Investing for beginners has become synonymous with today’s greatest wealth-building vehicles. If for nothing else, there are few better ways to increase your net worth than putting money to work in an asset that is able to compound gains over a prolonged period of time. The longer investors are able to stay invested in quality assets, the more likely they are to increase their wealth exponentially. It is worth noting, however, that the best way to invest for a long time is to start as soon as possible. It is true what they say: The best time to start investing was yesterday.
The sooner someone can become a new investor, the better. However, it’s important not to get ahead of yourself and get caught up in an asset class that’s far too complex or risky. Instead, it is traditionally a better idea to choose investments for beginners. Beginner investing usually coincides with risk-averse asset classes that can create solid portfolio foundations; that way any future investing has a strong leg to stand on.
There are countless ways to invest your hard-earned money. Unfortunately, not all investments are created equal; some are inherently better than others. Therefore, instead of simply investing in the first thing that comes your way, strongly consider one of the following strategies:
High-Yield Savings Accounts
Certificates Of Deposit (CDs)
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1. Real Estate
With estimations reaching closer and closer to a $300 trillion global market cap, real estate is the largest asset class in the world. As the largest asset class, real estate may simultaneously offer beginner investors enormous potential in a relatively well-understood industry. In fact, the book on real estate investing has already been written; there’s no need to deviate from already proven paths or formulate an entirely new exit strategy altogether.
Investing for beginners in the real estate sector looks a lot like it always has. If anything, investing in real estate has only gotten easier, with the advent of technology and greater access to funds democratizing the field. That’s not to say everyone who invests in real estate will become an overnight success, but rather that there is a proven formula that tilts the odds in beginner investors’ favor.
Those who mind due diligence and limit their exposure to risk can find real estate investing to be quite lucrative. Even in slow markets, in fact, there are profits to be made. According to ATTOM Data Solutions’ latest Home Flipping Report, “the gross profit on typical transactions (the difference between the median purchase price paid by investors and the median resale price) hit $73,700 in the second quarter of 2022. That was up 10 percent from $67,000 in the first quarter of 2022 and up 10.1 percent from $66,944 in the second quarter of 2021.”
The latest flipping report revelaed a 29.0% return on investment compared to the original acquisition price; that’s impressive, considering the Fed is doing everything it can to stall the housing market at the moment. In the future, rate hikes may shift profit margins one way or the other, but there will always be a profitable exit strategy for beginner investors to consider.
2. Retirement Plans
Investing for beginners may not get any easier than contributing to a traditional retirement account. In fact, many people across the country may already be investing without even realizing they are doing so. According to the latest Annual Transamerica Retirement Survey (June 2022), 79.0% of today’s employee workforce is saving through an employer-sponsored retirement plan (or something similar).
There are several types of retirement accounts (some are for employees, others are for business owners or self-employed people, and some are available to everyone). While each has its own unique advantages and rules, they were all designed with one purpose in mind: provide unique tax advantages to contributors in order to encourage saving for retirement.
The most common retirement plans are:
Simple IRA & Simple 401(k)
Each retirement plan will coincide with unique tax advantages, contribution limits, and withdrawal rules, so it is important to familiarize yourself with each before choosing which one to invest in. That said, a sound retirement plan is a good investment for beginners. If for nothing else, retirement plans allow contributors to compound gains over long periods of time, usually several decades. In that time, each contribution builds off of the previous and allows plan owners to grow their wealth while limiting risk.
Sometimes the best investments for beginners are the ones someone else (or something) makes for them. Investing for beginners, in particular, may be better left to the advent of technology. Otherwise known as robo-advisors, brokerages which offer algorithm-based investment decisions can automatically select investments for new investors who either don’t want to decide for themselves or don’t have the time to do so.
As their names suggest, robo-advisors are essentially the automated version of a financial advisor. Through complicated algorithms, technical analysis, and mathematical probabilities, robo-advisors can actually choose the best stocks to buy for those who are less inclined to do so themselves.
In order to provide beginner investors with the best experience possible, most robo-advisors will ask a series of questions to get a better feel for what the investors are looking to accomplish. Surveys are specifically designed to reveal the user’s financial situation, risk aversion, future goals, and anything else that may prove useful in picking stocks. Once the information is compiled, the gobo-advisor will build a portfolio of stocks around what the user is looking to accomplish. As a result, robo-advisors have become popular amongst those who don’t want to spend time investing themselves.
While different robo-advisors will use different algorithms, many attempt to track the performance of major indices. Results will vary, but shouldn’t stray too far from the performance of the respective index.
4. High-Yield Savings Accounts
Investing for beginners doesn’t get any easier than putting money in a high-yield savings account. As their names suggest, high-yield savings accounts will actually pay account holders for depositing money in the respective account. Account holders can actually collect money from their bank by simply depositing funds in their account and keeping them there. That said, the average annual percentage yield on traditional savings accounts is somewhere in the neighborhood of 0.21%, according to the Federal Deposit Insurance Corporation (FDIC).
To be perfectly clear, a 0.21% return isn’t a high bar for investors to reach. In fact, investors counting on the APY from a traditional bank will actually lose money to inflation over the long run. With such a low return on investment, any money sitting in a bank that returns 0.21% will actually buy less over time because inflation (the cost of goods and services) usually has increased an average of 3.8% each year for about 60 years.
