Beginning investors are sometimes slow to get started because they aren’t sure just what to invest in. If this describes you, there’s no need to delay – you can start investing in just about everything. You can do it now, and it’s easier than you think.
You don’t need to worry about individual stocks or bonds. You can invest in either mutual funds or exchange traded funds (ETF’s), each of which represents a portfolio of stocks and other investments in either the overall market, or in various specialized sectors.
This is the easiest route for most new investors, because you can diversify across literally hundreds of stocks, thousands even, simply by holding a very small number of funds. This will also cut down on the cost of investing, since you pay a single fee – if there is any at all – to invest in a fund that will hold dozens of individual stocks. Best of all, the whole portfolio will be managed by professional investment managers.
Everyone says to invest in stocks, but which stocks do you invest in?
Answer: any stocks you want! And that is hardly an exaggeration.
In today’s world of global computerized trading, you can invest in specific stock markets, such as foreign stock markets, bonds and specific industry sectors. You can also invest in real estate, commodities, and options.
You probably will not want to get into all of these investments immediately, as there is a learning curve involved in each. But it’s important to get started somewhere, and that usually means the simplest investments.
If you’re new and uncertain, the best place to start is with index funds. You can start with an index fund that is based on the Standard & Poor’s 500 index. An index fund is correlated almost exactly to the underlying index that it is based upon. This means that your investment performance will track the market (in this case the S&P 500, which tracks 500 of the leading U.S. companies as determined by Standard & Poor’s). Your investments will rise when the market rises, and fall in the market declines.
In rising stock markets, index funds are hard to beat. They rise consistently with the market and usually outperform other types of funds in the long run. Just put your money in index funds and then sit back, relax and enjoy the ride!
With an underlying base of index funds, you can branch out into other investments as you choose. In fact, you can even invest beyond stocks if that’s what you want. Just about anything you want to invest in is available in some form.
There are mutual funds and ETF’s that are invested in very specific industries, and these funds are referred to as sector funds. Some of the sectors you can invest in include:
-Foreign stocks, including those of specific countries.
-Specific industries, such as utilities, healthcare, and technology.
-Real estate, such as homebuilders, mortgage lenders and real estate investment trusts (REIT‘s).
-Resources, such as energy and metals.
-Bonds, including US treasuries (short-, intermediate-, or long-term).
There are also funds are in specific security types, such as high-yield dividend stocks, growth stocks, or even growth and income. Still others, such as target date funds will allow you to invest your retirement money based on your anticipated retirement date. If for example, you plan to retire in 2040, you can select a target date fund that automatically adjusts your asset allocation for each specific time period of your life, right up to retirement. No guesswork, the fund handles it all.
Certain funds can be so specific that they invest in only a single commodity. For example, if you want to invest in gold but don’t want to take possession of the metal, you buy shares in the SPDR Gold Trust (GLD) ETF. This is a fund that holds only gold, so a $5,000 investment in the fund will enable you to hold an equivalent amount of gold in your portfolio.
The easiest way to begin investing is to open up an online discount brokerage account. Look for a broker that offers the widest investment choices, but allows you to make trades for very small fees, say just a few dollars per trade.
There are literally hundreds of investment brokerage firms available, and many of them are very specialized allowing only a very limited number of investment choices. But you’ll probably want to go with the brokers that offer the widest selection, which will enable you to expand your investment options as you grow in knowledge and confidence.
Keeping Costs Low
Investment costs can trip up a lot of new investors. You can get solid returns on your money, but if you’re paying high account fees and transaction costs, you will simply be returning a large amount of gains to your broker.
Transaction fees are important to consider, especially you do good bit of trading. If you have a $10,000 account, in which you make 20 trades per year at $10 per trade, you’ll pay $200 just in transaction fees, or 2% of the value of your account. If you can find a broker that charges only $5 per trade, your transaction fees drop to $100 per year, or just 1% of your account. That’s the equivalent of increasing your annual return by 1%, and that will make a big difference over longer time.
You’ll also want to favor “no-load” funds in your investment mix. These are funds that do not have sales charges, or “loads”. Funds can charge loads of up to 8%, but there are plenty of no-load funds, and they are the funds you should invest in.
As an investor, never let your lack of knowledge keep you from investing. The only way to get the knowledge and experience that you need is to get started.
The number of investment choices is virtually unlimited, but start with index funds/ETF’s, and then expand your portfolio selections as you become more comfortable with investing.