Sometimes the hardest part of investing is just getting started.
The world of Wall Street can be confusing, and the stakes are high. If you invest a lot of money in the wrong places, you could lose a large portion of your hard-earned savings.
Fortunately, it's easier than you may think to become a successful DIY investor. These five tips can help put you on the right path.
1. Define your investing strategy
First, it's important to decide what investing strategy is right for you. Do you enjoy researching stocks and digging into corporate financial reports? If so, investing in individual stocks may be a good option. If you'd rather take a more hands-off approach, index funds or actively managed mutual funds may be your best bet.
Another option is to invest in multiple types of assets. For example, you could start by building a core portfolio of index funds that give you diversified exposure to the market, then invest in a few individual stocks that pique your interest.
There's no single right or wrong answer. How you choose to invest will depend on your personal preferences, so think about how much effort you want to put into investing. Being clear about that can help you determine which types of investments will best suit your needs.
2. Be prepared to do your research
Regardless of whether you plan to invest in individual stocks or funds, you'll need to do some research.
Choosing from index funds or actively managed mutual funds still gives you an array of options, and not all funds are created equal. S&P 500 index funds, for example, are on the lower-risk side of the spectrum. On the other hand, investments like growth ETFs carry more risk but can also produce higher returns.
If you're going to buy individual stocks, you ought to do much more research. You'll want to examine each potential investment's fundamentals to decide whether it's a solid long-term choice for your portfolio. Be prepared to dig into the details about each company's revenue growth and profit, its management team, and whether it has competitive advantages in its industry.
3. Think about your risk tolerance
Understanding your risk tolerance is vital when you're deciding which types of investments are right for you. Assets like S&P 500 index funds are among the least risky investments, making them a good option for people who are more risk-averse when it comes to their finances.
If you're willing to chance losing a larger share of your invested dollars in pursuit of higher returns, you may opt for individual stocks. Some companies are riskier than others, of course. For example, the share prices of younger organizations tend to be more volatile than those of older, well-established corporations with relatively steady revenues and earnings.
Not everyone can stomach high levels of volatility in their portfolio -- and it's very much a matter of your personal preferences. With high-risk investments, you may enjoy substantial gains. But if you won't be able to sleep at night if some of your holdings plunge in value -- or just because you're worried that they might -- then those high-risk/high-reward stocks might not be the right options for you.
4. Decide how much you can afford to invest
Before you start investing, decide how much you're willing to dedicate to your portfolio. The best way to invest in the stock market is to play the long game, so be prepared to leave your money invested for at least five to seven years. The longer you're able to leave that money alone, the more potential it has to grow.
Keep in mind, too, that you'll want to make sure your portfolio is properly diversified. If you're investing in individual stocks, it's best to choose at least 10 to 15 different companies from a variety of industries. This applies even if you have a limited amount of money to invest.
5. Be patient
Most importantly, be patient with your investments. It can take years to see substantial returns in the stock market, but it's worth the wait.
Say, for example, you decide to invest in S&P 500 index funds. Based on historical results, you might see, on average, a modest 10% annual return on your investments. If you invested $300 per month, you'd have around $22,000 accumulated after five years. But after 25 years, your portfolio would be worth more than $350,000. And after 35 years, it would be worth a whopping $975,000.
The longer you leave your money invested, the better your results are likely to be.
It can be intimidating to start investing for the first time, but it may be one of the best financial decisions you ever make. By doing your homework and going into it with the right strategies, you can put yourself on the long-term path to building wealth.