Investing in the stock market can be intimidating if you’ve never done it before. While it’s risky to invest in the stock market, there are time-honored strategies you can use to mitigate the risk and grow your wealth over time. Many of the same strategies that work for high net worth investors can work for the little guy, too.
One of the best things you can do for your investment portfolio is to put as much money as you can into tax-advantaged investment vehicles. You’ll also grow your wealth much more if you begin investing early in life and do it regularly. If you’re uncertain what to invest in, index funds are always a good idea. Make sure you only invest money you won’t need right away, and limit your stock holdings to mitigate your risk.
Use Tax-Advantaged Investment Vehicles!
Most people’s first foray into investing will be putting money into a 401(k) account offered through an employer. You should open a 401(k) account with your very first job and put in at least enough money each paycheck to get the company match. That’s basically free money towards your retirement.
If you’re maxing out your 401(k), open an individual retirement account (IRA). You can either open a Roth IRA or a traditional IRA – a traditional IRA allows you to take a tax deduction now and pay taxes on the money you withdraw in retirement, while a Roth IRA allows you to pay taxes on the money now and withdraw it tax-free in retirement. You can invest up to $6,000 a year in an IRA, or $7,000 if you’re 50 or older.
Invest Early and Often!
One of the best high net worth investing strategies that can work for anyone is to start investing early in life and do it regularly. The longer your money has to grow, the more it will compound over time and the more you’ll wind up with in the end. Begin investing as young as possible, and invest the same amount with every paycheck.
Investing the same amount of money each paycheck allows to practice a timeworn investment strategy known as dollar-cost averaging. Dollar-cost averaging is the opposite of trying to time the market so that you buy low and sell high. Instead, you’re putting the same amount of money into your portfolio each week or month, no matter how many shares it buys you. It’s not about timing the market. It’s about being patient and giving your funds time to grow.
Put Money into Index Funds!
Passively managed index funds seek to replicate gains across the whole market rather than leaning on individual stocks. Passive investment strategies have been found to outperform active investment strategies, which seek to time the market for maximum returns. Buying shares in an index fund is simple, and fairly foolproof – it’s a lot less work than analyzing the returns of individual stocks. An index fund that closely tracks the S&P 500 will get you the highest returns, and it’s automatically diversified so your risks are lower.
Only Invest Money You Won’t Need Right Away!
Plenty of people use taxable brokerage accounts to save for financial goals in the far future. But you shouldn’t invest any money that you plan to spend within the next five years. You need to give investments time to grow. Ideally, you won’t cash out your investments in five years, either. Many investors use the buy-and-hold strategy, which does exactly what it says. You buy your investments and then you hold onto them, allowing them to appreciate in value, and either reinvesting the returns or taking them as income.
Limit Your Stock Holdings!
Buying and selling shares of stock can be fun and exciting, but you should limit your shares of stock to no more than 10 percent of your portfolio. Investing in stock is riskier than investing in mutual funds, because you’re hanging all your hopes on a single company rather than a group of companies spread out across the industry. The risk of losing money is high, so keeping the percentage of stocks in your portfolio down can protect you from excessive losses.
Don’t let getting started in investing overwhelm you. The most important thing in investing is to give your money plenty of time to grow, so you need to start investing as soon as you can and put in money regularly. As long as you’re consistent with your investing, you’ll enjoy great results over time.