How to invest: 4 tips for beginners


The vast majority of American investors agree that their biggest regret with investing is straightforward: not starting sooner.

A 2019 survey from Magnify Money found that, across generations, 69% to 77% of respondents said they had procrastinated investing decisions. The top regrets were not saving for retirement sooner, not investing in stocks sooner, or not purchasing a certain stock earlier.

Investing may seem daunting or like something only people with a lot of money can do. The good news, though, is that it's easier and cheaper than ever to invest in the stock market — and by overcoming your fears, you can ward off some of those woulda-coulda-shoulda feelings down the road.

Here are four tips to help you get started.

1. Define your goals

So, you want to invest — but why? It's important to understand your goals and expectations for your money. While investing in the market results in significantly higher average returns compared to leaving money in a savings account, it's possible the value of your portfolio will fall, at least temporarily, or that your returns will be less than you expected.

Experts generally recommend that you invest money in the stock market that you don't need for at least five years. That's because the value of your portfolio can fluctuate during shorter time periods, even though every downturn has ended with an upturn.

You can also manage the risks associated with investing by identifying how much risk you're comfortable with, diversifying the assets in your portfolio, maintaining a consistent discipline of continually adding money to your account over time, and by investing in safer vehicles like index funds rather than by trying to pick individual stocks.

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If you're investing for far-off goals like retirement, you'll have a long time to ride out the market's inevitable ups and downs. However, if you have a more specific and near-term goal in mind, like a down payment for a home, make sure you're well diversified to manage the risks.

Finally, it's important to embrace your role as an investor. Thinking like an investor means realizing that investing can help you come out further ahead and then committing to that course: adding more to your retirement accounts whenever you can and remembering not to get spooked by moves in the market.

2. Start with a 401(k) or IRA

One of the best ways to start investing is with your 401(k) or other workplace retirement plan. Once you're eligible to begin contributing, it's easy to set up your account. You'll need to make just two key decisions: how much you want to contribute, and in what investments.

The reason a 401(k) is so attractive for beginners is that these accounts offer a valuable tax break and many employers match a portion of contributions. This free money that your company kicks in can help you to grow the value of your portfolio even faster.

What's more, 401(k) plans offer a relatively limited number of investment options to choose from — which can alleviate a common cognitive bias known as "choice overload." Beginner investors may feel overwhelmed by all of the new investing-related information, so it's helpful if someone else (in this case, your employer) has already curated the choices on your behalf.

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If you don't have a workplace retirement plan, you can focus on funding an IRA. These individual retirement accounts aren't tied to your workplace but still offer some of the same tax advantages, making them a low-cost and easy way to prepare for retirement.

Finally, you can begin investing with very little money thanks to automated investment services known as robo-advisors. While these accounts don't offer the same tax advantages as a 401(k) or IRA, they're typically low-cost by nature and use computer algorithms or software to build and manage your portfolio.

3. Focus primarily on index funds

How do you actually invest money when starting out? A proven strategy is to invest in the market itself, rather than trying to pick the winners from the losers.

That's why index funds that track the performance of major market benchmarks, like the S&P 500, have grown in popularity in recent decades. These investments offer three key advantages:

  • You don't have to be an expert. That's because you're investing in the broader market rather than individual stocks.
  • You won't lose money to hefty fees. Index funds pool money from a group of investors and then buy the individual stocks or other securities that make up a particular index, and this model helps to reduce the associated costs that fund managers charge.
  • You can diversify your portfolio. By spreading your money across a variety of assets rather than just a handful of individual stocks, your portfolio is less likely to see sharp, short-term fluctuations.

Index funds are the most common type of investment option to select from in many 401(k) plans or with robo-advisors. And even if you're selecting investments on your own, index funds — either of the exchange-traded fund (ETF) or mutual fund variety — are popular choices for the above reasons.

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Index funds also allow you to get exposure to different types of assets. There are funds that track other markets like bonds, commodities, or real estate. By investing in a mix of various investments, this will help to balance out the overall risk in your portfolio because not all assets move in the same direction at the same time.

The money managers at T. Rowe Price suggest these guidelines for your portfolio mix, based on your age:

  • In your 20s and 30s: Up to 90% in stocks (because of your long investment timeline), with up to 10% remaining in bonds.
  • In your 40s: Up to 80% in stocks, with up to 20% remaining in bonds.
  • In your 50s: 60% to 80% in stocks, 20% to 30% in bonds, and up to 10% in cash.
  • In your 60s: 50% to 65% in stocks, 25% to 35% in bonds, and 5% to 15% in cash.

4. Start small and keep at it

Many people have keyed in on $1 million as a goal for retirement savings. Even if that's not your magic number, you may be pleasantly surprised to learn that getting there isn't so hard, especially if you start saving and investing in your 20s.

The sooner you begin investing for the future, the easier it is to build wealth — and you have the power of compound interest to thank. Albert Einstein is said to have called compounding "the most powerful force in the universe," because you earn interest on your savings as well as interest on the interest you've earned.

Grow's compound interest calculator will help you see how different amounts of money will compound and can grow over time. To appreciate just how much small amounts add up, consider the idea of investing $1 a day for a child. By the time he or she is 18, you'd have $13,000, assuming a 7% average annual return.

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These types of daily, weekly, or monthly habits can make investing routine. Doing so will let you take advantage of a strategy known as dollar-cost averaging that's been shown to lead to long-term investing success. Regularly buying assets at set intervals helps smooth out the amount you pay for them, ensuring that you don't invest all your money when the stock market is at a record high, for example.

Finally, don't forget the goals you outlined above for why you're investing in the first place. When the market goes up, that can remind you not to cash out, since treating investment accounts like an ATM could create an unexpected tax burden, for example. And when the market dips, that can help you remember the long-term consequences associated with a short-term decision like selling investments out of fear. Doing so could mean you miss out when the market eventually rebounds, as it always has in the past.

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