A Beginner's Guide to Investing Like a Pro

A Beginner's Guide to Investing Like a Pro

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I’m a firm believer that basic personal finance should be taught in school. So many college graduates emerge with nothing more than a vague idea of how to start investing for a secure future. And this is a huge problem because investing is actually an important part of building wealth! Sure, it may come with a few new vocabulary words, but investing doesn’t have to be that complicated. So let's break it down in a simple, bite-sized, approachable way. Because who doesn’t want to make money from their money, am I right? Here are all the investing basics you need to get started.


Why should I invest?

The whole point of investing is to grow your money. Financial independence may be your dream, but to get there, you have to let your money work for you. And the long-term return you'll earn on your investments far exceeds what you can earn in a savings account. So here's the bad news: saving is NOT enough.

Consider this: high-yield savings accounts pay around 1.5% in interest annually. But inflation (general price increases), grows at around 3% per year. That means you are actually losing money because prices are increasing faster than your savings are. On the other hand, the average stock market return over a 10-year period is 10%-12%, which means you're growing money.

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When should I start investing?

The earlier you start investing, the more time your money has to compound and grow. But not everyone should start investing today. Here's a little quiz to determine if you're ready:

1. Do you have any credit card debt or other high-interest loans? If so, pay off your debt first. The interest you’re paying may outweigh the returns on your investments.

2. Do you have an emergency savings fund? If you faced a sudden $1,000 expense (say, a car repair or medical bill), could you pay it without borrowing money? What if you lost your job—how much cushion do you have to cover your bills until you find a new one? Before you start investing, open a savings account and start funding it. Give yourself at least three months of savings as backup in case something goes wrong.

3. Are you contributing as much as your employer will match to your IRA or 401(k)? This is free money, so don't give it up! Your employer will only match as much as you're contributing, up to a certain level.

If you're debt-free, have an emergency fund, and contribute to your 401(k), NOW is the time to start investing!

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What should I invest in?

First, ask yourself what you're investing for and how quickly you'll need the money. Your time horizon will inform how risky your investment strategy should be. If you're in your twenties or thirties and investing for retirement, you should put a good portion of your money into stocks or index funds that track the stock market. These assets will have short-term fluctuations, but that shouldn't matter if you're not touching the money for decades.

On the other hand, if you're fifty-something and looking to retire with a shorter time horizon, your investments should be weighted toward bonds. Bonds are loans made to corporate or government entities with a fixed rate. Though they come with lower return expectations, bonds are more stable than stocks and therefore, less risky.

If you're saving up for a really short-term purchase like a wedding or a house, I wouldn't recommend investing that cash at all. Instead, stash it into a high-yield savings account with an online bank like Marcus by Goldman Sachs or Synchrony Bank. That way, you can access it whenever you need it, with zero risk. The last thing you need is for the market to dip right before your down payment is due, so stay away from the stock market on this one.

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Should I choose my own stocks?

Unless you have significant time to research individual stocks, I wouldn't advise you to choose your own. Instead, invest in an index fund that tracks the overall stock market. An index fund is a basket of stocks that tracks a broader index, like the S&P 500, and gives you diversified market exposure.

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What's the difference between an index fund and a mutual fund?

It's easy to get confused between index funds and actively managed mutual funds. Both are baskets of stocks. The difference is in the way those stocks are chosen. An index fund chooses stocks based on an algorithm. The stocks in an actively managed mutual fund, however, are chosen by a person. Research shows that index funds outperform managed mutual funds. Because robots > humans, right? Plus, they are a lot cheaper for you because an algorithm is doing the work instead of a salaried person.

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How do I start investing?

If you have money in an IRA or 401(k), then you're already an investor! Just make sure your investments are consistent with your time horizon. If you're decades away from retirement, go with a riskier, stock-heavy portfolio. If you're closer to retirement, go with a safer, bond-heavy strategy.

Beyond your retirement accounts, another way to invest is by opening a brokerage account. There are countless options out there, but only one that I've used for years and personally swear by.

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Download the best investment app for beginners.

As a finance blogger, it's my job to test and curate new finance apps for my readers. As you might imagine, cool new platforms emerge all the time, and I'm constantly finding new favorites. But there is one that I have remained loyal to since day one. There is simply nothing better (in my opinion) than Wealthfront!

Wealthfront is an online brokerage platform, or robo-advisor, that makes investing simple and approachable. Here's how it works. Wealthfront starts by assessing your risk tolerance through a series of questions. Then, it calculates the best investment strategy for you based on your age, expected retirement date, income level, and wealth goals. Next, Wealthfront invests your money in low-cost index funds that line up with your strategy and maintains your portfolio over time. It'll even save you money on taxes through a strategy called tax loss harvesting. Wealthfront is cheaper than any financial advisor, will invest your money in the best way for your unique position, and you never have to lift a finger.

If you sign up here, you'll get your first $5,000 managed free! Which means you actually have nothing to lose.

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Avoid this major investing mistake.

There is one major mistake people make when it comes to investing: letting emotions impact investment decisions. Once you're invested in the right strategy, try not to monitor it every day or even every week. When the market dips (and it WILL dip), it's easy to get scared and sell all of your stocks. This is emotional investing. Do not do this. If you're invested in a long-term strategy, it shouldn't matter if the market dips 30% today or tomorrow or in a year or in five years. Trust that the market will correct itself and earn you a solid return in the long run. Here's the bottom line: short-term market volatility should NOT impact a strategy built for a longer time horizon.

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The Bottom Line

That was a lot of info to digest, so let's recap:

1. Investing is an important part of building wealth (saving is not enough).

2. Before you start investing, pay off high-interest debt, build an emergency fund, and contribute to your 401(k).

3. If you don't need your money for a few decades, invest in low-cost index funds that track the stock market.

4. If you need your money within the next year or two, don't invest it in the stock market. Instead, put it in a high-yield savings account.

5. Wealthfront will help you set the right strategy, execute it, and maintain it long-term. Because who has time for that? All you have to do is sit back and relax.

Happy investing!

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