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Investing can be intimidating when you’re just getting started, but you don’t have to be an expert at picking stocks to grow your wealth this way. In fact, you only need a single investment to get off and running. Below, we’ll take a look at one of the best options for new and experienced investors alike.
What should beginners look for in their first investment?
When building your investment portfolio, you always want to focus on strong companies you expect will perform well over the long term. It can seem tempting to try to buy in when a stock is skyrocketing, but if you don’t think it can sustain that high valuation over time, it’s probably not worth it. Trying to time the market usually doesn’t go well. You’re better off ignoring short-term swings and focusing on the company’s long-term growth potential.
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You also need to diversify your money. That means spreading it around between several different companies and sectors. Doing this reduces your risk of loss, because when some of your investments are doing poorly, you’ll have others to pick up the slack. This doesn’t mean you can’t lose money at all, but your losses are typically not as severe or as long lasting when you’re properly diversified.
Finally, you want to keep an eye on investment fees. You can check with your broker to see what its fee schedule looks like, but you also want to investigate the costs associated with your specific investments. Keep these as low as possible so you can hold onto more of your money.
The ideal investment for beginners
Index funds check all the boxes mentioned above. These are bundles of stocks you purchase as a package, and they’re designed to mimic a market index like the S&P 500. They contain all the same stocks as the index itself in roughly the same quantities, and the companies included are typically leaders in their industries.
Index funds instantly diversify your money, and they’re also pretty affordable. You’ll pay expense ratios, which are an annual fee written as a percentage of your investment. For example, if you have a 0.50% expense ratio, it means you’ll pay 0.50% annually on whatever you have invested in the fund. That’s not too bad, and some index funds have expense ratios that are much lower — even around 0.03%.
That said, index funds can’t do it all. They’re made to match the performance of their index as closely as possible, so they’re never going to beat it. In fact, many actually perform slightly worse than the index itself because you have fees taken out. But for most investors, this isn’t a huge deal. Even if you want to try your hand at picking individual stocks, it still helps to have an index fund or two in your portfolio.
But one of these probably won’t be enough on your own. An S&P 500 index fund, for example, invests your money in many companies and sectors, but they’re all large, U.S.-based companies. You probably also want to invest some money in foreign stocks as well so your portfolio doesn’t get hit too hard if the U.S. economy enters a recession.
You also want some of your money in safer investments like bonds. A good rule of thumb for this is to keep 110% minus your age in stocks and put the rest in bonds. So a 30-year-old would have 80% of their savings in stocks and 20% in bonds while a 50-year-old would have 60% in stocks and 40% in bonds. Doing this can further reduce your risk of loss.
Where to get started
You can invest in index funds with just about any broker. First, you need to decide which index you want. Then compare a few different funds tracking that index. The name of the index will usually be in the fund name. Look at each fund’s performance and pay attention to its expense ratio. Then choose the one you’d like to invest in.
If you plan to invest in multiple index funds, do your research to find out which stocks are in each fund. Try to avoid significant overlap if you can. This can expose you to too much risk by putting a lot of your savings into the few companies that show up in each fund.
Or you can always start with one index fund for now and add in other investments over time. If you’re new to investing, you might prefer to start slow and diversify your investments more as you gain more confidence. It’s all up to you.
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