So you want to start investing. But when you're bombarded with a wealth of investing platforms, it might be difficult to figure out which kind is right for you.
Don't worry. I'm going to help you figure out what approach to take based on your financial situation, investment goals, and risk tolerance.
But first things first.
Make sure you're ready to start investing
Before you start investing, make sure you have a manageable budget and a reliable emergency fund. Most financial advisors recommend you set aside enough to cover at least six months of expenses to cover the unexpected.
You should also make sure you've eliminated high-interest credit card debt. If you're just making the minimum payments on your credit card balances, it might be tempting to use your disposable income to invest in the stock market.
Despite the occasional market dip, the S&P 500 -- considered a benchmark for the overall stock market -- returns an average of 10% in the long run. That dwarfs the average interest rate on savings accounts of less than 2%.
But consider this: The average credit card's annual percentage rate is 15%. So work on getting over this roadblock, and then your investing dollars can really take the lead.
Know your investing options
The universe of investments is vast and growing. But there are a few choices that can work for beginners:
Stocks: Stocks represent shares of ownership in a company. Depending on the overall performance of that company, the share price can rise or fall throughout the day. Stock share prices can range from a few pennies to hundreds of thousands of dollars. Because of its inherent volatility, investing heavily in stocks is generally recommended for investors with the risk capacity to stomach the lows and the time horizon to recover the losses.
Bonds: Buying a bond basically means you're lending your money to a corporation or government that promises to pay you back plus interest. Bonds are generally low-risk investments. So if you're investing in the short term, devoting an adequate share of your portfolio to bonds can help. But remember: low risk usually means low returns.
Exchange-traded funds (ETFs): An ETF is a basket of various stocks or bonds. You can buy shares of an ETF like you would an individual stock. ETFs are known for instant diversification, low fees, and low costs.
Mutual funds: Like ETFs, mutual funds invest in a variety of stocks, bonds, and other securities. But they don't trade like stocks and ETFs. Most require a minimum investment, which can be around $1,000 or more.
Index funds: An index fund is a type of mutual fund that aims to mirror the performance of a stock market index like the S&P 500 or the Nasdaq. This strategy is known as passive management. Since index fund managers want to mimic the performance of a benchmark rather than outperform it, index funds tend to have lower fees than their actively managed counterparts.
So now that you know a bit about what's out there, you can shop around for the right brokerage account.
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Online investing apps
If you're a beginner, one of the easiest ways to start investing is by downloading a discount investing app. Most require no minimum investment.
If you're saving for retirement, you can open an individual retirement account (IRA) or Roth IRA. But if you're saving for the short term, you can also open a taxable brokerage account. You can withdraw funds from these accounts anytime penalty-free. But you could owe capital gains taxes.
Most of today's popular investing platforms let you invest in a wide variety of stocks, ETFs, and options commission-free. So if you want to build and manage your own portfolio, online brokerages offer an inexpensive way to do it.
Having patience and investing for the long term is typically best for most people. But if you want to try to succeed at day trading (and few people actually succeed at it), you need to know what you're doing. Learn how to research stocks through techniques like fundamental analysis and technical analysis.
Digital tools can help you do this. This is where some online brokers fall short. Many don't offer robust tools and platforms that can help you vet stocks and ETFs.
More-established brokerage companies may offer better solutions for your investing needs. Several asset management companies don't require a minimum investment to open a taxable brokerage account. And all the bells and whistles, like advanced stock screeners and analytical tools, come free.
But if you don't have the time to spend all day looking at charts and following price movements, you can still succeed at investing. In fact, day trading is one of the hardest ways to try to make money in the stock market.
Robo-advisors
A robo-advisor is an investment management service that uses an algorithm to build and manage a diversified portfolio for you.
Here's how it works: You answer an online questionnaire about your financial situation, investment goals, and risk tolerance. The robo-advisor then recommends a portfolio typically built with low-cost ETFs.
Since you won't be doing any of the legwork, the company offering the robo-advisor might charge an asset management fee. But these are typically competitive at about 0.25%. Some brokerage companies might waive the fee if your balance is below a certain threshold.
Moreover, many robo-advisors offer distinct features like automatic rebalancing. This means you won't have to check your portfolio to make any necessary changes to your asset allocation. The robo-advisor does it for you.
Another common feature among robo-advisors is tax-loss harvesting services. But the downside to robo-advisors is that you won't be able to pick your own securities. You're usually limited to a model portfolio built with ETFs or mutual funds.
The bottom line
Before you start investing, make sure you have a manageable budget, an emergency fund, and little to no high-interest debt. Once that's cleared, you have plenty of options. If you want to analyze and pick your own stocks, consider an online investing app.
If you're a set-it-and-forget-it investor, a robo-advisor could come in handy. It builds and manages a portfolio for you in exchange for a small fee. Online investing apps and robo-advisors can help the novice investor start building long-term wealth.
