Unless you’re already knowledgeable about finance and business, getting started as an investor can seem overwhelming, even a little dangerous. You may not understand the various terms and acronyms used in the investment world, let alone the consequences of the choices you make with your hard-earned savings.
Before investing your money, it’s important to understand your goals and time frame. If you’re young and saving for retirement, you’ve got the runway to pursue a higher-ceiling approach, accepting increased risk in exchange for better returns. If you’re older and trying to protect wealth, you’ll likely adopt a more conservative strategy instead.
The recent GameStop saga saw a group of small-time, amateur investors team up via Reddit to help drive the stock price of a struggling business to dizzying heights, soaring by nearly 2,000 percent before eventually crashing back to earth. While the meteoric rise made millions for a lucky few, GameStop’s sudden fall shows the seriously risky side of such investments. Nevertheless, the GameStop frenzy has inevitably sparked interest and curiosity among many people who may not have been investing until now.
Instead of trying to hit it big with a risky, GameStop-style gamble in the stock market, novice investors are generally better off making a more straightforward, stable entry into investing. Here’s a closer look at a few investment options for beginners.
Diversification is a common approach among risk-averse investors, and one of the simplest ways to launch a diversified investment strategy is by investing in a fund. Whether it’s mutual funds, index funds, or exchange traded funds (ETFs), these are baskets of different stocks and bonds that limit an investor’s exposure to the performance of any single business or financial product.
Of the three, index funds are the best option for beginner investors. This is mostly because of their simplicity, but also because they tend to have low fees and operating costs.
Stock markets around the world all have indexes, a broad, representative sample of the different businesses traded there. An index fund takes a selection of the companies within an index and tries to duplicate or exceed the broader market’s performance. Index funds are an autopilot investing strategy in that they don’t require much attention. There may be some short-term ups and downs but, over the long term, the market index is likely to out-perform most individual stocks and bonds.
Start with a robo-advisor
If you want to get involved in the stock market without having to do research or make decisions, the simple solution is investing your money with a robo-advisor. They’re a great way for beginners to learn how to build a balanced portfolio of different assets. You won’t need a huge sum to start with, and heavy automation means costs are kept low.
A robo-advisor is exactly what it sounds like: a computer program that asks a few questions to understand your investment goals and risk tolerance, then automatically builds you a diverse portfolio of different stocks and bonds. As market conditions change, the robo-advisor gets to work on your behalf, rebalancing your investments to optimize returns.
Some robo-advisor platforms even offer educational tools and services to help users better understand their investments. Then, when a user has developed the necessary comfort and confidence, they can choose to start working with a qualified financial planner to create a more robust customized portfolio of investment assets.
If you’re looking for a safe and simple investing strategy that will provide guaranteed, risk-free returns, consider a term deposit. A term deposit is basically a loan you make to your financial institution. They take your money to invest elsewhere for a fixed period of time, usually between 30 days and five years. In exchange, they agree to pay back the full amount once the time is up, plus a small amount of interest.
One tradeoff for the safety of term deposits is diminished returns: your investment won’t grow quickly, or by a whole lot, but you won’t lose a dime if the financial markets tumble. The longer you’re willing to loan your money, the better the interest rate you’ll get. Some term deposits offer returns linked to a stock market index, meaning you’ll earn more if the market performs well and smaller, guaranteed returns if the market suffers. When your fixed term is up, you can roll over the original amount, plus the interest, into a new deposit. With a bigger amount to deposit, you’ll earn slightly bigger returns the next time.
Term deposits are best for savers who have money they know they won’t need to access during the fixed period. Early withdrawals are often subject to penalties, including forfeiture of any interest earned. Another potential drawback is inflation, which may exceed your interest rate. As a result, the money you have at the end of your term won’t buy as much as it did when the term began.
Discover Moya Financial’s range of term deposits.