It is worth noting, however, that high-yield savings accounts can sometimes offer 18 times more than their low-yield counterparts. High-yield account holders can typically walk away with an APY upwards of four percent for simply banking with the right business. The return may not be the biggest, and may only keep pace with inflation, but it’s the closes thing to free money beginner investors will see with virtually no risk.
5. Certificates Of Deposit
Another good investment for beginners with relatively no risk is a certificate of deposit. Similar to high-yield savings accounts, certificates of deposit allow investors to make money on their savings. However, unlike high-yield savings accounts, certificates of depots require the money to be tied up for longer periods of time.
Certificates of deposit are sold by financial institutions in different time increments. Certificate time ranges can span anywhere from six months to five years, and anywhere in between. As a result, investors will buy CDs with the intention of receiving interest on the money they spend over the amount of time they predetermine.
High-yield certificates of deposit can return as much as four times the national average of 0.98% for five-year terms and over four times the national average of 0.90% for one-year terms, according to NerdWallet.
6. Mutual Funds
Mutual funds are unique investment opportunities which allow investors to pool their money together. The pooled money is then placed in the care of a qualified money manager who will invest in assets which meet the fund’s specific objective. As a result, mutual funds can range from highly diversified to specifically targeted. Depending on the fund’s objective, investments may include stocks, bonds, real estate, or almost any other asset class.
The value of a mutual fund is relative to all of its investments. However, mutual fund investors aren’t investing in the assets themselves, but rather the value of the fund. Because of this unique investment arrangement, the price of a mutual fund is called the net asset value (NAV). The NAV is equal to the total value of the fund’s investments, divided by the total number of outstanding shares, and is calculated every weekday at close of market.
Investor returns will depend on the fund’s performance and the amount invested. However, in return for managing the money, mutual funds will charge a fee. Actively managed funds will demand a higher fee than their passive counterparts, but fees can range from 0.5% to about 1.5%.
Why Is Investing Important?
Investing is important because it simultaneously breaks the dependance of a sole paycheck and allows individuals to compound their own capital. In other words, investing helps people build wealth by putting their money to work; not working more. A sound investment can generate wealth with little to no sweat equity, and the money generated can compound over time. As the money grows, so too does the return on investment, ultimately increasing exponentially in the hands of a good investor.
Investing For Beginners: What To Consider
Investing for beginners can be broken down into several steps, but there are four things every new investor needs to consider before they spend their first dollar:
Risk: One of the first investing basics for new investors to consider is their appetite for risk. In other words, how much risk is acceptable? Traditionally, new investors are awarded the luxury of investing in riskier assets with more upside because they have a longer time horizon to make up for any loss of capital. Over, veteran investors, on the other hand, tend to stick to more risk-averse assets because retirement is that much closer.
Diversification: Any beginner investment should start and end with diversification. If for nothing else, the risk of owning a single asset is too great, especially when a single event can eliminate an entire portfolio. Instead, it is wise to diversify between several industries, and even several asset classes. That way, a diversified portfolio’s success isn’t dependent on a single outcome, but rather many.
Goals: The best investments for beginners are the ones that help them see their long-term goals. As a result, investors must first understand what it is they want out of investing, and then create an optimized portfolio to help meet their goals.
Duration: It has been said that time in the market is better than timing the market. Case and point: the average return of the stock market is just above 10%, as measured by the S&P 500 index. Consequently, stocks tend to go down faster than they go up, but they also tend to go up more than they go down. The history of Wall Street tells us that stocks go up more than not over the long term, so it’s important to be in the market for the long haul.
How Much Money Do You Need To Start Investing?
Investing startup costs vary greatly based on the type of investment under consideration. For example, most retirement accounts allow investors to choose how much of their paycheck to dedicate to each deposit. Investors can choose a percentage of each paycheck or any recurring amount of their choosing (as long as it meets the individual brokerage’s rules). Stock prices, on the other hand, are based upon the supply and demand of company shares. Shares can vary from literally pennies to thousands of dollars, with everything in between. That said, the adoption of fractional shares is spreading, allowing investors to buy a portion of individual stocks. As a result, investing in stocks can cost as little as a few dollars.
Real estate is commonly misperceived as one of the most expensive investments. This is understandable since properties are sold for hundreds of thousands (or even millions) of dollars in some markets. However, real estate investors often get their start with little to no money of their own. For starters, real estate is one of the only investment options that allow investors to leverage their capital. This means that buyers can take out loans to finance the purchase of property, by putting down a fraction of the cost. Furthermore, many investors buy real estate without using any money of their own, such as by going through private money and hard money lenders. Knowing this information is a crucial piece to helping beginners get over their hesitation.
Investing for beginners doesn’t have to be nearly as intimidating or difficult as many assume. In fact, there are plenty of investments for beginners that are both easy to use and potentially lucrative; the two don’t need to be mutually exclusive. That said, it’s also not enough to choose just one of the investment paths above. Investors of every level are advised to diversify, which means it would be wise to choose any and all of the strategies that compliment their style, goals and risk appetite. A well diversified portfolio consisting of the strategies listed in this article will both reduce risk and increase the potential return on investment.
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