Investing can be a daunting experience for first time investors who aren’t familiar with financial terms or those who rely upon the bad advice or experiences of other novice investors. If you want to grow your hard-earned money through investing but are not sure how and where to begin, here are the answers to 10 frequently asked questions that can help you feel more confident about investing for the first time.
1.What is the most common type of investment?
Stocks are probably the most well-known option for investors as it offers you the opportunity to grow your money over time by buying into companies. You benefit from larger returns than keeping all your money in a bank savings accounts or let it accumulate without any interest underneath your mattress. Investing in stocks can provide income beyond your monthly paycheck in the form of dividends.
2. What stocks should I choose?
The stocks that you choose for your investment portfolio depends on your needs. If you are looking for a safer investment, you could choose blue-chip stocks. If you are looking for bigger, faster growth and are comfortable with taking on risk, you could invest in newer tech companies.
Investing in stocks is not just about watching stock prices go up and down. It’s also learning about the companies you want to invest in and then looking at their earnings history, projections, stock prices over time and ratings. Investing in individual stocks is one option – another way is to invest in several stocks at once through index funds, mutual funds or exchange-traded funds (ETFs).
3. Why should I invest in a fund instead of just a few stocks?
When you invest all your money into just one stock or even just two to three stocks, you increase your risk significantly because your entire portfolio is tied to one or just a handful of companies. Their fortune becomes yours. If their stocks go down in value significantly, you could lose a lot of money.
On the other hand, if you invest in a fund or ETF, you could own hundreds of stocks as well as bonds, creating diversification and lowering your risk.
4. Why do people invest in both stocks and bonds?
Investors own both stocks and bonds to diversify their portfolio and thus lower their risks. Bonds are typically considered safer. They are basically loans you are giving to reputable institutions, such as the government or well established companies, that you trust can pay you back with interest over time. Stocks, on the other hand, are investments in public companies whose value can go up and down.
5. How long should I keep stocks and bonds?
Investing in stocks and bonds in general should be done with funds that you do not need immediate access to. Being forced to sell your investments because you need the cash for your immediate expenses will cut you off from the benefits of longer-term growth. You can buy or sell stocks and bonds at any time.
Far too often investors focus only on short-term rewards. A 2015 TIAA-CREF survey revealed that over 50% of investors were focused entirely on short-term performance alone. Investors usually hold on to the bonds until maturity where the initial amount loaned out is due in entirety so that they can receive the full benefits.
6. How often should I check my portfolio?
It all depends on you. Maybe you enjoy watching the numbers go up or perhaps the ups and downs seriously stress you out. We suggests twice a year, or even once a year may be fine if you’re fairly comfortable with how your portfolio is performing.
The key is not to move your investments on a whim just because you see a drop in the stock market or hear that the S&P 500 hit a new record. A good rule of thumb is to consider rebalancing once a year to help ensure that your asset allocation (the percentage of your money dedicated to various types of assets) has not strayed too far from what you’re comfortable with, and if your portfolio is more than 5% off from your model asset allocation, think about making some adjustments.
7. Why knowing your risk tolerance is important?
Risk tolerance comes down to how much risk you are willing and able to stomach, and it’s important to know because it can impact how you shape your portfolio. If you’re up [at night] thinking about your investments and fearing that a down market may bring your portfolio down too much, then you may be carrying too much risk. On the flip side, if you’re worried that you could be missing out on earning potential, your investments might be too conservative. Your risk tolerance will also shift from time to time. For instance, the closer you are to needing the money, the more likely you should consider shifting to a less risky investment.
8. How many bull and bear markets have there been?
The market has cycled between 9 bull markets (when market goes up 20% or more) and 8 bear markets (when the market goes down 20% or more) since 1926, according to First Trust Portfolios. Each bear market lasted 1.3 years and had a loss of 41% on average, while each bull market lasted 8.5 years and had a gain of 458%.
9. What other investments should I have besides stocks and bonds?
You may want to have other short-term savings such as money market accounts and certificates of deposit (CDs) to earn a higher rate than your savings account at your local bank. CDs, however, will tie up your money for a period of time. You could also consider investments such as real estate and commodities.
10. How many types of investment accounts should I have?
This is an individual decision. Options include regular spending (checking and savings account), emergency fund savings account, investment accounts for mid-range goals, education fund accounts for your kids, pension account, retirement account as well as a brokerage account.
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