Credit: Shutterstock photoBy Barbara Friedberg
Investing is an important building block of a sound financial future. If you aren’t sure where to begin, use these essential tips from experienced financial professionals.
1. Set the Table
Before putting a dime in the investment markets, set the stage for sound investing. Mark Morelli, of The Mathematical Investor and frequent contributor to Seeking Alpha, The Motley Fool, and Benzinga.com, recommends these steps before treading into investing waters:
First, set up a budget with all monthly and infrequent expenses such as insurance and taxes, with 20 percent of gross expenses targeted towards savings. Next, Morelli reminds future investors to get rid of all credit card debt and car loans. Third, Morelli implores you to create and maintain that important emergency fund.
2. Call for Help Setting Up Your Investment Account
For brand new investors the process may be overwhelming. Here’s how Julie Rains, long-term investor, journalist and publisher of Investing to Thrive, recommends getting started:
“If you are unsure of how to open an account, fund an account, or even select a mutual fund or exchange-traded fund, call the customer service area of a brokerage firm. Representatives will be glad to answer questions and step you through the process. Generally, they won’t give specificinvestment advicebut they can point you to tools to help you make a decision.”
3. Keep Things Simple
Mike Piper, CPA, publisher of ObliviousInvestor.com and Wall Street Journal contributor, is known for his smart and simple investing approaches.
“To me, the best way to invest is to keep things simple. Automate your contributions every month—whether to an IRA, a retirement plan at work, or both. And find a low cost all-in-one fund with an allocation that’s appropriate for your risk tolerance. That way, both monthly saving and portfolio management are hands-off, thereby saving you time and minimizing the likelihood of mistakes.”
4. Where to Invest Your Money
George Papadopoulos, CPA/PFS, CFP and Michigan fee-only wealth manager, offered this advice on where beginners should invest:
“For beginner investors who are most likely investing in just one account (usually the 401k plan at work) and not willing to spend time managing and rebalancing, they should just pick a target-date fund and “set it and forget it”. Further, new investors should focus on expanding their marketable skills and aim to contribute more (ideally, to the point to capture the full matching) to their workplace retirement account.”
5. Dollar-Cost Averaging
This is the practice of regularly transferring a certain amount of money into an investment account to buy stocks or funds.
Dollar-cost averaging is a disciplined approach which forces you to buy more shares at lower prices and fewer when prices are higher. You can practice this investing strategy by simple investing in a 401k, 403b, or by having a set amount transferred from your paycheck into an investment account.
6. Small Investment Amounts Matter
Rains of Investing to Thrive, said even small amounts matter. There’s no need to wait until you have a big cash stash to invest.
“Buy a mutual fund with a low minimum, no load, or transaction fee; set up automatic purchases or just invest random amounts whenever you have extra money. Schwab has index mutual funds with minimum initial investments of just $100. After that you can invest just $1.”
7. Keep Expenses Low
Christine Guglielmetti, RIA and president of Future Perfect Planning, suggests keeping expenses low. Even if you have great investment returns one year, high expense ratios can slash the juicy returns. Here’s how Guglielmetti suggests keeping investing expenses low:
“Choose a broadly diversified index fund. Look up the expense ratio (the annual amount you will pay to own the fund) and compare it to others in its class. Over time, those fees can make a huge difference in the value of your portfolio.”
Most mutual fund companies offer access to low fee index funds such as the Fidelity Spartan 500 Index Fund (FUSEX) or the Schwab S&P 500 Index Fund (SWPPX) and many more.
8. Turn off the TV
So many investors believe that in order to prevail, they must monitor all of thefinancial newsand heed the advice of business television commentators. CNBC is not your investment advisor. Guglielmetti reminds you that sound ‘investing for beginners’ advice shouldn’t involve heeding the TV talking heads. Short-term thinking doesn’t belong with a long investment horizon.
9. Use Social Data for Investment Ideas
According to Laura Casey, co-founder of TickerChicks.com, “The methods behind social data trading were first described by Peter Lynch and then again by Chris Camillo in his book Laughing at Wall Street.” Essentially Casey said, if you see a popular product or know how the general public feels towards a company, you can use that information to recommend an investment for further study.
Casey suggests using social data as a springboard to gather ideas for conventional stock research methods. “For example, over the course of the past year there have been multiple shootings involving police officers. When these terrible events happen, people begin to talk on Twitter about how the police should be required to wear cameras. The publicly traded company Digital Ally (DGLY) manufactures police body cameras.”
The investor would then study and analyze the stock further by reading the company’s 10-K, 10-Q and analyzing profitability and other stock data ratios.
10. Invest in Stocks for Free
Several pros suggested using RobinHood.com for investing in individual stocks. This free app will cut your trading costs. Just remember that investing in individual stocks is riskier than investing in a diversified portfolio of low-cost index funds.
11. Rebalance Your Investment Portfolio Annually
When investing, it’s wise to choose an asset allocation that reflects your risk tolerance and risk capacity. If you’re younger, you’ll hold more higher risk/higher return stocks and fewer bonds. After setting your preferred asset allocation, every year make sure to rebalance your portfolio to get back to your original allocation.
This simple strategy will yield a small increase in returns and a decrease in volatility.
12. Don’t Time the Market
John Hogue, CFA and owner of Peer Finance 101, offers this wisdom for the investor:
“Don’t try to play the professional game of watching technical charts and trying to time the stock market. Play the amateur game! Don’t try to squeeze out every percentage of return from stocks by trading and analyzing. Pick investments in companies that have great products you love and will be around forever.”
Whenever you invest your money, make sure to do your due diligence. Understand what you are investing in and why. Only invest in the stock market funds that you will not need within the next 5 to 7 years. Investment markets are too volatile for short-term money.
This article was originally published on GOBankingRates.com.
Plus:
5 Things You Should Never Do With a 401k
Here’s the No. 1 Financial Challenge of Americans in Every State
8 Reasons You Won’t Retire at 65
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
