Beginner’s Guide to Investing in 4 Steps

When you think of an investor, maybe you picture a slick business person in an expensive suit who works in a corner office — and if you don’t fit in this box, you might think investing is out of your reach.

But almost anyone can start investing, even with as little as $5.

1. Figure out your goal

You don’t need a lot of money to start investing. However, keep in mind that you should only invest money you don’t need to cover rent, student loans, insurance, and other essential expenses.

To start, consider your financial goals. For example, maybe you want to save for a new home, plan for retirement, or tuck money away for your child’s college education.

As you think about your financial future and its timelines, here are some guidelines to keep in mind:

Short-term goals: 0 to 5 years

In general, experts recommend that you keep money for short-term goals in a savings account you can easily access, such as a high-yield savings account.

Investments can be volatile, so you don’t want to risk cash you’ll need soon. While a savings account might not earn you as much in interest, you won’t lose any of your money.

Mid-term goals: 6 to 10 years

If you won’t need the money for six to 10 years, consider investing in a mix of stocks and bonds to mitigate some of the risk.

Keep in mind that all investments come with at least some risk, so there’s no guarantee of future returns. However, over the past 60 years, average annual returns for the S&P 500 — a major stock index — were nearly 8%.

Long-term goals: 10 years or longer

For long-term goals, such as savings, retirement, or building future wealth, experts say you should invest aggressively by putting most of your money in stocks. Because your portfolio will be aggressive, you’ll see market fluctuations, but you’ll likely also experience growth over the long term.

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2. Plan for your retirement first

It’s typically a good idea to plan for your retirement before considering other types of investments. In general, you should aim to save at least 15% of your income for retirement.

If you can’t afford to invest that much right now, that’s OK — just save what you can and invest a little more each year if possible.

If you have access to an employer-sponsored retirement plan — such as a 401(k) or 403(b) — and your employer offers matching contributions, try to contribute enough to qualify for the full match. Otherwise, you could be missing out on a valuable part of your compensation package.

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3. Open an investment account

After you’ve planned for your retirement savings, consider what other kinds of investments might work for you. If you’re ready to open an investment account, you’ll first need to pick the type of account you want depending on your goals.

Here are a couple of common options:

• 529 plan: This type of plan is used to invest for your child’s educational expenses.
• Taxable investment account: Unlike an IRA or 401(k) that offers tax advantages, taxable investment accounts don’t have any tax benefits. However, they also don’t come with restrictions for when you can take withdrawals, which could make them a good option if you’re investing for mid- or long-term goals.

Next, find a brokerage firm you want to work with. Here are some popular firms for new investors. Note that these aren’t Credible partners.

Robo advisors

If you’re brand new to the world of investing or you’d prefer a more passive approach, you could also consider opening an account with a robo-advisor, such as Betterment or Ellevest.

Robo-advisors typically offer taxable investment accounts, retirement accounts, and education savings accounts — but unlike traditional brokerage firms where you pick your own investments, robo-advisors do the work for you.

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4. Find a strategy that works for your goals

The right investment strategy for you will ultimately depend on your goals and how fast you’d like to reach them. Here are a couple of potential approaches to consider:

Dollar-cost averaging

Timing the market is difficult, even for experts. One strategy to potentially mitigate risk is dollar-cost averaging. With this approach, you don’t pay attention to market fluctuations.

Instead, you make regular contributions at regular intervals — such as investing $50 each week into your 401(k), for example.

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Index funds

While learning how to invest in stocks might be popular, investing in individual stocks could be risky. If you invest your money in a single company, there’s a chance the company could perform poorly, and you could lose your investment.

To reduce your risk, you might decide to invest in index funds instead. Index funds are mutual funds or exchange-traded funds (ETFs) that track major stock market indices such as the S&P 500 or the Dow Jones Industrial Average.

Rather than investing in a single company, investing in an index fund lets you invest in hundreds of companies at once. If a company performs poorly, the other companies within the index fund can offset your losses.

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