5 Investment Tips for Beginners
1. Know your risk tolerance and timeline
The investments you choose depend on these two factors. Your risk tolerance is your ability to handle risks or a loss. What would happen if you lost 10% or more of your portfolio? Would it send you in a financial tailspin or could you wait it out and let the market bounce back? The lower your risk tolerance the lower your returns will be.
Your timeline is important too. A short timeline, say less than 5 years, leaves little room for investments to bounce back. A 20-year timeline, though, leaves more room for back and forth, allowing you to take greater risks.
2. Diversify your investments
Putting all your eggs in one basket is the biggest mistake new investors make. If you put all your money in one investment, what happens if it tanks? You lose everything.
If you diversify, you offset the risk of one investment with the stability of another. It’s rare that all investments lose everything so diversifying your portfolio is the key to keeping you out of the red.
3. Determine if you want a hands-on or hands-off approach
A hands-on approach means you make the investment decisions and make the trades. If the sheer thought of handling it yourself freaks you out, you’re a hands-off investor. Work with a robo-advisor or discount broker who does the investing for you.
Robo-advisors are great because once you answer questions about your risk tolerance and goals, they set up your portfolio and manage it for you. You just watch your money grow.
4. Split your investments between taxable and tax-deferred accounts
At least some of your money should be invested in your retirement accounts. Tax-deferred accounts defer your tax liability on the contributions and earnings until you withdraw them in retirement. This lowers your tax liability now and gives you more money to invest in your retirement.
Taxable accounts don’t have withdrawal requirements, but you’ll pay taxes on the money used for contributions and any capital gains earned.
5. Don’t be an emotional investor
Beginning investors should set it and forget it. If you let your emotions get involved, you’ll buy and sell too often. Instead, let the investments sit and earn the long-term growth.
Start Investing Today
The number one tip for any investor is to start today. The longer you wait, the more money you lose. Every dollar you invest today will be worth much more tomorrow, next week, and next year.
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