If you’ve never invested your money before, you might need some guidance about how and when to get started. There are many ways to put your money to work for you, and many types of investing to consider.
At Addition Financial, we often speak to beginner investors about investment strategies. We want every one of our valued members to meet their financial goals, so we are happy to help at any time. With that in mind, here are 11 investment tips and tricks that you can use to get your feet wet and invest your money.
When Should You Start Investing?
One of the questions we hear most frequently from people who haven’t yet invested their money is when they should start. In terms of saving for life’s biggest events such as buying a home, sending your kids to college or retiring, the answer is that it’s best to start as soon as possible.
The main reason that starting early is important is that it allows investors to take advantage of compounding interest. Setting aside and investing even a small amount of money that earns a modest return can allow you to earn money on your investments on a continuing basis. While the initial returns might seem small, they will add up and increase over time and can translate to hundreds of thousands of dollars added to your savings.
That said, we want to emphasize that if you didn’t start early, then the second best time to start investing is now. You might not see the same growth that you would have seen if you started investing right out of college that you would if you start investing at 35 or 40, but you can still save a substantial amount of money.
11 Investment Tips & Tricks to Try
If you’re ready to start investing as a beginner, here are 11 hacks, tips and tricks to help you.
#1: Understand Your Tolerance for Risk
We’re putting this tip first because it’s something that beginner investors may not do and it can lead to trouble down the line. Before you make a single investment decision, take a step back and think about how much risk you’re prepared to take.
Certain investments carry more risk than others. If you’re someone who’s anxious about money, then you may not want to wade into volatile investments because you know you won’t be comfortable if you lose money. Even if you are comfortable with risk, keep in mind that investment is a marathon and not a sprint. The overall trend of the stock market is up but you should be prepared for fluctuations along the way.
#2: Decide on a Diversification Strategy
When it comes to investment basics, diversification is one of the most important things to understand as a beginning investor. Diversification can be summed up with the adage, don’t put all your eggs in one basket. In other words, your investment portfolio should be spread out to minimize the chance that you’ll take a big hit if one investment underperforms.
One easy way to diversify your portfolio is to buy the market, by which we mean investing in index funds. Examples of popular index funds include the following:
- The S & P 500 Index
- Wilshire 5000 Total Market Index
- NASDAQ Composite Index
- Russell 2000 Index
The benefit of investing in an index fund is that you get an interest in a broad array of stocks, which guarantees that your portfolio will be diversified.
#3: Pay Attention to Fees
Investing isn’t free. Whether you use an investment app or work with a broker, you will pay fees as you invest. It’s important not to get carried away and invest before you have a complete grasp of how much it will cost you—and whether those costs are worth paying.
You’ll typically find the lowest fees with investment apps and the highest fees when you’re receiving personalized investment advice from a financial advisor. However, you should keep in mind that personalized advice may be worth paying for because it can increase your returns and help you build your investments quickly.
#4: Keep Taxes in Mind
We’d be remiss if we didn’t mention the need to keep your tax obligations in mind as you begin investing. Decisions that you make now can have an impact on how much money is available to you in the future.
For example, you may make a choice between a traditional IRA and a Roth IRA. A traditional IRA allows for pre-tax contributions, but you’ll be required to pay taxes when you withdraw funds. With a Roth IRA, you’ll make post-tax contributions but your money will grow tax-free and you won’t need to pay anything when you withdraw your funds. If you expect to be in a higher income bracket when you retire than you are now, making post-tax contributions is a tax strategy that can save you money in the long run.
#5: Automate Your Investments
Automating good behavior is one of the best ways to maintain it. With investments, you may have the option to automate contributions to an employer-sponsored investment account such as a 401(k) or an IRA.
If you’re self-employed or simply want to invest beyond what your employer offers, you can still automate your savings and investments by withdrawing a specified percentage from your pay to invest.
#6: Rebalance Your Investments Regularly
If you want to maximize the return on your investments, another basic investing trick to know is the importance of reviewing and rebalancing your investments regularly. Your investment balance indicates what percentage of your investments are in high risk vs low risk investments.
We suggest reviewing your investments every six months or so. For example, you might have started with 80% of your investment in stocks and 20% in bonds. If after a year, your stocks have performed well and left you with 90% of your investments in stocks, you should sell your equity to bring the total amount in stocks back down to 80%.
On a related note, you should also look at the specific mix of stocks, something that’s less of a concern if you invested in index funds or exchange-traded funds. As a rule, a single stock should make up no more than 5%-10% of your total portfolio to minimize your losses if that stock’s value decreases dramatically.
#7: Reinvest Returns & Dividends
When your investments perform well, it might be tempting to take your investment returns and spend them. In some cases that might make sense, as it would if you wanted to make a down payment on a house. But in others, there’s a better way to approach it.
If you take your returns and earnings and reinvest them, you’ll give yourself the best possible chance of attaining your financial goals. In the previous section, we talked about rebalancing your portfolio. You might need to sell stocks to do that, but reinvesting them in bonds is a good way to keep your money working for you.
#8: Put Your Windfalls to Work
What happens if you get a raise, bonus or a larger-than-expected tax refund? For many people, the temptation to spend that money is strong and while we understand that, we also know that any windfall represents an opportunity to grow your investments.
We’re not suggesting that you don’t enjoy some of your windfall. But a useful investment hack is to take half of what you get and invest it, while spending the other half. So, if you get a raise, increase your automated investments by half the amount of your pay increase and spend the other. Use half of your annual bonus to buy more stocks and bonds. Doing this regularly can help you increase your investments and savings, making it easier to achieve your goals.
#9: Take a Long-Term Approach
One of the most important things you can do as an investor is have the right mindset. As we noted above, the overall trend of the stock market is up. If you panic and make changes due to short-term fluctuations, you’re unlikely to see the growth you want.
Be patient. Make smart investments, of course, but try not to live and die by every change in the price of the stocks you own. If you need money in the next three to five years, then put it in a high-interest account such as Addition Financial's Insured Money Market account, which provides you with growth potential while keeping your money accessible.
#10: Invest for Dividend Income
If you want to balance growing your investments for the future and earning income today, then you may want to consider investing for dividend income. Some stocks pay quarterly or annual dividends to investors.
The most important thing to keep in mind is that if you don’t reinvest your dividends, you will need to report them to the IRS and pay taxes on them. For some investors, that’s a worthwhile investment to have a little extra money to spend.
#11: Earn Dividends by Checking
A dividend-bearing checking account pays dividends instead of interest. They are available only at credit unions because credit union members are also owners; the dividends represent members’ shares of the credit union’s profits. Usually, these dividends are higher than the interest rates you would earn at a bank.
At Addition Financial, our Benefits Checking account sees dividends compound daily and we pay monthly. That means that every month you have a qualifying account, you’ll earn dividends on your balance.
Start Investing Today with Help from Addition Financial
If you’ve never invested before, the 11 investment tips and tricks we’ve revealed here can help you get started and put your money to work to help you achieve your long-term financial goals.
Are you ready to invest in your future by earning dividends? Addition Financial can help! Click here to read about our Benefits Checking account and join today!