6 best investments for beginners
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Many Americans are swimming in savings following a year of reduced spending and a handful of stimulus checks courtesy of the federal government. And while the reopening of the economy could lead to higher spending on delayed vacations and other activities, many will be looking for ways to invest their newfound surplus.
With the stock market and seemingly every other asset class booming, it can be intimidating to dip your toe into the investing waters if you don’t have any previous experience.
Before making any investment, it’s important to know what your own tolerance is for risk. Certain investments carry more risk than others and you don’t want to be surprised after you’ve made the investment. Think about how long you can do without the money you’ll be investing and whether you’re comfortable not accessing it for a few years or longer.
Here are some top investment ideas for those just starting out.
Best investments for beginners
1. High-yield savings accounts
This can be one of the simplest ways to boost the return on your money above what you’re earning in a typical checking account. High-yield savings accounts, which are often opened through an online bank, tend to pay higher interest on average than standard savings accounts while still giving customers regular access to their money.
This can be a great place to park money you’re saving for a purchase in the next couple years or just holding in case of an emergency.
2. Certificates of deposit (CDs)
CDs are another way to earn additional interest on your savings, but they will tie up your money for longer than a high-yield savings account. You can purchase a CD for different time periods such as six months, one year or even five years, but you typically can’t access the money before the CD matures without paying a penalty.
These are considered extremely safe and if you purchase one through a federally insured bank, you’re covered up to $250,000 per depositor, per ownership category.
3. 401(k) or another workplace retirement plan
This can be one of the simplest ways to get started in investing and comes with some major incentives that could benefit you now and in the future. Most employers offer to match a portion of what you agree to save for retirement out of your regular paycheck. If your employer offers a match and you don’t participate in the plan, you are turning down free money.
In a traditional 401(k), the contributions are made prior to being taxed and grow tax-free until retirement age. Some employers offer Roth 401(k)s, which allow contributions to be made after taxes. If you select this option, you won’t pay taxes on withdrawals during retirement.
These workplace retirement plans are great savings tools because they’re automatic once you’ve made your initial selections and allow you to consistently invest over time. You can even choose to invest in target-date mutual funds, which manage their portfolios based on a specific retirement date. As you get closer to the target date, the fund’s allocation will shift away from riskier assets to account for a shorter investment horizon.
4. Mutual funds
Mutual funds give investors the opportunity to invest in a basket of stocks or bonds (or other assets) that they might not be able to easily build on their own.
The most popular mutual funds track indexes such as the S&P 500, which is comprised of around 500 of the largest companies in the U.S. Index funds usually come with very low fees for the funds’ investors, and occasionally no fee at all. These low costs help investors keep more of the funds’ returns for themselves and can be a great way to build wealth over time.
5. ETFs
Exchange-traded funds, or ETFs, are similar to mutual funds in that they hold a basket of securities, but they trade throughout the day in the same way a stock would. ETFs do not come with the same minimum investment requirements as mutual funds, which typically come in at a few thousand dollars. ETFs can be purchased for the cost of one share plus any fees or commissions associated with the purchase, though you can get started with even less if your broker allows fractional share investing.
Both ETFs and mutual funds are ideal assets to hold in tax-advantaged accounts like 401(k)s and IRAs.
6. Individual stocks
Buying stocks in individual companies is the riskiest investment option discussed here, but it can also be one of the most rewarding. But before you start making trades, you should consider whether buying a stock makes sense for you. Ask yourself if you are investing for the long-term, which generally means at least five years, and whether you understand the business you are investing in. Stocks are priced every second of the trading day and because of that, people often get drawn into the short-term trading mentality when they own individual stocks.
But a stock is a partial ownership stake in a real business and over time your fortune will rise with that of the underlying company you invested in. If you don’t feel you have the expertise or stomach to ride it out with individual stocks, consider taking the more diversified approach offered by mutual funds or ETFs instead.
Bottom line
If you’re just starting out in the investment world, make sure to consider your risk tolerance and what your financial goals are before committing money to an investment. Some investments, like high-yield savings accounts, allow for quick access to money if emergencies come up. Meanwhile stocks should probably be part of a long-term investment plan instead.
Many beginning investors also turn to robo-advisors, where an algorithm automatically selects and manages a diversified portfolio of exchange-traded funds (ETFs) for you, based around your individual financial needs and appetite for risk.
