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Smart Investment Choices For Beginners: Tips And Insights

Based in Boston, Marcos Cabello is Next Advisor and a personal finance reporter for . Marcos discusses cryptocurrency, investing, banking, and the US economy, as well as other personal finance topics. If you can’t find Marcos behind his computer screen, you might find him behind another screen, playing the latest Nintendo Switch title, streaming the latest TV show, or reading a book on his Kindle.

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Becoming an investor is not an easy time. Although the Federal Reserve’s rate hikes have helped raise high-yield savings rates significantly, the stock market has struggled — the S&P 500 index fell 20% in 2022.

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However, now that anyone can stream investment tips from a smartphone, it’s hard to find reliable advice: following the wrong TikTok or Twitter crypto gurus can lead to big financial mistakes.

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How can novice investors navigate the current financial landscape? Building wealth and saving for retirement requires careful planning and long-term strategies. To help you make smart financial decisions this year, we spoke with investment experts who explain how to balance proven strategies with new opportunities to support your investment goals.

Choosing stocks, choosing mutual funds, or buying Bitcoin is actually the easy part. But knowing a particular investment, strategy or philosophy is not that important

You invest from the start. In other words, what do you want to do with your money?

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James Lee, Certified Financial Planner and President-Elect of the Financial Planning Association, always starts working with his clients by achieving their life goals, before even talking about investment strategies.

“I ask them what goals they have that will require financial resources in the future,” Lee said. “It is important to understand what your goals are to inform your timeline and create a portfolio that takes on the appropriate risk and return characteristics to achieve those goals.”

While everyone has their own reasons for investing, most of us have the same goals: saving for retirement, buying a home and paying off student debt, starting a business, or funding your child’s college education. Your goals will also evolve and the bigger financial picture will influence your approach. For example, right now you may be worried about strengthening your nest egg against rising inflation and rising interest rates.

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Articulating your life goals or imagining your future, although challenging, is an important first step in investing. Setting clear goals and revisiting them annually will help inform your timing, strategy and appetite for risk.

Your goals may also include external, non-financial considerations. According to Anjali Jariwala, certified financial planner and founder of Fit Advisors, socially conscious investing has become an important touchstone for many people. Given the importance of climate change, more and more investors are building or restructuring their portfolios to support environmentally friendly companies.

For most of us, building a nest egg for retirement is a primary investment goal. According to Farnoosh Torabi, editor of Money, financial independence is a top priority for most people to retire comfortably. According to a recent survey published by Personal Capital, an online wealth management platform, only 57% of Americans have retirement savings.

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If you work for a company that offers a 401(k) or employer-sponsored retirement account, there are two good reasons to choose one. First, a percentage of each paycheck is put into those investments, providing regular and automatic contributions. Second, your employer may match some or all of your contributions.

For example, if you gross $4,000 per month and your employer matches up to 4% of your salary, you would need to contribute $160 to receive the full employer match. Adding up your and your company’s contributions, that’s $320 per month, or $3,840 per year. And you can always contribute more — in 2022, people can contribute up to $20,500 to a 401(k). As a general rule, your employer recommends that you deposit at least the appropriate amount so that you don’t lose out on “free” money.

And if you have more money to invest after maxing out your 401(k), you can open an IRA, a special class of savings account that offers protection from taxes. Traditional IRAs allow you to make pre-tax contributions during your working years and have your money taxed as ordinary income when you withdraw it in retirement.

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With a Roth IRA, your money is taxed when it enters the account, paving the way for 100% tax-free withdrawals after you retire. This arrangement is ideal for younger workers who are early in their careers or in a lower tax bracket. The caveat is, “there are income limits, so once you reach a certain income level, you can no longer contribute,” Zariwala said. “When you’re young, it’s a good time to roll as many dollars as possible into a Roth IRA.”

After decades of relative stability, the financial sector is changing. Inflation is at its highest point in 40 years and we are seeing interest rates rise as a result. Finding inflation-proof investment opportunities is critical. A price increase can destroy your portfolio because the same $100 dollars will buy you less than it did the day before. However, some types of assets are more affected by inflation than other types of assets. This is the moment to explore assets that help protect your portfolio, including some retirement accounts, real estate, and Treasury inflation-protected securities, a type of government bond that balances against inflation.

Today, “investing” is often associated with actively trading stocks on Robinhood or other brokerages. It indicates frequent buying and selling based on market analysis. But it’s difficult to make reliable profits through active investing — even for professionals — and, for many people, it’s not the most practical or efficient way to manage money.

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Passive investment strategies such as using index funds and ETFs are the best choice for most people. In contrast to active investing — where you (or your portfolio manager or broker) regularly buy and sell individual investments — passive investing typically involves buying and holding assets for the long term.

The ups and downs of the market, tracking the performance of established market benchmarks such as the Standard & Poor’s 500 or Nasdaq Composite index funds, are designed to provide the average return of the market as a whole. The reason is that over the long term, the market will usually perform better than any other investment. Research shows that index funds outperform actively managed funds. Passive investing through mutual funds is very productive for a generation that has had decades to build wealth early in their careers.

Warren Buffett, one of the world’s richest people and chairman and CEO of Berkshire Hathaway, is also a fan of index funds. Quoted in The Little Book of Common Sense Investing, Buffett said in an interview: “For most investors, low-cost index funds are the most appropriate equity investment. By investing in index funds over time, novice investors can actually outperform most investment professional.”

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Even better, index funds carry less risk and generally have lower fees than other types of investments — unchecked fees can kill your portfolio over time. While buying index funds yourself isn’t complicated, a robo-advisor can help you figure out what makes the most sense and manage your portfolio.

Once you’ve covered the basics like retirement, long-term investments, and emergency funds, you can dive into riskier — or less proven — ventures. High-risk investments often provide high returns…if the investment is successful (and the investment is large).

Cryptocurrency is an alternative to explore. You can invest in crypto by purchasing tokens like Bitcoin and Ethereum on exchanges like Coinbase or Binance. But it’s important to understand that crypto is unregulated and highly volatile. It’s not for everyone: you need a high risk tolerance and the financial ability to withstand market downturns. You also need to make sure that you can afford not to lose money and still pay your bills.

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Lee recommends investing in crypto, “if you have an asset that can be speculated on, it means it can go to zero and it won’t affect the range.

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