Take a stroll through Twitter on any given day and you’ll probably see headlines about the latest cryptocurrency or stock controversy on your “For You” page.
Over the past year, you’ve probably heard a lot more about investing (who could forget about GameStop and dogecoin?) than you ever have before, and the pandemic may be a big reason for that.
Behind the scores of Redditors jumping on GameStop stock are real people who were probably feeling the financial burden of the pandemic pretty hard, and investing in the stock market seemed like a good way to make some much-needed money.
Investing can certainly be a great way to grow your wealth, but you don’t have to risk it all on the stock market to build a better financial future for yourself.
As we’re going to talk about today, there are a variety of different ways to start investing, from mutual funds to ETFs, to everything in between.
Want to learn how to start investing in 2021? We’ve got you covered.
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Why is investing important?
Before you learn how to start investing, we’ve gotta give you a primer on why it’s a helpful thing to do in the first place.
Put simply, investing is a way to help the money you already have grow over time.
For example, let’s say you invest $1000 in a mutual fund, and there’s a 6% average annual return. After one year, you’ll now have $1600.
It’s easy to see then, why it’s so important for building wealth for your future. The earlier you can start investing (into say, your retirement account), the more money you’ll eventually have to spend when you’re no longer able to work.
Contrary to popular belief, you don’t have to have a lot of money to start investing. You could put $10 away each month and still grow your wealth. What matters is that you start early, and stay as consistent as you can with your monthly contributions.
How to start investing in 2021
One of the easiest ways to start investing is to open a retirement account.
If you’re a full-time employee, you’ll likely have access to a 401k retirement account. If you have one, take advantage of it!
Some employers also match contributions up to a certain amount, i.e. free money, so definitely don’t wait to start contributing.
If you don’t have access to a 401k, you can open your own Individual Retirement Account (IRA). Nowadays, you can do it online in a few simple steps.
First, you’ll have to decide whether you want a Roth or a traditional account. Next, decide whether or not you want your account to be managed by a broker or robo-advisor (NerdWallet has a great explainer on the details!).
If you’re investing for another, shorter-term goal that isn’t retirement, you can open a regular brokerage investment account, which will allow you to remove funds at any time without penalties. Try Public and earn $10 in free stock when you join using our affiliate link.
For the first-time investor though, we definitely encourage you to open up a retirement account first and foremost.
Different types of investment options
So you’ve opened an investment account – great! What’s next? Now’s the time to start thinking about what kind of things you want to put your hard-earned money toward.
Let’s break down what the most common types of investments are, and how to start investing in them.
Stocks: A stock is an investment into a company and its profits. If you ever hear about people “investing in Apple”, or “investing in “Tesla”, that means they’re buying stocks of that company. Depending on how well that company does, the stock price can go up, making you more money. If that stock tanks though, then you lose money, making it a risky way to invest.
Bonds: Think of a bond as a contract between two companies (or the government). If a company needs to borrow a lot of money, they may issue bonds that investors like you and I can buy. At the end of a fixed period of time, that company has to pay investors back with interest.
Mutual funds: If you’re investing in a retirement account, you’re likely investing in a mutual fund. This is an investment strategy that allows you to pool your money together with other investors to purchase a portfolio of stocks, bonds, and other securities that you otherwise might not be able to access.
ETFs: Exchange traded funds (ETFs) is a collection of securities that are traded on an exchange, just like stocks. Unlike mutual funds which only trade once a day, ETF share prices can fluctuate throughout the day.
Understand your strategy (and risk tolerance)
Investing is a great way to build wealth, but it’s important to be strategic about it. For example, if you’re investing in your retirement through a mutual fund, you’ll want to know what’s in your portfolio.
A little research can go a long way in helping you pick the best investment for your goals.
If you’re investing in stocks especially, you’ll also want to gauge your risk tolerance or the amount of money you’re willing to lose if your portfolio doesn’t do well. Again, this is where research can help you find investments that fit your appetite for risk.
Remember you’re in this for the long-term
Investing is for the long term. If you’ll need access to your money in a short time horizon (within 1-4 years) you won’t want to put it at risk by tying it up in the stock market.
Many investors get nervous when they see the market take a dip, and they’ll want to pull their money (or sell) when that happens. But that’s often the wrong move to make since you could be selling at a loss and then miss the market recovery.
When you’re playing the long game, you don’t need to worry every time the market fluctuates. Pick a good fund, and you’ll more than likely see great overall growth over the years (even if there are minor dips here and there).
If we’ve got you interested in investing now, don’t forget to bookmark this page and check out our recommended investing courses when you’re ready to learn more!
And don’t forget to check out the rest of the Paychecks and Balances blog, where we talk about everything from how to start saving in 2021 to why the ‘American Dream’ isn’t all it’s cracked up to be.
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