This is How to Start Investing if You’re a Beginner
The best time to invest is right now. Here’s how:
Anyone else currently have a severe case of FOMO when it comes to investing in the stock market? From the GameStop frenzy to folks on the internet encouraging everyone to “buy the dip,” it seems like now — right now! — is the best time to invest. But while some experts might say it’s as simple as calling your bank to open an investment account or signing up for a robo-advisor, I’ve found that there are several steps you might want to take before you dip a toe into the stock market.
“There’s a checklist you need to create and run through before you start investing,” says Saijal Patel, founder and CEO of Saij Elle, a financial wellness consulting firm. “So many people look to their friends or other family members for tips and investment advice. But how you create your investment portfolio has to make sense for you.”
In other words, just because the stock market is on sale doesn’t always mean it’s a good time to invest. Rather than wondering if it’s the exact right moment to enter the market, consider whether you are in the best place financially and mentally to do so.
(Related: How to Use Design Thinking to Revamp Your Finances)
Set your goals
“Ask yourself why you are investing in the first place,” suggests Patel. “Then you can allocate a dollar amount to each target and establish a timeline to achieve your objectives.” If you have long-term goals like retirement, you’re not going to need to access that money for a while — in which case, it doesn’t make sense to leave it in the bank earning very little interest. If you can afford not to touch the money, you can better ride out the stock market’s ups and downs. But if you might need the money in a year or two, Patel warns, “the market could crash and then you’re pulling it out at a loss.”
There’s no rule of thumb on this, but most experts recommend you have three to six months saved in an emergency fund before you invest. They also suggest you pay down high-interest debts first. But that doesn’t mean you have to wait until you’re debt-free to start investing.
(Related: How to Feel Better About Your Financial Situation, According to an Expert)
Identify your risk tolerance
Almost every investment entails some level of risk — the degree of uncertainty about how much money money you’ll make or lose. The greater the potential return, the greater the risk. And your tolerance for that risk will be influenced by your age, income, investment goals, and level of comfort. (Ask yourself: What would you do if the value of your investments declined? How would you feel?)
There’s no way to eliminate risk entirely when investing in stocks. To handle risk, you need to embrace the fact that the market will go up and down, put a plan in place that aligns with your tolerance and goals, and focus on nurturing the habit of investing.
(Related: I Had $1.11 in Savings. Here’s How I Improved My Relationship With Money)
Start small (really!)
A common misconception about investing is that you need to be making six figures to start. In fact, the earlier in life you start, the more time you have to take advantage of compounding — the process of money multiplying itself, which allows investors to earn interest on their interest. “That’s actually going to determine wealth far more than what you invest,” says Patel.
There’s also a myth out there that the stock market is scary. I get where that comes from. There are no guarantees, and the market can (and will!) crash again. But the good news is that you don’t have to take excessive risks. There are different investment products that vary on the risk spectrum: mutual funds, guaranteed investment certificates (GICs), government bonds and equities, to name a few. Diversifying your portfolio can be far more helpful than focusing on what you are investing in.
(Related: How to Save Money, Depending on Your Current Pandemic Situation)
Learn what you can
“Nobody can predict what’s going to happen in the market because there are so many factors you have to consider,” Patel says “You can look at a company and say the fundamentals are great, but then something happens, like a pandemic or geopolitical risk, that throws everything out.” That’s why she emphasizes that investment is a long-term game. And even if there are no sure things when it comes to investing, there are lots of ways to learn more: Watch YouTube, listen to podcasts, join free online communities, or pay for a course.
We all have to start somewhere (including me), so the only way to gain confidence is to take control and educate yourself. If you’re still on the fence about investing in the stock market, investigate why you might be feeling that way, then seek advice from a source you trust.
Now that you know how to invest, here is the conversation you need to have about finances after the pandemic.