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Have you become a smart saver? Do you know your net worth and your credit score, and are you working toward paying off debt? Way to go! It may be time for you to start investing your money. And thanks to technology, it’s easier than ever for you to do your own research, make your own trades (with the click of a mouse) and monitor your portfolio in real time. But with this power comes responsibility. It means doing your homework to find investment vehicles that align with what you value and in which you’ll feel comfortable committing your money. Ready to get started?

Investing: Prereqs

You can watch business news networks for hours on end, but it’s even more important to know yourself. How well do you understand your investment choices? Are you comfortable with the risk you’ve taken on? Before you begin investing, you should carefully consider: 

  1. Investment goals and time horizon: These are the most important factors in determining your investment strategy. What are you hoping to accomplish with your investment returns and over what period of time? If you’re planning for retirement in 40 years, you may approach your portfolio differently than if you are simply using discretionary funds to “play” the stock market. 
  1. Risk factors: Some investors are willing to shoot for higher returns at the expense of higher risk of loss, while others prefer a more conservative approach: less risk, but the real possibility of less of a payoff. Think about it: How much could you stand to lose? How much would your portfolio have to decline before you would rethink your investment strategy? Depending on what you choose to invest in, there are different types of risk, such as inflation risk, interest rate risk or international market shifts. Understand how much and what kinds of risk you’re willing to take on before deciding where to invest. 

Challenge: Make a list of the various stocks, funds or other investments on your radar. Now look up how they’ve performed over the past several years.

  1. Basic categories: Most investment choices fall into two categories: assets you can own (stocks, mutual funds, etc.) and opportunities to earn interest payments through a loan (CDs, bonds, etc.). Returns for the former type are typically less predictable, but the profit potential is often greater.
  1. Tax impact: All investing activities will have an impact on your taxes. Some accounts—including 401(k)s—allow pre-tax (or tax-deferred) contributions, while others—like a traditional brokerage account—are funded with capital on which you’ve already paid income taxes. Withdrawals from these accounts will also be taxed differently, so it’s wise to speak with an accountant to be aware of all probable effects.

Make your selections

Here are some (but certainly not all) of the possibilities to consider:

Investment vehicles  

Stocks (or equities)

  • The lowdown: Publicly traded companies raise capital by selling shares of their company (or stock) to investors. If you own stock, you’re a partial owner of the company, and as a shareholder, you’re entitled to a portion of the company’s profits and typically have voting rights at shareholder meetings.
  • Considerations: Historically, stocks have provided the highest rate of return but are most suitable for those with a long-term horizon. Many companies pay dividends, which is a way of giving some of their profits back to shareholders. On the flip side, if a company is struggling, so will its owners, the investors, who get paid last if a company files for bankruptcy.2

Bonds

  • The lowdown: Essentially an IOU, a bond is like a loan to the bond issuer (the government or a company) that gets paid back with interest. Bonds are expected to be relatively stable and a good alternative during times of stock market unease.
  • Considerations: Rising inflation can reduce the potential return of a bond investment, which is already typically less than what’s expected for stocks.

Mutual funds

  • The lowdown: These are professionally managed portfolios of stocks, bonds and/or other types of investments that allow investors to diversify their portfolio in an efficient way through exposure to a family of different sectors, stocks or other investment vehicles. Mutual funds employ a variety of strategies, such as focusing on particular industries or countries or targeting high-dividend payouts.
  • Considerations: Mutual funds have potentially high administrative fees and no real decision-making power, as securities within the funds are purchased and sold by investment managers.3

ETFs (exchange-traded funds)

  • The lowdown: Similar to mutual funds, ETFs enable investors to buy and sell sectors (think retail, biotech, precious metals) or indexes (like the S&P 500 Index), but they trade up and down throughout the day, just like shares of stock.
  • Considerations: Also like stocks, ETFs can fluctuate up and down in the wake of geopolitical concerns, company announcements (such as earnings) or other events that may impact the financial markets. In most cases investing with ETFs also involves paying a commission.

Investment account types

401(k)s

  • The lowdown: These are employer-sponsored accounts to help employees save for retirement, usually through pre-tax payroll deductions. Funds in the account can be diversified across different assets, and many employers offer a percentage match (aka free money).
  • Considerations: Depending on the plan, your investment choices might be limited, and you’ll pay a penalty if you withdraw funds early—of course, this reduces the temptation! 

Challenge: Does your company offer a 401(k) plan? Have you signed up? If so, great. Consider tweaking your budget so you can contribute a little bit more. If you haven’t signed up yet, what are you waiting for?

IRAs: Traditional and Roth

  • The lowdown: Retirement accounts that are available to individuals (hence the abbreviation for individual retirement account) and accumulate savings through tax-advantaged growth.
  • Considerations: Penalties are assessed if you take money out before you’re 59 1/2.4 There are also annual limits on how much you can contribute.
  • Distinctions: Traditional IRA contributions are tax-deductible, but you’ll pay taxes when you withdraw your funds. Roth IRAs are the opposite; you won’t get a tax break on contributions, but withdrawals will be tax-free (though penalties for early withdrawal still apply).5, 6 Traditional and Roth IRAs also have different withdrawal rules and income limitations.

Help is close by

Financial advisors are available for a wide spectrum of consumers who need guidance—not just for the wealthy. In order for these advisors to help you with investment research or account management, though, they’ll need to be aware of your risk tolerance and your financial goals.  

3 Key Takeaways
  1. Successful investors know the specifics about their investments, but they also know themselves.
  2. Investing should be part of your financial plan only after you have completed the prerequisite steps, such as paying down debt and becoming a consistent saver.
  3. Understand what you’re investing in, including the level of risk and how each selection might impact your taxes.

 

 

Challenge yourself

Now that you have a grasp on the basic investment types, keep reading and learn how to start using them to your advantage.

1 “Taxes,” 2017, Ameriprise Financial

2 “What Happens to a Company’s Stock When it Goes Bankrupt?,” Aug. 15, 2017, Investopedia

3 “Mutual Funds: Understanding the Pros and Cons of This Investing Option,” Aug. 18, 2015, The Motley Fool

4 “Overview of IRAs (Individual Retirement Account),” Sept. 13, 2016, The Balance

5 “Traditional IRA vs. Roth IRA,” June 26, 2017, RothIRA.com

6 “The Roth IRA Part IV: Early Withdrawals,” The Motley Fool

This content does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.
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