By Veronica Baxter
If you want to learn about investing, chances are you have steady employment, you are living comfortably within your means, you have a six- to eight-month emergency fund saved, you have very little credit card debt if any, and you are maxing out your IRA contributions.
No? Then accomplish those things for yourself before investing. Investing should be done with money you can take some risks with, not money to put food on the table. For example, if you have credit card debt, pay that down before setting aside money for investing. Nothing on the market will bring a return as high as when you avoid being charged that exorbitant interest.
These three tips are for people of any age who have their financial situation well in hand and are prepared to set aside some money to “play with” while they learn about the types of investments that are available, how those investments can perform, and their own level of risk tolerance.
Tip #1 – Only Invest Money You Can Afford to Lose or Afford to Lose Access To
Yes, this is somewhat of a repeat of the introduction because this is the first decision you make, and it is crucial. Investing is essentially a gamble, and even investments with proven returns can tank if, for example, a pandemic breaks out. Don’t gamble with your car payment or your children’s college fund.
Funds for learning how to invest should be those available above and beyond your household budget, contributions to your IRA, contributions to your medical and or college savings funds, contributions to your emergency fund, and any other bills or monthly obligations. Not only because you must fund those costs first, but because money invested is not easily divested.
In other words, don’t invest money you might need now or in the near future, because you won’t be able to easily access it if you need it.
Tip #2 – Shop Around Before You Invest
Just about anything you want to know about investing is online, but beware – just like television, not everything you see, hear, or read is necessarily true. However, it is easy to research the different types of investment vehicles that are available right now, and for the beginning investor, there is a lot to choose from.
Not only can you browse the different types of things to invest in and look at the projected returns and risk level, but you can invest according to your priorities. For example, if it is important to you that underserved communities have access to small business loans, you can invest in that. If you are interested in providing access to mortgage loans to those with poor credit, you can invest in that. There are many more places for individuals to invest than ever before.
The Stock Market
Traditional stocks and bonds are what come to mind first for most people, and yes, these investments are available even to the beginning investor now. There are online platforms such as E*Trade that can get you started, or you could go the traditional route and meet with an investment advisor. Either way, you can customize your portfolio to the level of risk of loss that you can endure, but be sure to ask about fees and costs.
For example, while E*Trade requires a minimum of only $500 to get started, it charges $9.99 for each stock trade. If you want to learn to trade stocks and expect to be actively doing so, that could eat into your principal pretty quickly.
Online brokerages such as TD Ameritrade offer a diverse array of investment products and level of customer involvement and guidance. Many tout their free online trades but be on the lookout for hidden brokerage fees.
Real Estate Investment Trusts (REITs) are a way for individual investors to invest in real estate with far less risk than if they bought and sold real property themselves, or managed rental property themselves. REITs own, operate, and/or finance rental property and come in four different varieties:
Publicly-traded Equity REITs. These own and operate a rental property, and are available as part of a stock market portfolio. Savvy investors often include these in their portfolio to balance out riskier investments.
Mortgage REITs (mREITs) finance income-producing property by originating or purchasing mortgages and earning income from the interest. These can be a stabilizing part of your portfolio.
Public, non-listed REITs (PNLRs) are registered with the SEC but do not trade on national stock exchanges.
Private REITs are exempt from SEC registration and do not trade on national stock exchanges.
For the beginning investor, access to REITs can be had through your online brokerage as part of your diverse online portfolio, or, you can invest directly with PNLRs or private REITs online. Many have mission-based objectives, such as lending to underserved communities or to those who have poor credit.
Micro-Lending and Crowdfunding
These are fairly new types of online investment vehicles that fund smaller businesses or individual projects. Again, these can be mission-based, and there are hundreds if not thousands to choose from.
Tip #3 – Diversify and Adjust Risk
It is important for your investment portfolio to have a number of different types of investments of varying risk, to spread risk over the whole of your investment, and provide more stable returns.
Generally, people earlier in their career can tolerate more risk, just because they have more time for the market to come back before perhaps needing those funds in retirement. People who are later in their career might shift investments to those with less risk and a guaranteed return, just to make sure the funds are there when they are ready to withdraw them.
But if you are investing not just for retirement but to grow your wealth in the here and now, take risks – that’s how you learn. Because you are not gambling any money you need to live on, you are free to think of any money lost as the cost of an education in investing. Good luck!
About the Author
Veronica Baxter is a legal assistant and blogger living and working in the great city of Philadelphia. She frequently works with David Offen, Esq., a busy Philadelphia bankruptcy lawyer.