Investing 101: Easy tips to create an investment portfolio and start investing at any age
If someone asked you for the difference between passive and active investing, would you stare at them blankly?
Some view investing in the stock market as a massive, overwhelming to-do that requires complete financial organization before you even begin.
Does that describe you? (It's okay, if so!) Either way, we have good news:
Investing in the stock market doesn't have to be overwhelming. And, guess what else?! You don't need to have perfect finances and loads of free time on your hands to start investing, either.
Follow our quick and easy investment guide to cozy up and get comfy with the world of stocks and bonds.
Let's do this.
Check your debt
While you don't have to be rolling in the dough to start investing, it's crucial that you tackle any high-interest credit card or personal debt before buying any assets.
We consider high debt as any Debt to Income (DTI) ratio above 35 percent.
Lots of high-interest debt can make it hard to refinance your student loans or do other things like buy a car or get a mortgage. So we recommend you ditch the dead weight and pay off your high-interest debt before you start playing in the markets.
Are you prepared for emergencies?
Before investing, you should be sure to have money set aside in a cash reserve. This fund will help you pay for food, rent, utilities, etc. in case of an emergency. Hey, life happens and you need to be prepared! (Uh...COVID-19, anyone!?)
Give your 401(k) the attention it deserves
Are you saving for your future? Investing in your retirement is one of our first If you have a 401(k) (or 403(b), 457 plan, etc.), the first step is to invest enough in this plan to receive your free employer match. Through an employer match, if you invest a certain percent of your salary, your employer will "match" it with their funds.
There are two different kinds of employer matches: partial and dollar-for-dollar.
Partial means that your employer will only match a portion of your investment; the most common match being 50 percent of what you put in—up to 6 percent of your salary. Dollar-for-dollar is exactly what it sounds like: your employer will match your investment, dollar-for-dollar—up to a certain part of your salary. If you do not invest enough for a match, you're leaving money on the table... your money... money you’re earning that your employer offers you as part of your salary.
Can you deal with market changes, dips and dives?
Does the thought of watching your investments bounce up and down with the market make your stomach turn? Us, too. But that's okay.
While investing doesn't have to be difficult, it can still get risky, depending on your asset allocation.
Regardless of your allocation between stocks and bonds (oh, my!), the market goes up over time. Simply put. So, if you can keep your Wheaties down while the market makes some changes, dips and dives, you're all set!
Try a low-minimum or no-minimum account
Some brilliant platforms out there allow individuals to invest with very small dollars ($5 in some cases) either in individual stocks (specific companies you'd like to invest in) or basic market investing (through ETFs and Index Funds). When choosing a platform, shoot for companies that have low minimums.
What should I invest in?
Stocks, bonds, commodities, real estate— there are several ways to make investments. Some are riskier than others. Before you start investing, it's essential you familiarize yourself with each kind of assets.
Stocks: Buying a share of a company. When you invest in a stock, you're investing in the success of a company. If a company does well, you also profit; vice versa.
Bonds: Just like loans, you can purchase bonds to lend money to companies and municipalities, companies, etc. There are two ways to profit from bonds: first, by collecting interest payments on them; and second, by selling them at a price that is higher than the initial value.
Index Funds: A mutual fund designed to match an underlying index. Index funds do not try to earn higher returns. Instead, they want to match the current state of the market. These can be a great way to try and balance your asset portfolio.
Exchange-Traded Funds (ETFs). A group of multiple assets combined into a single investment. You can trade or sell these on the stock exchange whenever the market is open. Keep in mind that the costs fluctuate often.
Allocate your assets
Once you have a general understanding of the different kinds of investment assets, it's time to create an asset allocation plan for yourself.
Be sure to factor in the amount of time you want to put toward investing. This time allowance can help you decide whether to focus on making active or passive investments. Active investments take more time and require you to do your research. Passive investments are for those who prefer a more hands-off approach. Their pros and cons vary. Take some time to figure out which one you think will be best for your lifestyle/needs.
Start with the smallest balance you're comfortable investing in the market and watch what happens for a few months. Then, as you get comfortable, add more. Slowly!
Eventually, you should be investing with consistent exposure as we like to call the dollar-cost averaging strategy.
You even have the option to buy partial shares of stocks to save money and start small—all while diversifying your portfolio.
Keep it going!
The most successful investors are typically those who start investing early and keep it up regularly. We're not saying to invest willy-nilly! No; create an investment strategy, determine your risk tolerance, know your limits and, critically, make sure the rest of your financial plan is in order. Investing consistently will help you take advantage of market fluctuations and may help you pay less per share, on average. However, when investing, nothing is guaranteed.
With these steps, you'll be investing like a pro in no time! Last words of wisdom? Remember that investments are for the long-term. While it may take a bit of time to see a good return value, it's not (usually) a get rich quick kind of deal.
Move over, Warren Buffet! There's a new investor entering the market!
Want more? Review our super simple bonus investing tips!