You understand your risk tolerance and your investment goal(s). You have spoken with a financial professional. You have a suitable emergency fund (6-12 months of expenses in savings or cash). You are employed and employment is stable. Expenses and debt are under control. You have extra cash in your checkbook at the end of each month. You may be ready to start investing. Now what?
Invest What you Can Afford to Lose
First, invest only what you can afford to lose. Over the long term, you may make money (that’s the goal), but be prepared to see your investment value decline over the short term. That’s what markets do: rise and fall. Historically, U.S. equity markets rise 75% of the time, on average. That’s good, but that also means 25% of the time they fall. And when they do, you cannot hit the panic button and sell!
This means that if you buy a stock and the broader equity (stock) market moves lower and thereby your stock price declines, you should hold it. While the value of your investment has decreased, you haven’t taken an actual loss, right? We call this a “paper loss.” When the market rebounds, your stock price will also likely move higher. When the price of your stock moves higher than what you originally paid, this is a “paper gain.” You don’t actually reap the gain – the profit – until you sell at this higher level. How much a stock price goes up and down is called “volatility.” Volatility is common in the stock market. So, in the short term, it may look like you’re losing money; but gains are made over the long term. Investors must remain patient.
Buy Low, Sell High
Second, the basic plan is to buy low and, if you sell at some point, you sell high. This means you will make a gross profit. But not so fast: you must deduct the (capital gains) tax on this profit to determine your net profit from the investment (assuming it’s not invested in an IRA of some kind). Since the market goes up and down (volatility), there are opportunities to buy low and sell high. This is called “buying the dip” – a great time for investors to buy stocks at lower prices.
Third, what if you want to begin investing and don’t want to wait for a dip? There is a process called “Dollar-Cost Averaging” that is very useful for investors who want to invest a little money regularly, monthly let’s say. It’s not complicated. It just means you invest a small amount of money into your portfolio at regular intervals; sometimes the market is higher (and you paid more for a stock) and sometimes the market is lower (and you paid less for a stock). At the end of 12 months, for example, the costs of your purchases average out. This is a wise investing practice, whether you’re just starting out or you’re an experienced investor.
Financial Advisor or Robo-Advisor
Times have changed drastically for investors since the introduction of Robo(t)-advisors, who are typically “faceless” DIY (Do-It-Yourself) online investment platforms. Robo-advisors have the investment process so automated, for the beginner or investor with few needs it’s easy and simple, and especially cheap. Advisor fees eat directly into your investment returns. If you are charged one percent, for example, for an advisor’s services, your six percent return becomes a five percent return – that can mean thousands of dollars in a single year! That adds up over time. So, it is inexpensive to invest using a Robo-advisor. There’s no confusing jargon or big decisions to make; you simply answer a few questions, and the Robo-advisor will build a portfolio for you. Invest as much or as little as you like, when you want, and you are on your way. Learn more at https://www.nerdwallet.com/best/investing/robo-advisors.
If you have significant assets to invest or have goals other than basic retirement, you may want to consult with a financial advisor. Most Robo-advisor platforms cannot provide financial advice or planning, for instance. If this is important to you, then you will need to hire a professional advisor. The best place to start this search is at www.letsmakeaplan.org.
Begin with Easy Investments
Contrary to popular belief, you don’t need to be rich to invest. Ironically, most of the rich invested to get where they are. There are many investment types you might consider adding to your portfolio over time, but when it comes to your first investment, you should keep it simple. Investments like individual stocks, real estate, and alternative assets can be later additions to your portfolio as you get comfortable with the investing landscape. Determine your initial investment based on your investment goals, appetite for risk, stage of life (age) and investment horizon. The important thing is to take that first step.