How to Start Investing for the First Time This Year

Getting started with investing can seem daunting, but it’s a pivotal step toward building long-term wealth. Luckily, there are well-established principles for getting your investing journey underway. Begin by setting clear financial goals, understanding your risk tolerance and educating yourself on different investment options. Then it's time to open an investment account, and select investments that fit your needs, often index mutual funds or exchange-traded funds (ETFs). Once you have made your first purchases, monitoring and consistently reinvesting and adding funds to your investment portfolio help to maximize growth over time.

If you're looking to get started investing or want to make changes to your portfolio, sit down with a financial advisor to create a personalized plan tailored to your goals.

Why You Should Start Investing This Year

The best time to start investing is now. Beginning as soon as possible allows you to take the earliest advantage of compound interest . This concept refers to the way you earn interest on both your initial investment and on the interest that accumulates. Compound interest creates a powerful snowball effect over time.

Investing is also a strategic way to preserve the purchasing power of your money. Unlike cash, which tends to lose value over time due to inflation , investments have the potential to grow faster than inflation. This growth helps maintain and even increase your money’s purchasing power, ensuring that your savings can buy more in the future than they would if left in a standard savings account.

Before You Start Investing

Before committing your money to an investment, it's helpful to define your financial goals . Are you saving for retirement, a down payment on a house or your child’s education? Clearly identifying your objectives helps shape your investment strategy and timeline.

Understanding your risk tolerance is another critical step. Ask yourself whether you are comfortable with the ups and downs of the stock market, or prefer more stable investments? Your risk tolerance will guide your asset allocation and investment choices.

Also, consider your investment horizon . Short-term goals may require different strategies compared to long-term goals. For instance, investing for a major purchase in five years differs from planning for retirement in 30 years. A clear timeline helps in selecting suitable investments and managing expectations.

Once your goals are clear, prioritize them. Determine which goals are most urgent and allocate your resources accordingly. Planning and prioritizing help in making informed decisions, aligning your investments with your financial aspirations.

Open an Account

When starting to invest, the first step is to choose the right type of investment account. There are two main options: taxable brokerage accounts and individual retirement accounts (IRAs). Each serves different purposes and offers distinct advantages.

Taxable brokerage accounts are versatile and accessible. These accounts allow you to buy and sell a wide range of investments, including stocks, bonds, mutual funds and ETFs. There are no contribution limits, and you can withdraw your money at any time without penalties. However, you will owe taxes on any dividends, interest, or capital gains.

For those looking to save for retirement , IRAs are an excellent choice. Traditional IRAs offer tax-deferred growth, meaning you don’t pay taxes on your contributions or investment gains until you withdraw the funds. Roth IRAs, on the other hand, provide tax-free growth, as contributions are made with after-tax dollars. Both options have annual contribution limits and early withdrawal penalties.

Opening an account is straightforward. Most financial institutions offer online applications, requiring basic personal information and identification. You’ll also need to link to a bank account so you can pay for your investment purchases. Once your account is set up, you can start selecting investments that align with your financial goals.

Avoid Single Stocks

Starting with single stocks can be risky for new investors. Single stocks expose you to the volatility of one company, which can lead to significant losses if that company performs poorly. Instead, consider diversified investments that spread risk across multiple assets.

Exchange-traded funds (ETFs) and mutual funds are excellent alternatives for investors wary of individual stocks. These investment vehicles pool money from many investors to buy a wide range of stocks, bonds or other assets. This diversification reduces risk and can lead to more stable returns over time.

Index funds represent another great option for beginners. These funds aim to replicate the performance of a specific market index, such as the S&P 500 . By investing in index funds, you gain exposure to a broad section of the market, providing a secure platform for growing your wealth.

Align Your Investments With Your Needs

Aim to align your investments with both your risk tolerance and your time horizon. For example, a conservative-leaning investor with a short time horizon might prefer certificates of deposit (CDs) or government bonds. Conversely, an aggressive investor with a long time horizon may opt for growth-oriented mutual funds or real estate investments. Tailoring your investment choices in this manner helps create a balanced portfolio that meets your financial goals.

Continue to Learn and Invest

Learning about investing is an ongoing journey. Reading books, following financial news and subscribing to credible blogs and podcasts can keep you informed. Engaging with online forums and attending webinars can also provide diverse perspectives.

Consistency is also key to successful investing. Making regular contributions to your investment portfolio, regardless of market conditions, can lead to significant growth over time. Automated investment plans can simplify this process, ensuring that you stay on track with your financial goals.

Regularly review your portfolio, as well. Over time, you may need to adjust your asset allocation and investments choices based on their performance, your time horizon and significant life events.

Bottom Line

Investing offers the opportunity to use your money to build and preserve wealth, making it a central component of a financial plan. By starting as soon as possible, you can benefit from compound interest, allowing your investments to grow exponentially over time. Setting clear financial goals, understanding your risk tolerance and choosing the right investment vehicles are fundamental steps.

Whether you’re saving for retirement or a significant purchase, aligning your investments with your objectives ensures a balanced approach. Continually educating yourself and maintaining consistent contributions will help you navigate the investment landscape and achieve long-term financial success.

Tips for New Investors

• Understanding various investing strategies is important for making informed decisions that align with your financial goals and risk tolerance. Income investing focuses on generating regular income through dividends or interest from stocks and bonds. Growth investing aims to increase capital by investing in companies expected to grow at an above-average rate. Value investing involves selecting undervalued stocks that have potential for price appreciation. Index investing , on the other hand, seeks to replicate the performance of a specific market index.
• A financial advisor can be valuable resource for new and seasoned investors alike. Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now .

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