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Investing 101: A Beginner’s Guide To Investing For Wealth

This post is sponsored by Lexington Law.

If you plan to start investing money in the near future, now is a great time to get yourself acquainted with the lingo, types of accounts, and some important details you should know. Investing can be overwhelming — with questions like should you sell now? — but it’s not a reason to stay away from investing. A beginner’s guide to investing is all you need to get started! 

Keep in mind that this is not a fully comprehensive guide. It’s essentially what you would learn in a class called Investing 101. You need to know the basic lingo, the types of investments, the options that best suit those new to investing, and a few things you should know overall.

The Lingo For Investing Beginners

There are many, many terms that Here are six common terms that you’ll see when you start investing:

  • Asset allocation: This is your investment strategy. Essentially, it’s how your investments will be divided between your various types of investments.
  • Expense ratio: Covers mutual fund expenses going to things like the CFP (certified financial planner) who manages the fund. The bigger the ratio, the less you’ll make. The smaller the ratio, the more you’ll make.
  • Fund: Investors pool their money with a fund manager who invests the pooled money in a set of assets.
  • Price-to-earnings ratio: A company’s stock price as it relates to its earnings (revenue minus the cost of production). An average P/E is between 10-17.
  • Rebalancing: Maintains your asset allocation. Some investments grow at a faster rate than others which changes you asset allocation.
  • Target-fund-date: When you expect to withdraw the money, say for retirement. Earlier on your asset allocation may be riskier, and as you approach the date, it will become more conservative.

Types of Investments

There are various types of investments that you can invest your money into. Your choices and options depend on your financial situation.

These include:

  • Bonds: A loan to a company or government. You loan them your money and when the bond matures, you cash it in and earn interest on the loan. There are different types of bonds and also bond funds that you can consider.
  • Real estate: Property you own — can be land, a house, or a structure.
  • Stocks: When you purchase stock in a company, you’re essentially buying a piece of the company. If the company grows, you’ll earn money. If it doesn’t, you’ll lose money. (Some companies also have different types of stocks that vary on how involved you can be with the company. These include common stock and preferred stock.)

Generally, you are not the only person contributing to the fund or account in these cases:

  • ETFs (Exchange Traded Funds): Similar to mutual funds, these are traded as if they are stocks. They generally track an index and holds assets like stocks and bonds divided into shares held by the shareholders.
  • Mutual fund: When you contribute to a mutual fund, you and a group of other anonymous investors will have your money invested into assets. This spreads the risk to a group rather than an individual.
  • REITs (Real Estate Investment Trusts): Instead of buying real estate yourself, you can invest in an REIT where your money goes towards different types of real estate.

When it comes to stock funds, there are generally two types:

  • Active funds: A fund manager actively researches and decides which stocks to include the fund. These generally charge higher fees.
  • Index funds: An index is the stock of a group of companies that represent a piece of the economy. The performance of these is tracked and gives an overall idea of how the market is performing. For example, the S&P 500 is an index including 500 companies that have common stock on NYSE (New York Stock Exchange).

Types of retirement accounts:

  • 401(k): Offered to employees by their employer, the 401(k) is a tax advantaged account, however, the taxes are paid when you withdraw the money at retirement. Employers often match up to a certain amount. There are contribution limits.
  • Rollover IRA (Individual Retirement Account): When you leave an employer, you can take the money from your 401(k) and put it in a rollover IRA which is essentially like a Traditional IRA.
  • Roth IRA : You deposit money into this account post-taxed but you are not taxed when you withdraw the funds at retirement. There are contribution limits.
  • SEP-IRA: A retirement IRA for the self-employed with limits based on income.
  • Traditional IRA: Your contributions are limited by income limits, however, no tax is paid on types of gains within the accounts until you withdraw the money at retirement.

The Best Options For Beginner Investors

While there are many, many ways to invest, for beginners there are three straightforward ways to go about it. This is by no means exhaustive but what I believe to be the best ways to start for beginners.

1. Robo-advisors

These are a good options for those who want low fees and a hands-off approach. You generally don’t need to know too much other than the risk level you are comfortable with and your target fund date.

Many robo-advisors have low minimums so you can start with just a few dollars. The use technology and algorithms to work towards your goals and often auto-rebalance your portfolios for you based on market performance. They’re easy to use and require very little management on your end.

Ultimately you’ll have to do research on your own to figure out which robo advisor you’d prefer. We at GenTwenty recommend Betterment. According to Investopedia, the top five robo advisors for 2018 are Betterment, Personal Capital, Schwab Intelligent Portfolios, SigFig, and Wealthfront.

