An introduction to investing
If the recent news story about GameStop’s dramatic stock increase has you wondering if you’re missing out on a money-making opportunity, you’re not alone. But if you’re new to the world of investing, you might think it’s an activity reserved for people with a certain income or in-depth knowledge of the stock market.
The good news is that investing doesn’t have to be complicated or expensive. What’s more, creating an investment strategy can be an important step toward securing your financial future and achieving future goals, from buying a home to saving for retirement.
What is investing and how does it work?
Investing is the process of buying financial products, known as securities, with the aim of selling them at a higher price than you paid for them in order to potentially make a profit. “Investing is a great way to earn a rate of return that’s better than what you’re earning with a savings account,” explains Steve Gambino, Financial Advisor with Commerce Financial Advisors.*
Unlike funds in a savings account that earn interest at a specific rate over time, investing involves risk. With the risk comes the potential for a much higher rate of return. Understanding risk is important when investing. Investing involves the risk of you losing what you put into the investment, however depending on the security purchased can give you the opportunity for growth over a longer period of time. Less riskier investments offer interest rates that can be higher than those offered in a checking or savings account. When left alone these types of securities, for example bonds, can offer long-term growth through compounding interest. Compound interest occurs when the interest you earn on your initial investment is added to your total balance — and future interest is then based on this new, larger amount. As you continue to earn interest, your total balance grows, generating additional earnings over time. The longer you are invested, the more successful you can be due to the annual growth of an investment and also through compounding interest. Therefore, the earlier you start investing — and the longer you keep your money invested — the more you potentially stand to earn.
Stocks, diversification and balancing risk
A stock is a form of investment that represents a share or ownership in a company. Historically, stocks are most likely to deliver the best return on your money when you invest in them for the long term versus for a quick gain.
While stocks may dominate news feeds, they represent one part of a well-balanced investment strategy. Imagine investing all your money in a single stock. If that company goes out of business, you’d lose everything.
A diversified, or balanced, portfolio consisting of stocks, bonds and mutual funds, for instance, can help spread investment risk. So, if a single stock or even an entire industry performs poorly, other industries or assets in your portfolio will hopefully perform better and balance your overall investment situation. “Having a good, diversified portfolio is vital to achieving a strong annual return,” explains Gambino.
4 Smart investments for beginners
If you’re new to investing, the good news is that you don’t have to go it alone. While any investment involves some risk, it’s easier than ever to choose an investment option that’s suitable for your long term goals, like the ones below.
1. 401(k) Retirement plan through your employer
“Contribute as much as you can into your 401(k) because it’s pre-tax money,” explains Gambino. He also recommends contributing at least enough to take advantage of any employer match, which is free money. If you don’t have access to an employer-sponsored plan, Gambino recommends opening a traditional IRA or Roth IRA, which may also give you a tax benefit.
2. Mutual funds
A mutual fund is a type of investment that includes a combination of stocks, bonds and other financial products, giving investors access to a professionally managed portfolio. “A good place for new investors to start is with a diversified mutual fund,” says Gambino. “They offer good management of your funds while being diversified across different market sectors.” If retirement is one of your goals, you can potentially consider a target-date mutual fund that automatically invests with your estimated retirement year in mind.
3. Index funds
An index fund is a type of mutual fund whose holdings track a particular market index, like the NASDAQ, or a certain sector, like technology. Index funds offer a simple, passive approach and generally have relatively low fees and minimums to get started.
4. Investment apps
Investment apps like Acorns make it easy to round up purchases on your linked debit and credit cards and invest the difference in a diversified portfolio of exchange-traded funds (ETFs), which operate similarly to index funds. Other apps like Stash let you start investing with as little as $5 and teach newbie investors how to build their own portfolios out of stocks and ETFs.
Once you’ve opened an account and made an initial investment (sometimes as little as $50), simplify your saving. Decide on a monthly contribution amount and have it automatically transferred from your checking or savings account to your investment account, or from your paycheck to your employer’s retirement plan.
Start early for long-term investment success
“There will always be some element of risk, so planning to have your money invested for the long term is best,” says Gambino. “The sooner you start investing, the higher probability of success you’ll have.”
But Gambino also recommends reviewing your overall financial situation first. “Before you start investing, it’s important to have an emergency savings account in place. Make sure you have enough money to pay your monthly expenses and try to get rid of higher interest debt before putting money into investing.”
Working with an experienced financial advisor can help you avoid common investment mistakes and create a diversified investment plan based on your needs and financial goals. A financial advisor can also help you revise your investment strategy over time to match life changes and new goals.
Commerce Financial Advisors* is here to help you plan for your financial goals. To learn more about investing or to find a financial advisor near you, contact us.
*Security and Advisory services provided through Commerce Brokerage Services, Inc., member FINRA, SIPC, and a registered investment advisor. Commerce Brokerage Services, Inc. is a subsidiary of Commerce Bank.
The information provided in this message is not meant as a recommendation or endorsement of any specific security or strategy. An individual’s situation can vary; therefore the information provided above should be relied upon only when coordinated with individual professional advice.
Investments in securities are Not FDIC insured; Not Bank-Guaranteed and May Lose Value.
This message is not intended for use by, or to provide any information to, investors in any state where Commerce Brokerage Services, Inc. is not registered or in any jurisdiction outside the United States of America where such use would be prohibited or otherwise regulated. Nothing in this message shall be considered a solicitation to buy or an offer to sell a security to any person in any jurisdiction where such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction.