How to start investing
Let’s talk about the basics.
It doesn’t take much digging on the internet to a guru sharing “investing tips.” They have industry secrets, promise amazing returns, and are willing to sell you their system for the low low price of half your life’s savings. Sounds great, right?
These cheap tactics aren’t just prolific in the financial world. You find these so-called gurus in weight loss, health products, power-balance wrist bands (remember those??), and so on. And unfortunately, they aren’t going away anytime soon.
As you try to determine the best way for you to get started with investing, use this framework to tell a helpful financial advisor apart from the shysters.
1. Choose a diversified investment vehicle
Diversification is an important step to creating a smart investment portfolio, and it happens when we spread our investment across a wide variety of stocks or bonds. While diversification isn’t a fool-proof guarantee, it does minimize the risk of loss.
Often when someone is just getting started with investing, they bog themselves down with stock picks, the optimal time to buy, and priced/earnings ratios trying to conjure up some magical investment formula. Wouldn’t it be great if there was an investment vehicle that could handle all of that for you? Well guess what?? There are! Mutual funds, ETFs, and index funds are all helpful options, but it’s important to research these funds to make sure that they align with your investment goals and risk tolerance.
We recommend choosing several that target different areas of the market. Even though a single fund vehicle may offer a lot of diversification in itself, you will up your diversification level if you invest across multiple.
2. Pair your diversified investment with the right account type
I don’t cook my eggs with a toaster (though please send us a video if you do) — I use a non-stick frying pan. The type of account you put your investment in can be just as important as the ingredients inside the account.
If you are just getting started with investing, remember that there are many different types of accounts that can hold an investment: A traditional IRA, Roth IRA, individual or joint account, 529, inherited IRA, to name a few. Each type serves a different financial goal, can carry different penalties for early withdrawals, and carries different tax consequences. Make sure that you do your research prior to opening up an account, or you can reach out to us to guide you through this.
The account type is kind of like the "starting blocks" for your investment. If a runner comes out of their starting blocks incorrectly, it can be a major detriment to the rest of the race.
3. Don’t time the market
New investors often worry they will jump in at the wrong time. There is an old adage in the financial world that says "time in the market beats timing the market." If you wait around to jump in the market at just the right time, you will lose the opportunity of today.
At Reverb, we teach our clients about "Dollar Cost Averaging." Dollar Cost Averaging is also known as the constant dollar plan. It is an old financial rule that teaches that if we invest in the market a little bit every month instead of a lot every year, we invest at all points in the market: the peaks and the valleys. This method can reduce our overall risk and is a smart step toward a more stable portfolio in the long run. As quoted on Investopedia, “[Dollar Cost Averaging] aims to avoid making the mistake of making one lump-sum investment that is poorly timed with regard to asset pricing.” Essentially, with this principle we are buying at the highs and lows, diversifying our timing and time in the market.
So, for example, if you are under age 50 and looking to max out your IRA this year, you could invest $6,000 all at once or $500 a month. Even though putting all $6k at once puts a little more time in the market for your dollars, there are some major benefits to spreading that investment over time period. Plus, this helps encourage the monthly discipline of investing.
At Reverb Financial, we would love to be a hands-on resource for you as you get started with investing. Get in touch with us to learn more about our investment management strategies and how we can be of service to you.