The world of investment can be intimidating, especially for beginners. However, investments are important for anyone who wants to build wealth and secure their financial future. Many wealthy people credit their early investments as a key factor in their immense financial success. By starting early and investing smartly, you can reach your financial goals faster instead of relying on a single source of income.
With so many investment options, figuring out where to start can take time.
Many beginners hesitate to put their money into investments because of some key reasons such as:
- Fear of failure, as many people fail, their investments will not work, and they will only lose money
- There’s also a common belief that investing takes a lot of knowledge and expertise, which beginners usually lack
- And there’s also a misconception that there is a steep and challenging learning curve for beginners to learn about investment options.
Don’t let these factors hold you back. Ask any expert, and they’ll tell you that investing neither requires extensive knowledge nor is it difficult to learn. Of course, you won’t become an expert and will quickly gain huge returns from your investments. But with some guidance, anyone can start investing without risking too much.
While there isn’t any option that is considered the best investment, a few ventures are particularly great for new investors. Whether you’re looking to save for retirement, grow wealth, or dip your toes into investing, read on to discover the best investment for beginners.
Investment for Beginners
Here’s a list of the best options for people new to investing:
410 (k) or employer retirement plan
In a 401(k) plan, employees agree to contribute a percentage of their paycheck to another investment account every month. When they retire after many years, they will have a significant amount collected in their 401(k) account. It’s simple as that, well, at least for starters.
Of course, there are some other details to consider. In many plans, the employer also contributes some amount to the employees’ 401(k) account. There are also two types of plans – a traditional plan, where contributions are deducted before income tax deductions, reducing your taxable income, and the Roth plan, where contributions are deducted after tax deductions are made, making the withdrawal tax-free during retirement. You can learn more about this from your employer.
Target date mutual funds
A target date mutual fund is a type of investment for beginners that, as the name suggests, has a target date, usually when you plan to retire. This plan involves a fund manager responsible for allocating your money across various assets, stocks, bonds, etc.
When you’re young, and the target date is far in the future, your funds will be spread across high-risk, high-return investments such as company stocks. And when you’re getting close to retirement, your holdings will also be shifted towards low-risk, low-return investments. It’s leveraging the risk-taking ability of people at a young age and diversifying your portfolio, making it great for beginners.
Index funds
An index fund is a type of investment fund that is designed to track the performance of a specific market index. An index is a group of stocks or other assets representing a particular sector’s performance or the overall market. For example, the S&P 500 is an index of the 500 largest publicly traded companies in the United States.
When you invest in an index fund, you buy a share of a fund that owns a small piece of each of the stocks or assets in the respective index. For example, in the S&P 500, you’d buy a small stock of all the 500 companies in the index. It’s suitable for beginners because it is a low-cost and diversified investment.
ETF
An Exchange-Traded Fund (ETF) is a pool of investments for beginners that include stocks or bonds of different companies, either from a specific sector or a particular market index. When investing in ETF, you buy shares of all the stocks or assets within the funds. Index funds can also be considered a specific type of ETF involving only a group of companies from a particular market index.
Another critical aspect of ETFs lies in their name – they can be traded on stock exchanges, which means you can sell and buy them as you would with individual company stock. It gives you more flexibility and, of course, diversifies your investment portfolio as well.
High-yield savings accounts
If you want a simple investment option that still gives decent returns, it doesn’t get any simpler than a high-yield savings account. These are accounts that offer significantly higher interest rates than traditional saving accounts. So if you keep saving money in a high-yield savings account for the long term, the total earnings in interest can get pretty big by the time you retire.
Many banks offer high-yield savings accounts, so a bit of research will be due on your end to find the best interest rates. But also consider other factors like deposit requirements, minimum balance, and additional fees.
Certificate of Deposit (CD)
A Certificate of Deposit is a savings account where you deposit a certain amount of money and cannot withdraw it until a certain period, ranging from a few months to many years. Again, this is also a simple yet rewarding investment without many complexities. When you open a CD, you have to decide the amount you want to deposit and the term period.
Since you can’t withdraw money from a CD until it has reached its term, these accounts offer much higher interest rates to compensate for the loss of liquidity. Put your savings in CD for many years, and you’d be surprised how much it could grow by the time you retire.
Individual stocks
Individual stocks can be a tricky investment for beginners. Many industry experts and seasoned investors often make lots of money by buying certain stocks and then selling them later when their value has dramatically risen. The active buying and selling of stocks is a strategy that requires extensive knowledge and understanding of the market, industry, and overall economy.
However, beginners can still invest in stocks passively by researching and purchasing one or more low-risk stocks. You won’t be selling them and making a fortune anytime soon, but if you hold on to them for many years, the value of those stocks could become much higher when you’re close to retirement.
Considerations for New Investors
While we encourage beginners to enter the world of investing early on, it’s also essential to be careful and make wise decisions when investing. That is why one must consider some crucial factors before making any investment, such as:
Risk Tolerance
Risk tolerance is your ability or willingness to take risks with investments, and high-risk investments also offer higher returns and vice versa. So you must assess your risk tolerance based on age, financial status, investment goals, and other relevant factors.
Active or Passive Approach
Some investments, such as target-date mutual funds, must be managed actively, which requires more time and effort. As such, they tend to have more significant returns as well. On the other hand, investments like index funds or CDs are passive, so you don’t need to check up on things occasionally, but you won’t get as big returns as active portfolios. It would be best to decide which approach is right based on your preferences and investment goals.
Financial Goals
Everybody has their own financial goals, directly influencing investment choices. If you’re planning for a comfortable retirement, you should prioritize options like 401(k) plans. But if you’re investing for short-term, faster returns, you can opt for a CD where you can set the term period accordingly. Your financial goals will help you decide on the right investment option.
Taxes
Your investments can also help you save on taxes, as previously discussed in the case of 401(k), whereas tax deductions also affect your investable income. Since taxes and investments involve each other, it’s essential to understand the tax implications of your investments so you can make informed decisions and minimize your tax liability.
Conclusion
Now that you know the best investment options for beginners, we hope you are eager and enthusiastic to start investing without any fears or doubts. You should now have a good understanding of the different types of investments available and be able to make an informed decision on which one is right for you.
So, whether you are saving for retirement or looking to achieve more significant financial growth, it’s high time that you step into the world of investing as soon as possible. And when you do, also remember to carefully consider some important factors such as your risk tolerance, active or passive approach, financial goals, and tax implications.