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Getting Ready to Take the Plunge into Investing? Understanding the Basics is Key

Getting Ready to Take the Plunge into Investing? Understanding the Basics is Key

| June 05, 2019

You’ve worked hard, saved up some money, and now you’re wondering how to make that money work for you. Stocks? Bonds? Mutual Funds? Real Estate? The sheer number of options are dizzying and leave many aspiring investors unsure of where to start. 

Entering the market as a first-time investor can be challenging, and in many cases overwhelming, especially if you have never ventured beyond a basic savings account. Given the unpredictability inherent to investing, it is imperative to educate yourself and implement a sustainable investing plan with the attitude to match. 

The good news is that you can start investing at any age — and with the right strategy, you can see your wealth start to grow. Here are a few questions to ask yourself as you enter the investing world. Your answers can help you decide the best pathway toward reaching your short- and long-term goals.  

What Kind of Investor Are You?

The first step in constructing your investing plan is determining your unique approach. Everyone has a different investment style, which is often based on their comfort with risk, life circumstances, and overall goals. Generally, investment styles are categorized as aggressive, conservative, and somewhere in-between based on where you fall on the risk-tolerance scale. 

Understanding this is vital to creating a sound plan. At Pinnacle Financial Advisors, we work with all of our clients to complete a questionnaire to determine their risk tolerance. It might include a question such as:

From an original investment of $10,000, your portfolio, now worth $20,000, suddenly declines $3,000, or 15%. Which best describes your response?

  • I would look for a way to invest more
  • I would take no action
  • I would be somewhat concerned
  • I would avoid any investment that could suddenly lose 15%of its value

An aggressive investor would look for a way to invest more, whereas a conservative investor would avoid investing anything that could lose 15% of its value. The other two options represent choices for a more middle-of-the-road investor.

Essentially, aggressive investors are willing to weather market volatility because they see potential longer-term gains and may be operating within a longer-tail timeline that gives their portfolio time to recover. Conservative investors might have a shorter timeline in mind and want to protect their assets as much as possible. Do some number crunching (or consult an investment advisor) to find out where you’re most comfortable on the spectrum. Remember, in most cases, you can change your strategy according to emerging circumstances and changing goals.

What are Your Goals? 

Your short- and long-term goals can also play a role in determining your investment choices. Envision yourself in five, 10, 15 years: How much do you want to have in savings by then? What about retirement funds? Are you planning on opening a business within that timeframe? There are so many possibilities, so it’s wise to build your investment strategy around the important life milestones you want to hit.

What are Your Investment Options?

This is the area where investing gets the most confusing for first-time investors. Not only are there several investment options, all with their own associated risks, but there are an overwhelming number of options within each area. 

Following are a few of the most common investment vehicles:

  • Mutual funds – Mutual funds are typically a collection of individual stocks grouped together in one bucket. These are investment strategies that allow you to pool your money with other investors to purchase a broad collection of securities.
  • Stocks – Perhaps one of the best-known investment vehicles, stocks are an equity investment that represents your ownership in a particular company and entitles you to a share of its earnings and assets. These types of investment vehicles do well when the economy is growing. Those who are optimistic about the financial future will more likely invest in stocks.
  • Bonds – On the other hand, bonds are fixed-income securities that do well when the economy begins to slow. Instead of investing in a more volatile stock, bonds allow investors to essentially lend their money to a government, municipality or corporation. This option is ideal for the investor who wants to better protect their wealth and is willing to accept a lower rate of return.
  • Exchange-Traded Funds – ETFs represent a collection of assets which are then divided into shares and sold on the open market. Typically bought or sold through a brokerage firm on the stock exchange, there are several types of ETFs with different advantages. Some may be particularly suited to income generation, speculation, or to offset risk.
  • Retirement Accounts – In many cases, retirement accounts are a must, but there are many to choose from, each with distinct advantages and limitations. Research or speak with a financial advisor to determine what type of retirement account – 401(k), IRA or Roth IRA – works best for your individual situation. And if you have access to an employer-sponsored 401(k), it’s wise to contribute to the company’s percentage match at the very minimum, and then contribute more as you rise through the ranks and increase your earning power.
  • Real Estate – This is one of the oldest and most consistent investment tools. However, while investing in real estate might seem easy, it can be a serious time and financial commitment, requiring a certain temperament and willingness to take on numerous responsibilities. This blog might help you decide if real estate investing is right for you.

Note that investments like stocks, bonds and real estate can be held as individual securities, in mutual funds or in exchange-traded funds. They could also be placed in regular, non-qualified investment accounts or in retirement accounts. Individual circumstances and goals can influence how you manage these investments.

Remember that adage about not putting all of your eggs in one basket? The same rings true for investing. Diversifying your investment portfolio by incorporating several types of investment vehicles can protect you from volatility.

Where Can You Get Advice? 

Reach out to a financial advisor for additional insight on how to best accumulate and protect your wealth over time. They may provide guidance on what investments most align with your goals and risk tolerance, and your expected rate of return. Explore how the Pinnacle team can help you start your investing journey.