6 best investments for beginners
Many Americans are swimming in savings after a year of reduced spending and a handful of stimulus checks offered by the federal government. And while reopening the economy could result in increased spending on delayed vacations and other activities, many will be looking for ways to invest their new surplus.
With the stock market and seemingly every other asset class booming, it can be intimidating to dip your toes in the waters of investing if you have no prior experience.
Before making an investment, it is important to know your own risk tolerance. Some investments carry more risk than others and you don’t want to be surprised once you’ve made the investment. Think about how long you can go without the money you are going to invest and whether you are comfortable not accessing it for a few years or more.
Here are some great investing ideas for those just starting out.
The best investments for beginners
1. High yield savings accounts
This can be one of the easiest ways to increase the return on your money above what you earn in a typical checking account. High yield savings accounts, which are often opened through an online bank, tend to pay higher interest on average than standard savings accounts while still providing customers with regular access to their money.
This can be a great place to park the money you save for a purchase over the next couple of years or just in case of an emergency.
2. Certificates of deposit (CD)
CDs are another way to earn extra interest on your savings, but they’ll tie up your money longer than a high-yield savings account. You can buy a CD for different time periods such as six months, a year, or even five years, but you usually can’t access the money until the CD matures without paying a penalty.
These are considered extremely safe and if you buy one through a federally insured bank, you are covered for up to $ 250,000 per depositor, per category of property.
3.401 (k) or other workplace pension plan
It can be one of the easiest ways to start investing and comes with some major incentives that could benefit you now and in the future. Most employers offer to match a portion of what you agree to save for retirement against your regular paycheck. If your employer offers a match and you don’t participate in the plan, you decline free money.
In a traditional 401 (k), contributions are made before they are taxed and grow tax-free until retirement age. Some employers offer Roth 401 (k), which allows you to make after-tax contributions. If you select this option, you will not pay tax on withdrawals during retirement.
These workplace retirement plans are great savings tools because they are automatic once you’ve made your initial choices and allow you to invest consistently over time. You can even choose to invest in target date mutual funds, which manage their portfolios based on a specific retirement date. As you get closer to the target date, the fund’s allocation will shift away from riskier assets to reflect a shorter investment horizon.
4. Mutual funds
Mutual funds offer investors the opportunity to invest in a basket of stocks or bonds (or other assets) that they might not be able to easily build on their own.
The most popular mutual funds track indices such as the S&P 500, which includes about 500 of the largest companies in the United States. Index funds usually have very low fees for fund investors, and sometimes no fees. These low costs help investors keep more of the fund’s returns to themselves and can be a great way to build wealth over time.
Exchange-traded funds, or ETFs, are similar to mutual funds in that they hold a basket of securities, but they trade throughout the day the same way a stock would. ETFs don’t have the same minimum investment requirements as mutual funds, which typically cost a few thousand dollars. ETFs can be purchased for the price of a share plus any fees or commissions associated with the purchase, although you can start with even less if your broker allows investment in fractional shares.
ETFs and mutual funds are ideal assets to hold in tax-advantaged accounts like 401 (k) s and IRAs.
6. Individual actions
Buying stocks in individual companies is the riskiest investment option discussed here, but it can also be one of the most rewarding. But before you start trading, you need to determine if buying a stock is meaningful to you. Ask yourself if you are investing for the long term, which usually means at least five years, and if you understand the company you are investing in. the mindset of short-term trading when owning individual stocks.
But a stock is a partial stake in a real business and over time your fortune will increase along with that of the underlying company in which you have invested. instead, take the more diversified approach offered by mutual funds or ETFs.
At the end of the line
If you are new to the investment world, be sure to consider your risk tolerance and financial goals before committing any money to an investment. Some investments, like high yield savings accounts, allow quick access to money in an emergency. Meanwhile, stocks should probably be part of a long-term investment plan.
Many newbie investors are also turning to robo-advisers, where an algorithm automatically selects and manages a diverse portfolio of exchange-traded funds (ETFs) for you, based on your individual financial needs and risk appetite.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past performance of investment products is not a guarantee of future price appreciation.