If you've never invested before, the stock market can seem like the most intimidating thing in the world. But some simple, easy-to-follow investment strategies can make investing for beginners a lot less scary. Let's take a look at four ways beginners can get started in their investing careers.
1. Target-date mutual funds
Target funds are a relatively new financial concept, having become popular just in the past decade. But as a one-stop shop, they're perfect for beginners seeking to invest without doing a lot of legwork.
Target funds are tailored for particular time horizons, with most funds specifying a target date that matches up with when investors will need to start spending down their savings. With a mix of stocks, bonds, and other investments, target funds start out investing aggressively when the target date is long in the future but then get more conservative as the target date approaches. With this automatic risk reduction over time, you don't have to make any adjustments of your own along the way. Understanding exactly how your target fund works is important, but as a low-stress way for beginners to invest, target funds are hard to beat for simplicity.
2. Index mutual funds
An only slightly more complicated method of investing for beginners to consider is a portfolio of index funds. Unlike target funds, most index funds focus on a particular type of investment. That leaves you with the decision of how much money to allocate across various investments, but they still give you broad exposure to entire markets or submarkets rather than requiring you to pick individual stocks. Their flexibility gives you greater latitude than target funds to adjust your exposure to your own risk tolerance and views of the markets, making index funds a good second step for beginners once they start getting comfortable with investing.
3. Exchange-traded funds
Most ETFs are essentially the same as index mutual funds, except that the mechanism for buying and selling shares is different. ETFs trade like regular stocks, so you need a broker in order to use them. However, many brokers offer ETF trading at no commission, often giving them a cost advantage even compared to similar index mutual funds. Moreover, although broad-based ETFs Vanguard Total Stock Market (NYSEMKT:VTI) and SPDR S&P 500 (NYSEMKT:SPY) cover entire swaths of the stock market, more narrowly focused ETFs target smaller sectors and subsectors, giving you even greater investing flexibility.
4. Low-volatility stocks
Beginners often shy away from individual stocks because of their higher risk. But there are steps you can take to help you sleep better at night. To start out with, focusing on less volatile stocks with stable business models will get you used to investing in individual companies.
For instance, consumer giant PepsiCo (NASDAQ:PEP) has well-known brands like Pepsi and Frito-Lay in its stable of popular products. For investors, the company has huge potential for international growth and has boosted spending on marketing and brand awareness in an effort to drive sales higher. But despite that promise, on average, its shares have been only about a third as volatile as the overall stock market. That means you might not get the full benefit of a strong bull market run in stocks, but you might also see smaller declines if the market turns downward. Looking at holdings lists of ETFs like PowerShares S&P 500 Low Volatility (NYSEMKT:SPLV) can give you ideas for other low-volatility stocks to consider.
Don't be afraid!
With the market at new highs, it's natural for would-be new investors to be afraid of what could come next if they buy stocks now. But the primary appeal of these low-stress strategies on investing for beginners is that they should be able to help you break through your fears and get your money working harder for you for the long haul.