How to start investing on your own
It’s tempting to put off investing. You can think of plenty of excuses: I haven’t saved enough money yet, it’s time consuming, or I don’t know where to start. But the truth is, you can start investing with just a few hundred dollars by considering the following steps.
How to Invest: Make a Plan
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If you could have the chance to triple your net worth, would you take it?
Research has shown that, on average, people who create a financial plan end up with three times the wealth of those who don’t.*
So consider taking the time to do some financial planning.
Here are 5 simple steps to get started:
1. Identify your important goals and give them each a deadline. Be honest with yourself. It’s better to set a modest goal that you can accomplish than set a goal that’s so unrealistic you give up along the way.
2. Come up with some ballpark figures for how much money you’ll need for each goal.
3. Review your finances. How much money have you saved, and how is it invested?
4. Think carefully about the level of risk you can bear. If you want to take a big risk and it doesn’t work out, will you still be able to pay your bills?
And 5. Look at what kind of returns your investments have generated over the long term and ask yourself: if they continue to perform in line with long-term averages, will you be on track to meet your goals?
And that’s it.
If this still seems overwhelming, it’s OK to ask for help. A Certified Financial Planner can walk you through the process, and they can check in with you periodically to help you stay on track to reach your goals.
*Source: Lusardi, A. & Mitchell, O.S. (May 2011) Financial Literacy and Planning: Implications for Retirement Wellbeing
Identify your goal.
Ask yourself what you want to achieve. Is your goal a down payment on a house? Are you saving for retirement? Or do you just want to get started and learn how to invest in the stock market?
Divide your goals into short-term, medium-term (one to five years), and long-term (more than five years). Then, decide how much money you’d like to save for each goal. Our calculators can help you define your target amount.
Now, it’s time to put your plan into action and start investing.
Some investors are tempted to wait for the “right” moment to invest. But starting early, and regularly investing what you can, usually takes you a lot further than waiting.
Select an account based on your goal.
The type of account you choose depends on your goal. There are many types of investment accounts
but here are some of the most common ones—organized by goal:
A range of goals
A brokerage account can help you save and invest for a broad range of goals.
Allows you to invest in everything from stocks and bonds to mutual funds, ETFs, and more.
Tax-advantaged accounts can help you invest for retirement needs.
Allows you to invest pre-tax dollars for tax-deferred growth.
Allows you to invest after-tax dollars, and qualified distributions are tax-free.
Tax-advantaged accounts can help you save and invest for educational expenses.
529 College Savings Plan
Allows you to save for college and qualified distributions are tax-free.
How do I choose tax-efficient investments?
Investment accounts can be divided into two main categories: taxable accounts (like a brokerage account) and tax-advantaged accounts (like an IRA, 401(k), Health Savings Account (HSA), or 529 College Savings Plan). As a general rule, investments that tend to lose less of their return to taxes are good candidates for taxable accounts. And investments that lose more of their return to taxes may be better suited for tax-advantaged accounts.
Build a diversified portfolio based on your risk tolerance.
Investing can generate returns over time, but it also involves risk. As an investor, you need to decide how much risk you’re willing, and able, to take on.
If your goal is many years away, there may be more time to weather the market’s ups and downs. So, you may be comfortable with a portfolio that has a greater potential for growth and a higher level of risk. But if your time frame is shorter, and you have little ability to take a loss, you should consider taking a more conservative approach.
Risk is the potential for your investments to lose value.
Risk willingness is your comfort taking risks. It’s how much fluctuation in value you can stomach on the way to your goal.
Risk tolerance is your willingness to take on risk. It’s how much risk you can stomach.
Risk capacity is your ability to take on risk without jeopardizing your financial goals. It’s how much risk you can actually afford.
If you need help working out your risk tolerance and risk capacity, use our Investor Profile Questionnaire or contact us.
Now, it’s time to think about your portfolio. Let’s start with the building blocks or “asset classes.” There are three main asset classes—
(equities) represent ownership in a company. They can provide both price appreciation and dividend income. Stocks are considered relatively risky, because the stock price may also decrease and there’s no guarantee you’ll be paid dividends. Stocks also tend to be more volatile than bonds.
represents a loan you make to a government, municipality or corporation (issuer). In return, that issuer promises to pay you a specified rate of interest and to repay the face value after a certain period of time, barring default. They can provide income and help balance the risks of stocks. As with any investment, bonds have risks such as default risk and reinvestment risk.
and cash investments include bank deposits (checking and savings accounts), money market funds and short-term investments (like CDs and short-term Treasury securities). These can provide flexibility and stability. Shorter-term investments tend to have lower returns than longer-term investments.
The way you divide your money among these groups of investments is called asset allocation. You want an asset allocation that is diversified or varied. This is because different asset classes tend to behave differently, depending on market conditions. Generally, stocks are considered to have the greatest risk (of losing money) but also the potential for the greatest gains. Bonds are generally seen as less risky but with lower potential for returns than stocks, and cash has the least risk and lowest potential return. This is what makes asset allocation, your mix of stocks, bonds, and cash, so important. You want an asset allocation that suits your goals, risk tolerance, and timeline. How do you know? Let’s look at Schwab’s model portfolios.
Schwab’s model portfolios
These five portfolios are sample asset allocation plans. The more conservative portfolios include a larger allocation (percentage) of bonds. The more aggressive portfolios include larger allocation of all types of stocks (large-cap stocks, small-cap stocks, and international stocks).
Source: Schwab Center for Financial Research. All models presented are hypothetical, for illustrative purposes only, and cannot be invested in directly. Models are shown at the asset group level and not intended to represent a specific investment product.
Build a portfolio in 3 steps:
Determine your asset allocation.
See our sample asset allocation plans above. In general, if you’re a risk-averse investor looking for income and stability, the conservative portfolio with a larger allocation of bonds than stocks may be right for you. But if you’re a long-term investor looking for high-growth potential, the aggressive portfolio with a large allocation of stocks may appeal to you.
Diversify within asset classes.
Stocks and bonds can be broken down further into different types. For example, you can invest in stocks that represent large companies (large-cap), small companies (small-cap), international companies, and everything in between.
Diversify within sectors.
You can break down your investments even further. For example, with large-cap stocks, you can invest in different sectors (like technology, health care, and communications). Within each sector, you can also invest in different industries. For example, within the health care sector, you could consider pharmaceuticals, biotechnology or equipment industries. Many funds that track indexes have this level of diversification built-in. A fund that tracks the S&P 500, for example, would give you exposure to all the companies and sectors represented by that index.
Want help with building a portfolio? Contact us.
Want help with building a portfolio? Contact us.
Stay the course
It’s important to look at the progress you’re making toward your goals over time, as opposed to tracking short-term ups and downs.
Because of the power of compound growth (reinvesting earnings and keeping them invested to generate more earnings), investing is as much about how much time you have, as it is about how much money you start with.
- Set up regular contributions. Even modest contributions, when made regularly, can potentially pay off over the long term.
- Check in periodically. Check on your investments at least annually to make sure they’re still in line with your original allocation. If not, consider
means adjusting your portfolio periodically to keep it in line with your chosen asset allocation and risk level—in other words, maintaining the relative percentages of stocks, bonds, cash, and other investments that you originally selected.
. Major life events, such as a new job, new child, marriage, or divorce, may also call for some adjustments.
Take the next step
Take the next step.
We can help.
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