So… you’ve decided you want to invest. Now what?
This week, we’ll go over five easy steps to help you start investing.
1. Know your why
Time to get self-reflective: Why do you want to invest? Do you want to buy a beach house in 10 years? Retire in 30 years? Build a nest egg? Learn about markets?
There’s no wrong answer, but you need to be honest with yourself. Your reason for investing could determine what your portfolio looks like, when you buy and sell, and how you approach market selloffs. This includes deciding when you’ll need your investment returns, as well as a loose target for what your ultimate monetary goal is.
Once you’ve figured out your why, pick an account that best fits your needs. If you’re investing money for a short-term goal, you may be better off stashing some cash in an FDIC-insured savings account, so you don’t risk losing your original investment in a selloff. Or, if you’re investing for retirement, you may want to look into tax-advantaged accounts, so you can avoid paying the tax man more than you need to.
2. Know your assets
Next, get familiar with the assets you can invest in. Different investments can play different roles in your portfolio. Stocks and crypto are generally higher risk with the potential for higher return, and investors typically use them for growth. Bonds are generally lower risk, but have a lower potential for return. There are several other types of assets, all with varying levels of risk and reward.
And don’t forget to consider those risks. We talk about the power of investing, but we rarely talk about the challenges. The S&P 500 has gone through a 10% selloff every two years on average since 1950. Bitcoin has dealt with a 20% drop every six months on average since 2010. Market swings can be opportunities early on in your journey, but they become more serious deterrents as you get closer to your goals.
3. Make a plan
Now that you know your assets, decide how you want to use them. The world likes to frame investing as this Gordon Gekko-type approach of buying the hot stock and selling right at the top.
But in reality, that can be a risky endeavor. Even the pros struggle with stock picking. Researching investments can be overwhelming, too.
Don’t fret. You have options. Exchange-traded funds (ETFs) allow you to invest in different sectors or asset classes. You may have to pay a management fee, but they could save time and provide you with exposure to a bunch of securities all at once.
Or, if you want a more active approach, you can choose to follow a Popular Investor on eToro. With CopyTrader, you can replicate the real-time moves of the platform’s most popular crypto investors and let them take the lead on your strategy.
4. Start early
Starting early can be tough if you already feel behind. But time is critical in investing. The longer your money stays invested, the more it could benefit from the mathematical wonder known as compounding.
Plus, you may not need to swing for the fences with your portfolio construction if you have time on your side. Even average returns can make a difference down the line if you wait long enough.
Consider this example. You run the math and figure out you’d like to save up $1 million for retirement in 30 years. A seven-figure target feels ambitious, especially if you only have about $500 to invest every two weeks. But here’s the power of compounding: if you invest $500 every two weeks like you planned, you’d only need your money to grow at a 5.6% annual rate to reach that $1 million goal in 30 years. For context, the S&P 500 has averaged about 8% annual returns over the past 30 years (although past performance is no guarantee of future results).
5. Stick to your goals
Congratulations! You’ve decided why you’re investing, picked your assets, assessed your risk, and devised a plan based on your timeline and goals. Now, your main challenge is to stay committed through thick and thin so you can get the most out of your investments.
It’s important to continue assessing all potential oncoming risks and prepare for market swings. Furthermore, avoid making emotional decisions with your money. Set your buy and sell targets, whether they’re price, return, or time targets. Keep your portfolio in balance and consider stop-loss and limit orders, which can help you automate your targets so you don’t have to think twice.
Remember: markets go up and down. It’s natural. Don’t let the swings scare you off.
There’s a lot more to investing, including a number of different strategies (i.e. dollar-cost averaging and more aggressive methods) and exciting new asset classes. Early on, it’s important to keep things simple, based on your knowledge and risk tolerance. Once you get more comfortable, there’s a whole world of new possibilities to explore — and eToro can keep you updated along the way.
Happy investing!