Many people focus on saving money while neglecting to invest their money. Without investing that money, they are missing out on the power of compound interest and the ability to make their money work for them.
Newbies may want to invest but don’t know where to start. Lee Fondiller, a seasoned entrepreneur from Eldersburg, MD, discusses the best investment opportunities for newbies and how they can help them achieve long-term prosperity and financial health.
Determine your risk tolerance
Before making any investments, it’s a good idea to think about your tolerance for risk. Beginners are generally advised to start with less risky investments, but you might want to be more daring if you have a little more experience in the market.
Whatever your risk tolerance, it is necessary to diversify your investments. This means avoiding putting all of your money in one type of investment and spreading your leverage. For example, you might want to put some of it in your 401 (k) matching employer and some in a high yield savings account.
Here are some of the best ways for newbies to get involved in the market:
High yield savings accounts
A high yield savings account, usually available from online banks, gives you a better interest rate than what you would normally get on a local bank account. These accounts are easy to access, making them the perfect place to put money aside for an emergency fund or a short-term purchase.
Certificates of deposit (CD)
Certificates of deposit are FDIC insured up to $ 250,000, so they make great investments for beginners. With a stress-free form of investing like this, you won’t have to worry about what will happen to your money if the economy goes into a recession.
401 (k) s and workplace retirement plans
If your employer offers matching funds for a 401 (k) and you don’t have one, you decline the free money. The 401 (k) tend to perform at roughly the same rate as the stock market as a whole, so over time they produce returns between 5 and 8 percent. This beats high rate savings accounts and CDs by a significant amount. Just be aware that 401 (k) is not without risk, and if you are nearing retirement you may want to put your money in a more stable investment vehicle.
ETF (exchange traded funds)
An ETF is a collection of securities traded throughout the day, similar to a stock. Unlike mutual funds, they do not have minimum investment requirements and can be purchased for the price of a stock, like a mutual fund.
Mutual funds are a great way for newbie equity investors to get started. Although they have a minimum investment of a few thousand dollars, they have very low fees and sometimes no fees.
The most popular mutual funds follow indices like the S&P 500 or the Dow Jones Industrial Average. There are also industry-specific mutual funds in energy stocks, construction, and technology, to name a few.
Real estate can be a very profitable form of investment. However, Lee Fondiller cautions that it carries more risk than most of the other investments in this article. Over time, real estate tends to appreciate at around 4 to 8 percent per year. In some cases, this can beat the stock market.
If you’ve been in the market longer and can afford a bigger investment, a home or office may be the way to go. However, if you don’t have enough capital to invest in the entire property, you can turn to REITs or real estate investment trusts. Like mutual funds, these trusts allow a buyer to buy a fraction of the investment and trade it with the same liquidity as a stock.
Individual stocks are also riskier than trading mutual funds or similar investments. Decide whether you are investing for the long term or the short term. Short-term investing in individual stocks is not recommended for beginners. Don’t get caught up in the market game with your stocks. Always look at the rate of return over time and the general growth of the economy. Gains and declines in the price of an individual stock can be finicky, and going with the flow can lead to lost opportunities.
The bottom line
As you begin your investment journey, carefully consider your risk tolerance and financial goals. Before committing money to an investment, make sure you are fully informed about its risks and benefits. It is good to gradually shift from low risk investments like CDs and move towards investments like individual stocks.
Lee Fondiller reminds all new investors to consider long-term investments, as overall market growth is likely to be positive over a longer period. Constantly trying to play with the market can result in a loss of money and a smaller wallet.
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