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Sometimes in life, you may find yourself with a cash windfall that you’re wondering what to do with. For example, if you work with a lawyer to get the most money from a car accident, you then have to decide what to do with that money.
Maybe you inherit money or get a bonus at work.
These are all times that you should think about becoming an investor.
Even if you don’t get a windfall and you only have very little money to put into it initially, you should still start investing sooner rather than later.
The following are some general tips for beginners who want to start investing, regardless of how much money they have.
Choose a Platform
There are different platforms you can use to invest, including an online brokerage or a roboadvisor. It gives you an alternative to a traditional and often expensive investment advisor.
When you’re a new investor, you might want to start out with a roboadvisor because it’s simple, and you don’t need a lot of knowledge. Be aware that roboinvesting fees can be high, however.
Roboadvising uses algorithms to pick diversified investments based on someone’s goals and their risk profile. It’s totally hands-off if you want it to be.
There are major roboadvising platforms with fees that aren’t too high. Many of these platforms can be good for someone with no previous experience investing. Betterment is one example, but there are quite a few options.
You can use these platforms to open a Roth IRA or a SEP IRA as well, which are tax-advantaged retirement accounts.
A brokerage account may be a less expensive alternative to a roboadvisor. You can open an individual retirement account (IRA) through a brokerage account.
What’s Your Strategy?
Along with thinking about the type of platform you want to use, what is your strategy, and how long do you have to reach your goals?
If you’re saving for something like retirement and you’re well away from that time, you can usually put all of what you’ve set aside into stocks. Picking stocks can be complex, however, which is why you’ll want to consider mutual funds and ETFs, which are detailed below.
If you have a short-term goal you’re saving for, you might want to put your money in something where there’s less risk. When you’re investing in the stock market, you’ll inevitably have short-term losses, but over the long-term, you’ll see higher returns than you would with a safer option.
If you’re saving for something in the short-term, those losses are going to affect you more.
Mutual Funds and ETFs
For new investors, mutual funds, and exchange-traded funds (ETFs) are often your best option. You can learn a bit more about these independently, but if you use a roboadvisor it’s likely your money will also be invested in one of these funds.
A mutual fund allows you to avoid picking individual stocks, as does an ETF. You can buy many different stocks in one transaction, and mutual funds and ETFs are both inherently diversified.
There are index funds that follow a certain index. For example, you might invest in a mutual fund that follows the S&P 500. Index funds charge lower fees than funds that are actively managed.
An ETF is again a collection of investments, but ETFs are traded like a stock, and you buy them for a share price.
ETFs may be a better option even than mutual funds for a new investor because there tends to be a lower minimum investment requirement.
Individual stocks are stocks you buy in one specific company. You can be several shares or just one share. You have to be careful to remain diversified if you’re picking individual stocks, but doing so can be expensive, which is why most newer investors go with mutual funds and ETFs.
How Much Should You Invest?
Finally, aside from considering minimum requirements, there is no amount of money that’s too little to start investing with.
Share prices can range anywhere from a few dollars each to a few thousand dollars each. Mutual funds tend to have investment minimums of at least $1000, while ETFs can usually be purchased for a share price that’s in some cases lower than $100.
Once you get started, try to invest 15% of your income each month if you can. That still should leave you with enough money to set aside for other purposes, but it’s also something that thanks to compounding interest can add up over the years.