What First Time Investors Can Expect
How do you invest? Learning to invest takes some practice and practical hands-on application before you master it. Before you get going, here are some tips on what to expect:
Tax Implications
When you work, you get paid for your work and the government takes a portion of that income through taxes. When you begin investing your income into mutual funds, IRAs, 401(k) plans, CDs and money market accounts, you do have to consider the tax implications. You pay different amounts for the same amount of money invested depending upon the investing method you choose.
For example, with a traditional IRA when you invest, you don’t pay any taxes upfront. However, when you retire your total IRA contribution is taxed. Similarly, with a traditional 401(k) plan, your money is protected until you retire. At that time, you pay taxes on the full amount. A 401(k) plan can be very beneficial because your employer matches your contribution, helping you grow your nest egg bigger. (For more, see: Investing 101: Types of Investments.)
Finally, with a Roth IRA, your investment is taxed up front and then grows ta -free. When you retire, you do not have to pay any taxes. A Roth 401(k) plan is similar, except that you pay taxes on the matching employer contribution when you withdraw funds.
When you look at these four options, you will get the most value and keep more of your money when you are not taxed for your investment at retirement. Investing with a Roth IRA or Roth 401(k) plan (if available at your company or place of employment) is ideal so you can maximize your investment.
Your Emotions
Far too often, individual investors get in their own way despite good intentions. Emotions can often cloud judgment. If you buy and sell stocks when you are afraid or reacting to news and stock market volatility, you may end up losing more money than you expect. Being able to stay calm and manage your own emotions regardless of news cycles and market volatility significantly impacts the investment you build.
How Much Should You Invest?
While the answer to this question is personal to your own specific financial situation, a general rule of thumb is to invest 15% of your household income towards retirement. If you have a lot of high-interest debt, you will want to pay that off first and ensure you have an immediately accessible emergency fund before you allocate a full 15% or more of your monthly income. Creating a budget and monitoring your daily or weekly progress can help you accelerate your way to clearing out your debt and growing your investment savings.
In addition to allocating a monthly sum towards your retirement, you need to invest consistently. This is important to do despite market ups and downs or your own desires to splurge on a new product, car or other item you’ve longed for. (For more, see: Investing 101: A Tutorial For Beginner Investors.)
Learning to Invest Takes Time
Take time to learn more about investing, even if it seems daunting at first. Investing involves buying full or partial shares into companies. Learning about the companies and how they do business is important. The book The Intelligent Investor by Benjamin Graham can help you think critically and appreciate the fundamentals of a valuable investment.
Investing is a journey, and you will get better at it as you learn and gain experience. Investing is not an abstract concept - it is a way of protecting your future and ensuring that you can enjoy a high standard of living when you retire. When you realize that investing is tied to your personal goals, you become more motivated to invest consistently. In addition, how much you wish to invest, how often and with what companies, funds, exchange-traded funds (ETFs) and individual stocks, depends a lot upon your risk profile and how much risk you are comfortable taking.
Your investment strategy at 20 years old will most likely be quite different from the one you have at 60 where you have different goals. Knowing what your goals are and what you wish to accomplish with your investing dollars will help you in your investment decisions.
Managing Your Investments
You can manage your own investments entirely. However, working with a seasoned financial advisor can help you reap significant rewards over time and help you stay on top of your investment goals. Talk to and get to really know your investment professional first. He or she must take the time to listen to your concerns and goals, answer your questions, educate you on options and be there to assist you when you are ready to make investing decisions.
When choosing an investment professional, consider the individual or company’s investment approach, communication methods and frequency and how you will be informed of your investment performance.
Investing for the Long Term
Investing really pays over time. For example, if you invested in the stock market throughout 2017, you would have reaped benefits as the market overall did very well. The S&P 500 ended 2017 with a 19% gain. All markets go up and down. Downturns do not mean that you need to pull out all your cash.
The stock market does not always just go up either, having "dips" of roughly 5% or less or corrections of 10% or more. If you had pulled out your funds last year during February when the S&P 500 went down, you would have lost approximately over 3% of your gains. Every year has top trading days and months and some of the largest gains are made when the market recovers. Pulling out your cash prematurely has a negative impact on your investment potential. Riding out the stock market for the long term can help you earn more money over time.
Investing for the first time can seem daunting. Knowing what to expect can help you prepare and learning to invest takes time and practice. (For more from this author, see: Investing FAQs: 10 Common Questions Answered.)