How to start investing

Maybe you just landed your first full-time job. Or maybe you’re finally ready to cross it off your to-do list. Whatever your reason, here’s how to get started.

Tags: Investing, Investments
Published: April 17, 2020

Investing isn’t a one-size-fits-all activity, so there are a few things to consider before you invest, as well as a few investing questions to ask (such as financial goals and feelings toward risk) that can help guide your overall strategy.

Once you’re ready, here are three ways to start investing.

 

1. Make the most of an employer match

The simplest way to start investing, if it’s available to you, is through an employer-sponsored retirement plan (a 401(k), IRA or 403(b)). Contributions are directly withdrawn from your paycheck, typically with pre-tax dollars, and many employers match contributions, up to a certain amount.

These types of plans often include a selection of mutual funds. Mutual funds are large, professionally managed investment funds that offer a broad exposure to different stocks and bonds. You’ll have the option of choosing your own investment mix or selecting a target date fund, which is a mix of investments based on your expected retirement year. Target date funds are broadly diversified and automatically adjust as your targeted retirement year approaches.

 

2. Open an IRA

If you don’t have access to an employer-sponsored retirement plan or are looking for tax diversification, you may want to consider an investment retirement account, or IRA.

Most people are eligible to open and contribute to a traditional or Roth IRA, you’ll have thousands of investment options and, unlike an employer-sponsored plan, it’s exclusively yours. There are even IRAs specifically for self-employed or small business owners.

Read 4 benefits of an IRA to learn more.

 

3. Consider non-retirement investment options

Retirement accounts come with annual contribution limits, so if you’ve maxed out your contribution or have other goals you want to work toward, you may want to consider one of these additional investment options:

  • Health Savings Account (HSA), funded with pre-tax dollars that continue to grow untaxed and remain tax-free if funds are used to pay for qualified medical expenses.
  • 529 plan, funded with after-tax dollars that also continue to grow untaxed and remain tax-free if funds are used to pay for certain qualifying education expenses.
  • Brokerage account through a licensed broker who makes investments on your behalf, or using an online, self-directed account.
  • Online automated investment account, also known as a robo-advisor. Many robo-advisors invest in low-cost exchange-traded funds (ETFs). ETFs are similar to mutual funds, but instead of investing directly into a fund, you can buy shares of the fund on a public exchange, similar to a stock. ETFs are often built to track specific things, like an index or a basket of assets (such as stocks, bonds, real estate, or commodities).

Brokerage and robo-advisor accounts provide a bit more flexibility when it comes to how and when you access your money. While any earnings are subject to capital gains tax, these types of accounts don’t have any restrictions on when you can make withdrawals.

Read more about non-retirement investment options.

 

Continue calibrating your mix

Once you start investing, you may want to factor in other criteria that will help you finetune your investment selections, such as your financial goals, risk tolerance and time horizon (the number of years you have until retirement).

A financial professional can help make sure your investment choices are aligned with your age, goals and tolerance for risk. Keep in mind not every investment decision fits into a flow chart, and you don’t have to choose a single path. After all, you may have multiple objectives, and your goals could – and should—change as you age.

 

Read more about investment strategies by age.

 

Investing in mutual funds involves risk and principal loss is possible. Certain funds involve special risks, such as those related to investments in small and mid-capitalization stocks, foreign, debt and high-yield securities and funds that focus their investments in a particular industry. Exchange-traded funds (ETFs) are baskets of securities that are traded on an exchange like individual stocks at negotiated prices and are not individually redeemable. ETFs are designed to generally track a market index and shares may trade at a premium or a discount to the net asset value of the underlying securities.