No matter what your long-term financial goals may be — whether it’s buying a home, funding your retirement, sending a kid to college, building an emergency fund or something else — one of the best ways to see the money you set aside grow is to invest it wisely. But particularly for those who are new to investing, the wide range of investment options and the sometimes complicated concepts that come with the territory can be daunting, to say the least.
So, especially considering that April is National Financial Literacy Month, we here at Arthur State Bank thought it would be a good time to share a few insights on the basics of investing, along with a quick, step-by-step guide on how you can get started with your own investment portfolio.
What is investing?
Investing is the act of — rather than letting your money sit idle — putting unused funds into assets or financial products that can potentially grow in value over time. By making wise investments, consumers can “let their money work for them,” generating passive income and enabling them to sell the asset invested in at a later date for more money than they paid for it. Most investment offerings, though, do carry an inherent risk, presenting the possibility of losing some or all of the money that has been invested. For this reason, it’s important to be educated about your investments, develop an investment plan that aligns with your financial goals and your risk tolerance, and create a diverse portfolio of investments over time.
How investing works
With most investment types, the investor hands over his or her funds to become the owner of a hard asset (such as a property in a real estate investment), a part-owner of a company (such as when purchasing stocks), or a creditor to an organization or entity (such as when buying bonds). Factors such as market conditions, economic trends, and the law of supply and demand can impact the value of the investment over time. And when a good investment has been made, the asset or financial product the investor has purchased or otherwise procured will grow in value over time. In other cases, dividends (portions of company profits regularly distributed to shareholders) and/or interest payments can add to the value of the investment.
6 steps to starting your own investment portfolio
So just how can an aspiring investor get started? Here are six basic steps to creating an investment portfolio of your own:
- Start investing as soon as you’re able — When investing, time can be one of your greatest assets. For one, getting started with your investments early enables you to grow the total amount of money you have invested gradually, as even small amounts invested can grow into large sums over time. Further, thanks to the power of compound earnings, your investment returns can start to earn significant returns of their own over time, creating a snowball effect that contributes to a larger return on investment. No sum of money is too small to get started with. Even if the amount you can devote to starting your investment portfolio seems miniscule, by making a regular practice of investing, you can take gradual strides toward reaching your financial goals. And the sooner you start, the more progress you can make.
- Decide how much money you’ll invest — The amount of money you can afford to devote to investing will depend largely on your financial situation, your investment goals and your investment timeline. To start with, choose an amount that you can comfortably devote to investing after you’ve covered all of your living expenses, bills, debt payments and other financial priorities. Over time, you can increase the amounts you invest and ensure they’re in line with achieving your long-term financial goals. For example, if you’ve got a 401(k) retirement account at work, a good initial investment goal would be to contribute at least enough to the account to earn the full investment match that many employers offer. (That match essentially represents free money that you don’t want to miss out on.) From there, a good rule of thumb that many financial experts advise is to contribute 10% to 15% of your annual income (once that amount becomes realistic) toward your retirement savings.
- Determine how much investment guidance you’ll need — The investment strategy that’s right for you will depend on your savings goals, how much money you can contribute to your investments, how long you have to achieve your goals, and your levels of investing confidence and knowledge. Before you get started, you’ll want to decide what level of professional support and guidance you’ll need to build your investment portfolio. For those who have limited investment knowledge and appreciate one-on-one guidance from an investment expert, working with a professional investment advisor allows for ongoing, personalized advice as needed. Some consumers might want to minimize their involvement in the investment process and let the pros handle the decision-making. Choosing a professionally managed portfolio enables these consumers to, after sharing their investment goals and preferences, provide the needed investment funds, then largely step away. And for those who would like to be more involved in the process and who trust their investment knowledge and research skills, building and managing their own portfolio can be a rewarding route to take.
- Create an investment account — If you’re looking to start saving for retirement and don’t have a 401(k) account through your employer, you’ll want to decide what type of individual retirement account (IRA) best fits your needs, with two of the top options here being the traditional IRA and the Roth IRA. Both of these account types are designed to be used for building retirement savings, so they place limits on how and when you can withdraw your funds (without paying added fees and penalties).
Other account types are better suited for achieving financial goals outside of retirement. For example, a brokerage account is a good option for investors looking to buy and sell stocks, bonds, mutual funds and other investments. Alternatively, for those aiming to simply set aside funds and let them earn interest, a savings account, money market account or certificate of deposit may be a good choice, especially for those looking to achieve shorter-term financial goals. And some of the top options for college savings include 529 college savings plans and Coverdell Education Savings Accounts. - Examine and understand your investment options — Next, you’ll need to choose what you want to invest in, then actually make your investment purchases. Because all investments carry varying levels of risk, and each has its own pros and cons, you’ll want to make choices that align with your investment goals and risk tolerance.
Some of the most popular investment options include:
– Stocks: Also known as equities, stocks represent an investor’s ownership of a small portion (or share) of a company. Typically, as a company’s performance and value rise and fall, the stock’s value follows suit — making it impossible to know with certainty whether the return on investment will be negative or positive. But with this risk can come the potential for greater returns (and losses).
– Bonds: A bond represents a loan made by an investor, typically to a company or a government entity. When the loan is given, the issuer agrees to pay the investor back the amount of the loan plus an agreed-upon interest, typically following a term of a specified number of years. Investing in bonds is generally less risky than investing in stocks, as the return on investment is known in advance. But with the lower risk, the ceiling on bonds’ long-term return is typically much lower than that of stocks.
– Mutual funds: Representing a pre-packaged mix of stocks and bonds, mutual funds enable investors to purchase diversified assets in a single transaction without having to choose individual stocks and bonds. And because they’re inherently diversified, purchasing mutual funds typically presents less risk than purchasing individual stocks. Some mutual funds are created and managed by financial industry professionals (and thus carry extra management fees), while others follow the performance of a specified stock market index such as the S&P 500 or the Nasdaq.
– Exchange-traded funds (ETFs): Similar to mutual funds, ETFs represent a mix of individual financial assets such as stocks and bonds that have been bundled together. But ETFs are purchased for a share price that’s often lower than the minimum investment requirement carried by mutual funds, and they can be traded throughout the day much like a stock. - Relax, keep (not too close) an eye on your investments, and maintain the momentum — Now that you’ve started your investment portfolio, give yourself a pat on the back and work to grow your investment knowledge. Know that it’s perfectly normal for the value of your investments to rise and fall, especially over the short term. Try to avoid checking on your account value too frequently, as the short-term volatility you’re likely to observe can lead to added stress. Instead, try to stay focused on the big picture and your long-term investment goals — and keep setting funds aside for more investing.
Proudly serving South Carolina since 1933, Arthur State Bank offers accounts and services to meet a variety of financial needs. To help you achieve all of your financial goals, the bank offers in-person service as well as a range of convenient digital solutions. To learn how Arthur State Bank can help you with banking needs ranging from checking and savings to retirement accounts, mortgages, other personal loans and more, visit arthurstatebank.com.
