if each individual investment holds some risk. With the proper education and planning, you will soon be planning how you are going to spend your new found wealth. Good luck!