2. A CFP (Certified Financial Planner)

A CFP is the way to go if you’re looking to develop an overall financial plan. CFPs offer many different services from managing your accounts, to creating a plan, to advising you on the best services for you. I don’t think it can hurt to talk to a financial expert at any point (just make sure to vet them first).

Keep in mind the fees associated with working with a CFP will likely be higher than you expected. They are experts and there are regulations in place to protect both you and them when they provide financial advice. Working with a CFP is a good balance between a hands-off tactic like with a robo advisor and the do it yourself approach of brokerage accounts.

3. Online Brokerage Accounts

If you want to invest in stocks, bonds, ETFs, etc from a specific company or industry, this is how you would do it. These have lower fees but generally higher minimums to start. You’ll also want to be confident in your choices and know that you’ll have to manually rebalance your portfolio.

According to NerdWallet, the best online brokerage accounts of 2018 are Merrill Edge, Ally Invest, E-Trade, Ameritrade, Charles Schwab, and Fidelity Investments.

The Investing Mindset

When you start investing, it can seem overwhelming at first.There are a lot of terms and information to learn. Plus, there is no definitive answer on what is going to give you the best return. The most important thing to do is to educate yourself on what the best options are for you.  

1. It’s a long-term plan.

When you start investing, it’s crucial that you understand it’s a long-term plan. You won’t be seeing major growth from your investments in a few years. In fact, the longer you can invest for, the better. The more time your money has to grow, the more it can grow thanks to a little thing called compounding.

2. You still need to manage your finances in the short-term.

Putting money into investment accounts doesn’t mean you can nor should abandon the rest of your financial plan. Managing your budget, spending, and maintaining good credit are all part of a strong investing foundation.

3. Keep an eye out for the signs of investment scams.

If you’re keen on investing, you’re probably on the lookout for opportunities. Keep in mind that if something sounds too good to be true, it probably is. Avoid being taken advantage of by scammers.

Not only will these people run away with your money, but they could run away with your identity, too. Our friends at Lexington Law remind us to keep an eye out for these warning signs:

  • Small investment, large profit:An investment offering big payoffs is usually too good to be true, especially if your time is part of the deal. Also known as a pyramid scheme, this money-making model relies on “investors” to recruit new members to build their network and drive more business into the parent company. Participants are asked to pay an entry fee and promised a cut of the profits from the business they bring in. The problem? Rather than receiving the promised profits, investors are only given a fraction of the bottom line.”
  • Rapid returns: “Many scammers use social media and email strategies to increase the level of interest in specific (and cheap) stocks. After drumming up interest, the increased demand for shares will artificially drive up the price, leading new investors to believe that they have stumbled onto a gold mine. Unfortunately, the share price will eventually restabilize and result in a loss for investors. Of course, this is after the scammer has “pumped and dumped” his shares at the elevated price, allowing him to earn a hefty return at the expense of his unsuspecting victims.”
  • The “It’s Complicated”: “Investing can be complicated, but that doesn’t mean you should do it without understanding the deal. A broker who says, “It’s very complicated, but I promise…” is not interested in protecting your interests. Don’t get involved in murky deals with clear guarantees.”

Identity Theft

If you do become a victim of identity theft, Lexington Law can help you rectify the situation and bring you peace of mind. The Identity Theft Track is worth considering if this happens to you. And of course, there are immediate steps to take once you do believe your identity has been stolen. Using a credit and identity monitoring tool, like Lex OnTrack, can also be invaluable to monitoring your financial health.

Still with me? Phew, I know it’s a lot of information. But as you can now hopefully see, investing is very accessible. You don’t need a degree in finance to get started! Just be sure to have a solid financial foundation before you get started. Knowing basic terms, a few beginner-friendly ways to get started, and having the right mindset can make all the difference.

Like I mentioned previously, I do recommend having additional tools in your back pocket for peace of mind. Having minimal debt, an emergency fund, a credit and identity monitoring service, and experts to call can make all the difference in your financial situation.

About the Author

Nicole Booz

Nicole Booz is the founder and Editor-in-Chief of GenTwenty, GenThirty, and The Capsule Collab. She has a Bachelor of Science in Psychology and is the author of The Kidult Handbook (Simon & Schuster May 2018). She currently lives in Pennsylvania with her husband and two sons. When she’s not reading or writing, she’s probably hiking, eating brunch, or planning her next great adventure.