Investing 101: How to Start Investing

Investing is a key step in securing your financial future. It’s a great way to grow your money and increase your financial wellness.

The world of investing can feel foreign and tricky, especially for a newcomer. That’s because, when it comes to investing, you have many choices and factors to weigh. Consider these tips as a basic roadmap to getting started with investing.

Understand your risk tolerance

In simple terms, investing is purchasing an asset that’s projected to increase in value over time. Investments can bring significant financial growth. However, there’s no such thing as a “sure thing.” You need to prepare yourself for potential losses. Ask yourself: how much potential loss are you comfortable with? The answer will help you determine your risk tolerance.

Your risk tolerance is comprised of many factors, including:

• How much you hope to gain from your investments

• The amount of money you can afford to lose

• When you want to cash in on your investment

You can invest more or less aggressively based on your risk tolerance. Evaluating your tolerance helps ensure that you feel comfortable with your investment plan.

Determine your goals

There are many types of investments, and some vary according to your investment goals. Common reasons to invest include: 

• Funding your future retirement

• Paying for your child’s education

• Saving for a down payment

Determining your financial plan will help you decide how much to invest and which accounts fit your needs.
There are several account types designed to support different investment goals, including:

• 401(k)s, employee-sponsored retirement plans. You or your employer contributes tax-deferred dollars into the account, meaning you don’t pay taxes now. Instead, you pay taxes on the funds when you withdraw them.

• Traditional IRAs, retirement accounts for individuals. Traditional IRA contributions may be tax deductible. Like a 401(k), you pay taxes when you withdraw the funds. There is no age limit for Traditional IRA contributions. You must start taking required minimum distributions (withdrawals) when you reach age 72 (or 73 if you reach age 72 after 12/31/2022). Consult with your tax advisor or a certified public accountant for details.

• Roth IRAs, a retirement account where you pay taxes upfront, but your withdrawals in retirement are tax-free.

• 529 plans, savings accounts earmarked for future education costs.

  • 529 savings plans are designed allow you to accumulate savings for tuition

  • 529 prepaid tuition plans lock in lower tuition rates at designated universities and colleges. These plans may have higher fees but can be a good choice for families of students who know which college they’ll be attending.
    

• Annuities are financial contracts with insurance companies. In exchange for a lump sum or a series of payments, the insurer agrees to provide you with income—either for a set period or for life. Many people choose annuities to guarantee steady income after retirement.

  • Immediate annuities: You pay the insurer a lump sum, and payments start within the first year.

  • Deferred annuities: You make contributions over time, which are converted into income when you retire.
    

• Life insurance is an agreement between you and an insurance provider. It stipulates that the insurance provider will pay a specified sum of money to a designated beneficiary when you pass away. In exchange, you pay monthly premiums to the insurance provider.

Define your investing style 

Figure out which investing style best suits you based on your risk tolerance and goals. You can choose between:

• Active management: You manage your investments yourself. To actively manage your accounts, you’ll need a strong knowledge of the investment market. This option is best for seasoned investors who are confident in their knowledge about financial markets and their decision-making skills.

• Broker or advisor management: An outsider broker or financial advisor manages your investments for you.

  • Full-service brokers have the most hands-on approach. They manage all aspects of your investments, including retirement planning, estate planning and giving financial advice. They typically charge higher fees.

  • Discount brokers offer fewer services but charge lower fees. They often manage your investments but don’t handle your financial planning or advising.

  • Financial advisors monitor your investment portfolios, make investment decisions for you and adjust your investments as necessary based on your risk tolerance.

• Robo-management: Your investments are managed automatically. You give a robo-advisor information about your goals and risk tolerance, and you get automated management. This option typically costs less than traditional brokers or financial advisors. 

Choose your investment vehicles

The next step to investing is understanding the different types of investment funds available to you. You may choose from: 

• Bonds are loans to a company or government entity who agrees to pay you back within a set number of years. You receive modest dividends until your bond matures. Bonds tend to offer lower long-term returns, but they are low-risk, so they may be a good choice if you have a low risk tolerance.

• Stocks are a single share or a few shares in a specific company. When you purchase a stock share, you essentially own a small portion of the company.

• Exchange-traded funds (ETFs) are individual investments that are bundled together and traded throughout the day. You purchase shares, like you would with a stock. Share prices are relatively low, so ETFs can be a great choice if you have a modest budget.

• Mutual funds are professionally managed pools of funds from multiple investors. They allow you to diversify your investment portfolio and can be a great choice for beginner investors. 

A broker or financial advisor¹ will make recommendations or decisions about your investment accounts, including what stocks or other accounts to invest in. You can ask them to explain your options more in-depth so you understand your investments fully.

Diversify and reduce your risk 

Investing requires you to continually monitor and adjust your portfolio for optimal performance. Most importantly, you want to make sure your money is divided across different investments and classes. Diversifying your funds helps ensure that one poorly performing investment doesn’t weigh down your entire portfolio. It inherently reduces your risk and helps you invest more smartly. 

Start investing today

Golden 1 Investment Services¹ can help develop a personalized strategy to help you achieve your investing goals. Get started today.

¹The LPL Financial registered representatives associated with this website may discuss and/or transact business only with residents of the states in which they are properly registered or licensed. No offers may be made or accepted from any resident of any other state.

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