Maybe you think investing isn’t accessible — it’s too expensive, too difficult — but the truth is, investing is for everyone. It’s a great way to build wealth, work toward your long-term goals, and improve your financial literacy. While it can be intimidating to get your foot in the door, it doesn’t have to be — we’re here to demystify it all for you. Keep reading for UBank’s guide to investing for beginners. We’ll banish some of the most common misconceptions about investing and give you a breakdown of the investing process from the ground up!
Understanding the basics of investing
“Investing” is a term used to describe any purchase of assets that have the potential to increase in value over time. Making the right investments can help you generate extra income, adapt to inflation, and support your long-term financial growth. Sounds good, right?
The truth is that not all investments are created equal — each comes with its own potential risks and returns. The general idea is that the greater the risk of an investment, the higher your possible returns might be. However, that doesn’t mean you should always opt for the risky choice — especially when you’re first starting out. It’s up to you to determine your risk tolerance, or how much risk you’re willing to take for a potential return.
One of the best ways to understand the potential risks and returns of investments is to learn about the types of asset classes. These are categories of investments that you can often expect to behave the same way, whether because of their similar characteristics or economic regulations. Below is a rundown of the most common types of asset classes:
- Commodities are materials, ingredients, and other basic items that can be manufactured into more complex (and lucrative) goods and services. Think of metals like gold and silver or agricultural products like wheat or cattle. They’re a classic example of an asset that entails higher risk but higher potential returns.
- Fixed income is an investment that pays you a fixed amount of money over time until the investment is paid back in full. Some of the most common fixed-income investments are government and corporate bonds. This asset class is associated with moderate risks and steady returns.
- Cash or cash-equivalent investments are representative of — you guessed it — cash. The most common example of a cash or cash-equivalent investment is a savings account. These investments typically carry low risk, but, in turn, offer low potential returns.
- Equities allow you to invest in the shares of a public company, organization, or other business entity. There are some moderate risks, but this asset class is generally on the safer side.
Investing for beginners: setting financial goals
Setting financial goals is one of the first steps to building a successful investment strategy. If investing is a house, then your financial goals are the foundation — if they’re not solid, neither are your investments. Below are some of our tips for setting achievable financial goals.
- Be realistic. Take stock of your current financial position, including your income, current assets, and growth potential. These will all have very real impacts on how you shape your financial goals.
- Make it specific. The more clear-cut and direct your financial goals are, the more easily you can take concrete steps toward achieving them.
- Keep your eye on the prize. You should orient your financial goals around the material accomplishments you want to achieve. Whether you’re saving toward a new house or retirement, make sure your goals are structured around a financial milestone.
- Set benchmarks. When working toward financial goals, you want to measure your progress along the way. Setting benchmarks is the best way to do that. These will keep you on track when seeing your long-term investments through — and you’ll feel really accomplished when you meet them!
Creating a budget for your investments
One of the keys to a solid investing plan is effective budgeting. Below is our step-by-step guide for how to create a successful and realistic investing budget.
- Determine your income. Your income is the basis for how much you can put toward your investments.
- Be confident in your goals. Once you’re firm in your financial and investment goals, you can think more concretely about how much money you’ll need to budget to achieve them.
- Evaluate your fixed and variable expenses. You don’t want your investing to cut into your fixed expenses (the expenses that you can count on paying every month). Based on your variable expenses (the ones that fluctuate), you can determine how much budgeting flexibility you have. That said, some variable expenses are inevitable, and it’s important to factor those into your budget.
- Figure out where investing fits in. Once the other aspects of your budget are squared away, you can determine how much might be left for an investment budget. In this step, you’ll decide which stocks, bonds, and other investments fit within your unique economic framework. This process is personal to you, and it all depends on the above three steps.
With these foundations, you’ll be well-equipped to build a responsible investing budget!
Building an investment strategy
Your investment strategy should be based on your long- and short-term goals, risk tolerance, and how long you’re willing to wait for returns. There are plenty of investment strategies you can try, and some of our favorites are below.
