What is the best way to start investing?  |  personal finance

What is the best way to start investing? | personal finance

(Xavier Simon)

So you want to start investing. But when you’re bombarded with a plethora of trading platforms, it can be difficult to determine which one is right for you.

Don’t worry. I’ll help you determine which approach to take based on your financial situation, investment objectives, and risk tolerance.

Make sure you’re ready to start investing

Before you start investing, make sure you have a manageable budget and a reliable emergency fund. Most financial advisors recommend that you set aside enough to cover at least six months of expenses to cover the unexpected.

You should also make sure you have eliminated high-interest credit card debt. If you’re only making the minimum payments on your credit card balances, it might be tempting to use your disposable income to invest in the stock market.

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Despite the occasional market crash, the S&P 500 — considered a benchmark for the stock market as a whole — yields an average of 10% over the long term. That dwarfs the average interest rate on savings accounts of less than 2%.

But consider this: The average credit card APR is 15%. So work to get past this hurdle, and then your investment dollars can really take the lead.

Know your investment options

The investment universe is vast and growing. But there are some options that can work for beginners:

Stocks: Stocks represent ownership shares in a company. Depending on the overall performance of that company, the share price may go up or down throughout the day. Stock prices can range from a few cents to hundreds of thousands of dollars. Due to their inherent volatility, investing heavily in stocks is generally recommended for investors with the risk capacity to withstand the lows and the time horizon to recoup losses.

Captivity: Buying a bond basically means that you are lending your money to a corporation or government that promises to pay you back plus interest. Bonds are generally low-risk investments. So if you’re investing for the short term, dedicating an appropriate portion of your portfolio to bonds can help. But remember: low risk generally means low returns.

Exchange Traded Funds (ETFs): An ETF is a basket of various stocks or bonds. You can buy shares of an ETF as you would an individual stock. ETFs are known for their instant diversification, low fees, and low costs.

Investment funds: Like ETFs, mutual funds invest in a variety of stocks, bonds, and other securities. But they are not traded like stocks and ETFs. Most require a minimum investment, which can be around $1,000 or more.

Index Funds: An index fund is a type of mutual fund that is intended to mirror the performance of a stock market index such as the S&P 500 or the nasdaq. This strategy is known as passive management. Since index fund managers want to mimic the performance of a benchmark rather than outperform it, index funds tend to have lower fees than their actively managed counterparts.

So now that you know a little about what’s out there, you can search for the right brokerage account.

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online investment apps

If you are a beginner, one of the easiest ways to start investing is by downloading a discount investing app. Most do not require a minimum investment.

If you’re saving for retirement, you can open an individual retirement account (IRA) or Roth IRA. But if you’re saving for the short term, you can also open a taxable brokerage account. You can withdraw funds from these accounts at any time without penalty. But you may owe capital gains taxes.

Most of today’s popular investment platforms allow you to invest in a wide variety of stocks, ETFs, and options commission-free. So if you want to build and manage your own portfolio, online brokers offer a cheap way to do it.

Being patient and investing for the long term is usually best for most people. But if you want to try to be successful day trading (and few people actually do), you need to know what you’re doing. Learn how to research stocks through techniques such as fundamental analysis and technical analysis.

Digital tools can help you do this. This is where some online brokers fall short. Many do not offer robust tools and platforms that can help you browse stocks and ETFs.

The more established brokerage firms may offer better solutions for your investment needs. Many asset management companies do not require a minimum investment to open a taxable brokerage account. And all the bells and whistles, like advanced stock filters and analytical tools, are free.

But if you don’t have time to spend all day looking at charts and following price movements, you can still be successful in investing. In fact, day trading is one of the most difficult ways to try to make money in the stock market.

Robo-advisers

A roboadvisor is an investment management service that uses an algorithm to create and manage a diversified portfolio for you.

Here’s how it works: You answer an online questionnaire about your financial situation, investment goals, and risk tolerance. The robo-advisor then recommends a portfolio typically built with low-cost ETFs.

Since you won’t be doing any of the legwork, the company offering the robotic advisor may charge an asset management fee. But these are typically competitive at around 0.25%. Some brokerage companies may waive the fee if your balance falls below a certain limit.

Additionally, many robotic advisors offer distinctive features such as automatic rebalancing. This means you won’t have to refer to your portfolio to make the necessary changes to your asset allocation. The robo-advisor does it for you.

Another common feature among robotic advisors is tax loss collection services. But the downside of robo-advisors is that you won’t be able to choose your own values. You are usually limited to a model portfolio built with ETFs or mutual funds.

The bottom line

Before you start investing, make sure you have a manageable budget, an emergency fund, and little or no high-interest debt. Once it’s cleared, you have many options. If you want to analyze and pick your own stocks, consider an online investment app.

If you are a set-it-and-forget-it investor, a robotic advisor might come in handy. Create and manage a portfolio for you for a small fee. Online investment apps and robotic advisors can help the novice investor start building long-term wealth.

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