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Beginner’s Guide for Retail Investors


How Do I Start posterThere are so many choices, acronyms and tax codes in the investing world that many people get intimated and never start. While there are complex investments available, beginning to invest doesn’t have to be difficult. In this beginner’s guide to investing, we’ll cover the basics to help you get started with your first investment. Additionally, we’ll share some powerful tools that will grow your portfolio without increasing your risk. Besides those four tools, a financial advisor can introduce you to many other facets of the investing world.

Three Ways to Get Started

When you want to start investing, figuring out where to make your first investment can be a challenge. Here are three steps to take as you begin building your wealth. We suggest investing in this order, but you can rearrange the list to suit your personal circumstances.

Employer-sponsored retirement plans

Your company’s retirement plan, such as a 401(k), 403(b) and 457, lets workers contribute up to $19,500 per year. Employees who are 50 or older may contribute an extra $6,500, for a total of $26,000 per year. The money is withdrawn from your paycheck automatically and invested according to your choices. Contributions grow tax-deferred and you will not pay any taxes on the account until you start withdrawals in retirement. Many companies also provide a “company match” that boosts your account balance – without affecting your contribution limits. For example, your company may match 50% of the first 6% you contribute. This means that they’ll give you extra money (up to 3% of your pay) to reward you for saving towards retirement.

Roth IRA

You can contribute up to $6,000 per year towards a Roth IRA ($7,000 for people ages 50 and up). These accounts grow tax-free and there are no taxes when you withdraw money in retirement. There are also circumstances in which you can withdraw your contributions tax- and penalty-free after the account has been opened for at least five years. Investors with larger salaries should be aware of the income limitations for contributing to a Roth IRA. Once your modified adjusted gross income (MAGI) exceeds $125,000 for singles ($198,000 for married filing jointly), your maximum contribution to a Roth IRA is reduced. If your MAGI is above $140,000 ($208,000 married filing jointly), you cannot contribute at all.

Start a taxable brokerage account

As investors maximize their retirement accounts, the next best option is a taxable brokerage account. These accounts allow you to contribute without annual limits and withdraw at any time without any penalties. In a brokerage account, you pay taxes on dividends and from capital gains on the sale of investments. Losses can be used to offset capital gains and to reduce up to $3,000 of ordinary income each year. Many large discount brokerage firms have slashed fees and minimum account balances to attract customers. Plus, numerous personal finance apps are making it easier to invest with low fees and even $0 minimum balance requirements.

Three Ways to Maintain Progress

Once you’ve begun investing, it’s important to have strategies for maintaining your progress. Here are three that will help ensure you maximize your opportunities to growth your net worth.

Reinvest capital gains and dividends

Watering a "money plant"Some investments provide capital gains and dividend distributions to investors. These distributions are the investor’s share of profits from the underlying investments within their portfolio. While some investors take these distributions as income to pay their normal expenses, beginning investors are recommended to reinvest those distributions into more investments. Reinvestment of distributions is an easy way to invest more money without affecting your bank account.

Dollar-cost averaging

Dollar-cost averaging (DCA) is the term used to describe investing on a regular basis regardless of the ups and downs of an investment’s value. Over time, DCA investing buys fewer shares when prices are up and more shares when investments are down. This strategy results in a lower average cost per share as investors build their investment portfolios. The biggest benefit here is that a lower average cost typically leads to higher profits with your investments.

Automate your investing

Putting your investing on automatic makes it simple to do. The set-it-and-forget-it nature of automated investing removes one of the regular tasks from your to-do list and ensures that you never forget to initiate an investment. Contributing to your company retirement account through payroll deductions is one of the easiest methods of automated investing. Automated contributions can be made from your bank account to your Roth IRAs and brokerage accounts on a day that works best for you. These contributions can be set up monthly, weekly or on another recurring basis. Just remember that the total of your recurring investments cannot exceed your annual Roth IRA contribution limits.

Ensuring Time Is on Your Side

Investors are encouraged to start investing as early as possible. Time is often the greatest asset investors have to reach their goals. When starting early, even if the investment is small, you have years to allow your investments to grow.

Compound interest has been called the “eighth wonder of the world,” because it allows the gains from one year to earn additional gains the following year. This compounding effect year over year supersizes the growth of investments in your favor. With the power of compound interest investing $100 a month at 8% for 30 years ($36,000 total) will result in a balance of $140,855.

The Bottom Line

Piggy bank, coins and model houseSome people hold off from investing because they think it is too complex or they don’t have enough money to open an account. Beginning investors can choose from several investment account types to start investment. Many of these accounts can be started with no minimum deposit requirement and allow for recurring investments with small dollar amounts. With regular, automated contributions, investors are able to DCA into their investments to accumulate more shares and increase their profits over time.

Tips for Beginning Investors

  • Even you still have questions about how to start investing, consider speaking with a financial advisor. SmartAsset’s financial advisor tool makes finding an advisor in your local area simple and easy. These professionals can help you understand the pros and cons of each type of account and help you select investments that are appropriate for your goals. If you’re ready, get started now.
  • By using our investment calculator, you can forecast how much your investments can grow over time based on how much you can afford to invest each month.

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