Top 5 Strategies to Get Started Investing While the Market Is Hot
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Why you should learn about investing in the stock market
Let’s say you received a $2,000 bonus in January and you put it in your savings account. At the end of 2020, you'd have the same $2,000 plus the 0.01% interest earned, which is a standard rate with traditional savings accounts. Now, let’s say you took that same $2,000 and invested it in an index fund like the Schwab S&P 500 (SWPPX). Their annual total return in 2020 was 18.39% - meaning that $2,000 is now worth $2,367.80. You’ve just earned $367.80 without doing anything.
Related: How to Start Investing
Investing for beginners
1. 401(k)s and Roth IRAs
You’ve likely heard of a 401(k) and Roth IRA. Many employers offer their full-time employees a 401(k) plan. Some even have employer match programs. These types of investments are usually considered very safe, as they’re meant to be long-term investments. These are retirement accounts, so you’ll only want to invest in them if you are okay with having your money locked down till the age of 59 ½. Early withdrawal will result in fees that are rarely worth it. If you have an employer who is offering a match program, you should start investing by aiming to earn their full match - otherwise, that’s just free money gone to waste. Plus, if you’re going through an employer, you likely will have no minimum contribution.
2. Mutual funds and index funds
Mutual funds are less risky in nature due to their diversity. That means that even if one sector of the market is down (for example, energy or healthcare,) you won’t feel the effects of it as strongly. Your mutual fund will also be invested in other areas (for example, information technology, and real estate) and those areas may be thriving. Mutual funds are professionally managed, so there is an associated fee. However, you can choose an index fund, which is a type of mutual fund, in order to get lower fees. Index funds follow specific stock market indexes, like the Schwab S&P 500 we mentioned earlier. Since they follow a certain stock market index, there’s no longer a need for professional management.
Bonds are separate from the stock market. Rather than investing in stocks, you’re actually investing in a company or government entity and giving them a loan with the promise of gaining interest. Bonds come with terms, so you know exactly what you’re getting back and when. Since there’s a lower level of risk, you also get less reward than you would with other types of investments.
4. Individual stocks
Investing in individual stocks responsibly will require a lot of research. Individual stocks can be volatile, so you’ll want to educate yourself on the company, its history, its future direction, and its competition before investing. To begin, you’ll need to either open a brokerage account or an account with a robo-advisor. While both will charge fees, a brokerage account gives you a hands-on approach while a robo-advisor will do more of the legwork for you. You can also try an app like Robinhood, which allows for commission-free trading.
5. Real estate investing
Stocks and bonds aren’t the only things you can invest in: real estate is a huge market with many investors. If you don’t want to deal with the duties of being a landlord, you can invest in REITs - real estate investment trusts. With REITs, you’re investing in a company that owns commercial real estate. You can also try renting out a room in your home on Airbnb - this is a great way to build up capital for later investing. To purchase property, you’ll need to save some cash, although not as much as you may think. If you were to take advantage of an FHA loan, you can even put down as little as 3.5%. On a $200,000 home, you’d need just $7,000. You can use that FHA loan to buy an apartment building with up to four units. You’ll need to live in one for the first year of ownership, per FHA loan requirements. Then, rent out the other three units and you’ll gain enough capital to pay for the loan and then some.
Investing for beginners comes down to three things: your comfort level with risk, your timeline (long-term or short-term), and your starting capital. Take some time to map out your particular situation, then form a plan of action. What type of investing fits you best? What are your long-term financial goals? No matter your circumstances, there’s an investment option for you.