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How to Start Investing

Steps to Get Started

  • 1. Decide what you’re investing for
  • 2. Pick a timeline for your goal
  • 3. Identify your risk tolerance
  • 4. Choose a provider

By Stephen Sellner | Citizens Bank Staff

Investing — it can be an intimidating topic.

You’ve probably heard people talk about how investing could grow your money. Who wouldn’t want that? But that first step into the unfamiliar can be filled with nerves and uncertainty.

What do I know about the stock market? Am I going to lose my money? What’s the difference between a stock and a bond anyway?

The fact is, if you’ve been contributing to a 401(k) or IRA, you already have been investing. However, it also makes sense to consider an after-tax portfolio. Success could not only supplement your retirement assets, but help you plan for other financial goals, too.

Here’s a quick guide to get you started.

1. Decide what you’re investing for

The first step is outlining your goal(s) for the money you’re investing. Your goals could be buying a home, funding education, or saving for retirement. All the investment decisions you make should focus on your specific goal(s).

2. Pick a timeline for your goal

When do you hope to achieve your goal? A few months? Five years? Ten years? Thirty? That timeline is known as your investment time horizon.

A portfolio designed to invest for the short term will look a lot different than one eyeing a long-term goal. Your investments should be aligned with the time horizon of your goal(s).

Spend some time thinking about your goals and when you hope to achieve them so you know your investment time horizon.

3. Identify your risk tolerance

Investing, by nature, involves risk. That means you could lose money on your investment. But generally, the higher the risk, the higher the potential return of an investment. That’s why people opt to invest some of their money rather than stash it all in a savings account.

Not all investment portfolios are created equal; each has a unique amount of risk. Portfolios can be aggressive, moderate, or conservative.

For example, someone with a higher risk tolerance would steer toward an aggressive asset allocation — a strategy that attempts to maximize returns and take higher risk by allocating substantially in stocks, as opposed to bonds or cash. Someone with a low appetite for risk would take a conservative route, with higher exposure to bonds. Therefore, moderate portfolios would consist of an almost 50:50 split between stocks and bonds.

Your individual risk tolerance could be impacted by:

  • Personal preference: Are you the type of person who will pull out of your investment at the first sign of trouble? Or are you comfortable riding it out through market fluctuations?
  • Investment time horizon: Time is always a factor with investing. For example, if your goals are 20 years away, then you can handle larger fluctuations in performance (since there’s more time to recover from any losses). Following that same reasoning, goals that are only five years out tend to be exposed to less risk.
  • Your wants vs. needs: Is your investment goal something you want or something you need? “Wants” can be postponed if the market experiences a fluctuation, while “needs” are more important to reach by a certain date. For example, buying a new boat or sports car would fall into the “want” category; funding your child’s education would be a “need” for most.

The type goal — like funding your child’s education — will likely impact your exposure to risk.

4. Choose a provider

Who will handle your investments — you or a financial advisor? The answer has a lot to do with your knowledge and comfort. Some investments require sophisticated knowledge and monitoring. Others are more set-and-forget.

People who successfully manage their own investments typically have advanced knowledge and experience in various investment vehicles, and are willing to devote time to researching and monitoring the market. This method may involve fewer fees, but it’s not for everyone. A good question to ask yourself would be: If a friend needed an advisor, would you recommend you?

Meanwhile, a financial advisor will use their expertise to build a customized portfolio and manage it for you. Advisors also help manage your emotions, which can be a wealth-building hazard for many when making financial decisions. You’ll periodically meet with your advisor to go over your portfolio and make the appropriate changes to stay on target. In exchange, you’ll either pay management fees (a certain percentage of all assets), commission, or a combination of the two. An advisor-managed account tends to require a minimum of $50,000-$100,000.

Or, a third option is to use a digital investing platform, which provides automated, algorithm-driven investment services. Digital advisors require you to answer a series of questions about your goals, time horizon, risk tolerance, and financial situation. Then, the platform uses the data to offer advice and recommendations regarding your investment. In exchange, you’ll still pay management fees, but they tend to cost only a fraction of those paid to financial advisors (since this management style is passive instead of active) and usually require low account minimums of a few thousand dollars.

◆ ◆ ◆

OK, now that you have the 101 information, let’s answer some other questions you might have.

How do you earn a return?

It all depends on the type of investment. In general, there are three types of returns:

  1. Capital gains: For stocks, bonds, mutual funds, and ETFs, you earn a return when you sell shares for more than what you originally paid. If you sell the shares for less than what you paid, that’s called a capital loss.
  2. Dividends: Stocks can also yield a return via dividends — that’s when the company shares a percentage of its profits with shareholders instead of putting the money back into the business. The amount of the dividend isn’t guaranteed; it depends on how well the company did and the type of stock you own.
  3. Interest: Bonds and other fixed-income investments earn returns in a slightly different way. These investment vehicles are essentially loans made to an organization. The organization must pay investors a pre-determined interest rate on a set payment period. Or, sometimes, at maturity. With these types of investments, you know exactly how much money you’ll earn and when. Therefore, they’re considered more conservative.

Need some guidance? Talk to a financial advisor or tax professional.

No matter your investment type, taxes are a factor, so consult with a financial advisor or tax professional to learn how to limit your tax bill.

How do brokerage and retirement accounts differ?

Retirement accounts, like 401(k)s and IRAs, are great ways to save for retirement. That’s because of their tax advantages and, in some cases, matching contributions from employers. However, there are two factors to consider:

  1. Penalty-free withdrawals can’t begin until age 59 ½.
  2. 401(k)s and IRAs have annual contribution limits.

So if you have a goal you hope to reach by, say, 50 years old — a beach house, perhaps — an after-tax account could be a great option to avoid the 10% early withdrawal penalty from a 401(k) or IRA. That would mean having 10% less for your beach house!

An after-tax account could also supplement your retirement savings if you want to contribute more than the annual limit. In 2018, 401(k)s have an annual contribution limit of $18,500 ($24,500 for those 50 and older); for IRAs, the limit is $5,500 ($6,500 for those 50 and older).

What to remember

Investing doesn’t have to involve making trades on the New York Stock Exchange. You can be as active or passive as you’d like, and you can choose a risk exposure you’re comfortable with. In the end, it comes down to setting a goal, achieving that goal, and doing it comfortably. And if you have questions, a financial advisor can give you the answers.

More information

Want to begin investing but don’t know where to start? SpeciFi is a digital advisor that will build a personalized, professional portfolio to help you plan for whatever goal you have in mind. Or, you could speak with a financial advisor.

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