Investing can be a great way to grow your money, but it's not without risk. The fear of losing money scares many would-be investors away, but you don't have to be one of them. While it's true that being a successful active trader requires a lot of study and practice, you can jump into long-term, buy-and-hold investing without knowing that much about the stock market. Here are a few tips to help start you off on the right foot.
A good rule of thumb is to never invest money that you can't afford to lose. If you break this rule and your investments don't pan out, then you could find yourself struggling to pay your bills at the end of the month.
Figure out how much money you need for living expenses and set that aside each month. Then you can use as much as you want of what's left over for investing. Traditional 401(k)s and IRAs are a great place for beginners to start investing, because these accounts are tax-advantaged, which means the money you put into them comes off of your taxable income, and you don't have to pay any taxes on your investments until you withdraw the money.
It's up to you to decide how much money you're willing to risk, but if you're concerned about losing money, it's best to start with a relatively small sum until you're more comfortable with investing. You could start with a lump-sum investment or contribute a set amount to your investment account each month. As your money grows and you become more experienced, you can gradually add more money and purchase new stocks to diversify your investments. This will give you a greater chance of success.
So how do you decide what to put your hard-earned money into? Here are some of the basics.
Buy what you know
Everyone dreams of investing in the next big thing and making a fortune, but those opportunities are never easy to spot. The smarter play for beginning investors is to stick with large, familiar companies that you know have a long and bright future ahead of them. Investing in start-ups early can be a gold mine, but more often than not, you'll end up losing your money when they go under.
Warren Buffett advises that you stick to companies within your "circle of competence" -- that is, companies you understand. If you don't know much about advanced tech, you probably shouldn't waste your time investing in artificial intelligence, because you'll have trouble assessing the companies' long-term growth potential. On the other hand, if you work in the tech industry yourself, this could be a great place to invest your money, because it'll be easier for you to spot the good opportunities.
You don't have to stick to your professional sphere, though. Look at the products and services you use most often and which ones appear to be the most popular. Use this as your jumping-off point. Then investigate the companies further and figure out which ones offer the best value and the greatest long-term growth prospects.
Another solid option for beginning investors is index funds. These are mutual funds or exchange-traded funds that are designed to track a specific index -- for example, the S&P 500. These funds invest in all of the components of that index in an attempt to replicate its performance. They usually carry low fees and deliver reliable returns.
Choose the right broker
Once you've decided what you want to invest in, you have to decide where you want to stash those funds. There are dozens of brokers to choose from, but not all of them are great fits for beginning investors. Many require you to contribute a minimum balance that can be more than $2,500. If you only have a few hundred dollars to invest, that won't work for you.
Focus on finding a broker with a low or no account minimum so you can start small. It's also a good idea to compare fees across several brokers and see which one offers you the best deal. Transaction fees, custodian fees, and expense ratios are a few of the most common fees. If your account is professionally managed, you can expect to pay advisory fees as well. You may also want to look into what resources the broker has to help beginning investors learn about the stock market. If you're serious about growing your portfolio, these tools can be invaluable.
Re-evaluate your portfolio periodically
It may seem like keeping a close watch on your investments is a smart move, but this isn't always the case. Even the best companies sometimes have a bad quarter, and this can drive some investors to make emotional decisions that cost them money. All stocks have their ups and downs, and it's important not to judge their value solely based on their performance over the last few weeks or months.
You're usually better off holding on to your investments for years or decades, even if their value dips for a while. A whopping 90% of active traders fail to beat their index targets, according to a study by S&P Dow Jones Indices. Investors who purchase stocks and let them sit for years on end tend to enjoy much higher returns than traders who buy and sell many times a year.
Most investors should rebalance their portfolios once or twice per year. Rebalancing means selectively buying and selling some investments in order to maintain the asset allocation you want. Let's assume your portfolio is 50% stocks and 50% bonds to start. If the stocks do well, then after a year, their value may suddenly make up 60% of your total portfolio. So if you still want to keep a 50/50 split, you'll need to take some of your money out of stocks and put them into bonds. Rebalancing is also a good time to look at how your stocks are doing and decide what you want to keep, what you want to sell, and what else you may want to invest in. By limiting how often you rebalance your portfolio, you will save money on transaction fees as well.
All of these tips can help you get started with investing, but if your goal is to one day manage a large and diverse portfolio, there's no substitute for education. Familiarize yourself with the different types of investment funds and common investment strategies and learn how to assess your risk tolerance. Don't be afraid to ask for help if there's something you don't understand. The more you learn about investing, the better your chances of success.
The Motley Fool has a disclosure policy.