Investing 101: How to Start Investing

Invest in Your Retirement

• Even if you can't invest very much, you should start investing in a retirement account as soon as you have a steady income. Financial experts generally suggest putting at least 10% to 15% of your pretax income into your retirement account. If you started putting $20 a month into a retirement account at age 25 and earned 10% interest a year on average, by age 65 you'd have $107,127.40. Wait until you're 35, though, and at 65 you'd only have $39,827.55.
• Contribute to your employer-sponsored retirement plan. Many employers offer a 401(k) or 403(b) plan, which allows you to invest part of your pretax income for retirement. If your employer matches your contribution, put in at least enough to get the full matching amount.
• If you don't have access to a company-sponsored retirement plan, consider setting up an individual retirement account (IRA) through a bank, credit union, investment firm or mutual fund company.
  • A traditional IRA lets you contribute pretax or after-tax dollars. Contributions grow tax-deferred; withdrawals are taxed after age 59½.
  • A Roth IRA lets you contribute after-tax dollars. The money grows tax-free; you usually can withdraw money after age 59½ with no taxes or penalties.

Invest on Your Own

Once you've built an emergency savings account, have a retirement fund well underway, and have little to no credit card debt, you may want to explore stocks, bonds and other investments on your own. (Short-term investing options usually include high-yield savings accounts, certificates of deposit and money market funds; the investments below are part of a long-term strategy.)

There are several different ways you can invest.

• Robo-advisor: These are automated advisors that use algorithms based on your financial goals and risk preferences to recommend and manage your investments.
  • Robo-advisors typically charge less than human financial advisors, but don't provide in-person financial planning services.
  • They can be a good option for beginner investors who don't want to manage their own investments and want to minimize fees.
• Online brokerage: You can set up an account with an online brokerage such as TD Ameritrade, Fidelity Investments or E-Trade to buy, sell and manage your own investments.
  • You'll need the time and expertise to research your investment decisions and monitor your investments.
• Financial advisor: Human financial advisors provide in-depth financial planning that includes recommending and managing investments. They often require a certain minimum initial investment amount.
  • Financial advisors may charge an hourly fee, a flat rate, or a percentage of the investment amount they manage for you.
  • Before working with a financial advisor, make sure they and their firm are registered with the SEC and licensed to do business in your state. Visit the North American Securities Administrators Association website to check for any complaints.

Select Your Investments

Whether you are investing via a retirement account or on your own, there are several types of investments to choose from.

• Mutual funds: A mutual fund is a portfolio of professionally managed investments that may include stocks, bonds and other securities. They offer a way to diversify your investments by owning small shares in a wide range of assets.
  • Mutual funds may vary by industry (such as all tech stocks), geography (such as all U.S. stocks), type of security (such as stocks or bonds) and risk level (such as stocks in start-up companies vs. stocks in big-name companies).
  • An index fund is a type of mutual fund that's tied to a market index, such as the Dow Jones Industrial Average or the S&P 500.
• Exchange-traded funds (ETFs): Like an index mutual fund, an ETF is a portfolio of investments typically based around a market index. But they have some significant differences.
  • Like an individual stock, an ETF can be traded at any time, and its value fluctuates throughout the day. A mutual fund can be traded only at the end of the trading day, when its price is set.
  • Mutual funds are professionally managed; most ETFs are "passively managed," meaning trades are made only to keep the fund in line with its index.
  • Compared with mutual funds, ETFs offer more flexibility; you can choose to trade them at any time. However, trading fees may negate the lower administrative costs of an ETF.
• Individual stocks: Each share of stock represents a percentage of ownership in a publicly traded company. Stock prices rise and fall based on the company's financial performance and market factors.
  • The goal is to buy stocks at a low price and sell them for a high price.
  • Buying individual stocks can be pricey; as of this writing, one share of Amazon stock cost over $3,000.
• Bonds: Bonds are loans to governments, corporations, municipalities or other entities that pay interest in return.
  • Bonds are typically purchased to balance out riskier investments in your portfolio or provide income for those nearing or in retirement.
  • A bond ETF or bond mutual fund can provide an affordable way to invest in diversified bonds.
• REITs: A real estate investment trust (REIT) is a company that owns and manages income-producing real estate, such as apartments, hotels or commercial office buildings.
  • Shares in publicly traded REITs are sold on stock exchanges and can be purchased through brokerages.
  • Investing in REIT mutual funds or REIT ETFs may provide greater diversification than investing in an individual REIT.

Decide How to Invest

Don't just jump into investing willy-nilly. Consider the following:

• Your goals: Are you investing for a long-term goal, like retirement, or a short-term goal, like a down payment on a home?
• Your age: Young people have more time to recoup losses if they are investing long-term, so they can take more risks. Closer to retirement, shifting to more conservative investments helps protect your nest egg.
• Your risk tolerance: Some people are inherently cautious, while others like to take risks. Just make sure your income and finances can support your tolerance for risk.
• Diversification: Purchasing a variety of investments can provide some level of balance, because if one loses value, the others may cushion the blow.
• Your budget: How much do you have to invest? Again, this should take into account savings needed for your emergency fund, credit card bills and other expenses that make up part of your monthly budget.
• Dollar cost averaging: Investing a set amount of money at regular intervals can reduce the risk of investing all your money at a bad time (such as right before a stock market crash).

Don't Set It and Forget It

Whether you take the DIY approach or use a financial professional, don't just invest your money and forget about it.

• Read all communications regarding your investments.
• Review all trade confirmations to make sure they are accurate.
• At least once a year, review your investments to make sure they still fit your overall financial strategy, and reallocate funds as necessary.