- Passive investing is the process of holding onto your bought stocks rather than frequently trading them. This strategy might save you transaction costs and avoid risks, but it might also yield lower potential returns.
- Active investing refers to, as you might have guessed, the process of frequently trading your shares rather than holding onto them. When compared to passive investing, this strategy has inverse outcomes, including higher transaction costs, higher risks, and higher potential returns.
- Diversification is the process of covering as much ground as possible through your investments. You’ll invest in an especially wide range of different assets to reduce your investment portfolio’s overall risk.
- Dollar-cost averaging is the most open-ended investing strategy on this list. With dollar-cost averaging, you’ll make investments in the market as often as you see fit without being confined to one strategy. You’ll choose how much money to put in an investing account and when — all while pursuing other investing strategies in the meantime.
When you’re starting your investing journey, you might look for low-cost investment advice to help you learn the ropes. Robo-advisors and investment apps can lend a helping hand, but, ultimately, nothing beats advice from a real person. Here at UBank, we take pride in giving you the support, guidance, and encouragement you need to meet and exceed your financial goals. Our skilled and experienced financial advisors are here to help you put the best investing strategies into action!
Investing for beginners: researching investment options
When it comes to researching investment options, it’s important to do your homework. We recommend reading up as much as you can on the different investing options out there. You’ll also want to think critically about how different investment options fit into the context of your financial capabilities and future goals.
While researching, you should look at the historical performance, or past returns or losses, of each potential investment, as well as the associated fees. Finally, consider how involved you want to be in managing your investments — different investments require different levels of management.
The following are some of the most popular options for investing.
- Individual stocks are shares of ownership in a company. Depending on a stock’s historical performance in the market, these investments can be riskier, but — as usual — may yield higher returns.
- Mutual funds allow investors who meet the minimum investment requirements to diversify at a lower cost. That’s because mutual funds pool money from shareholders to buy assets. A popular type of mutual fund is the index fund, which holds stocks in an already-curated market such as the S&P 500.
- Exchange-traded funds (ETFs) are similar to mutual funds, but they give you more control over the price of your trade. They also involve an investment in an index, but you can buy, sell, and trade them on the stock exchange like an individual stock.
- Real estate investments involve buying and selling property for a profit. While this might seem like an expensive investment strategy, we’ve written plenty about how to make real estate investing work for you.
- Government and corporate bonds operate in the same way but in different market spaces. Government bonds allow you to give a low-risk loan to a government entity with all but a 100% promise of return. On the other hand, corporate bonds come with a slightly higher risk, as you’ll be giving the same type of loan to a private entity.
Opening your first investment account
Investment accounts can make the process of working toward your financial goals especially easy. Below, we’ll walk you through all the steps to open a brokerage account.
- Assess your options. When the time comes to open an investment account, you’ll notice that there are tons of options out there. Consider your risk tolerance, how involved you want to be in investing, and how frequently you want to buy and sell in stock markets. These preferences will help you narrow down your account options.
- Pick your features. If you’re new to investing, you might want some hands-on support with your first brokerage account. More robust customer service and additional educational materials will certainly help, but they might cost extra. So make sure you’re prepared for these extra expenses — they’re worth it, but budgeting always matters!
- Know your needs. Just like with any other part of the investing process, it’s important to know why you’re investing your money. This will help you figure out which account is the best fit for you. For example, if you’re investing with the goal of retiring, you’ll know to narrow down your options to a Roth, traditional, or SEP IRA.
- Apply and invest! If you need help, you can always visit a UBank branch.
Start your investing journey on the right foot
Whether you’ve just become curious about investing or you’re ready to open your first account, investing can be daunting at first. That’s why we at UBank are here to help you. From our variety of investment options to the support we give you at every stage of your journey, we’re more than just a bank. We’re a team of experts — of people — wholly committed to helping you get the most out of your investments. Visit your nearest UBank location to get hands-on help and start investing confidently today — and long after!