Investing for Beginners: 6 Important Considerations for New Investors

You want to retire with enough money to live comfortably if you’re like most people. As it turns out, a lot of Americans have already taken the proper steps to secure their future.

A recent Gallup survey shows that 58% invested in stocks as of April 2022. It is never too early or too late to start investing.

If you are new to investing or looking for a refresher course, read on for important things you need to know about the basics of investing for beginners.

Why Should You Start Investing?

If you have been on the fence about investing, there are a few key reasons why it is essential.

1. Compound Growth

Investing is a great way to make your money work for you by allowing you to grow your money over time.

Compound growth means that as you reinvest your earnings, your money will exponentially increase over time. Your investment will not only earn returns on the principal amount but also reinvested profits. Reinvesting your earnings will significantly enhance your ability to reach your financial goals faster and grow your net worth.

2. Protect Against Inflation

Investing is also important because it’s one of the best ways to protect your money against inflation.

Investing is especially relevant right now, as the US consumer price index rose by a jaw-dropping 8.5% year-over-year in July 2022. The US consumer price index increase means you can afford to buy less this year with money sitting in your bank account.

Inflation can eat away at your savings if you don’t invest. Returns on your investments can help you keep up with inflation and maintain your money’s purchasing power.

3. Shorten Time to Retirement

Investing is a great way to shorten your time to retirement. If you simply saved your money, it would take you far longer to accumulate enough to retire comfortably.

4. Ride Out Economic Cycles

Finally, investments help you ride the economic cycles. The sheer choice of investments means you can diversify your portfolio and reduce risk while progressing toward your financial goals. Investing in a mix of assets can help ensure that your portfolio remains strong even if there are bumps in the market.

What’s the Best Age to Start Investing?

It is never the wrong time to start investing, but one of the best things you can do for your future is to start investing early. The earlier you start, the more time your money has to grow.

The best part is that due to compound growth, investments can snowball and grow exponentially over time. This snowball effect can significantly impact the size of your nest egg.

Consider this example: Let’s say you invest $100 per month in an investment that earns an annual return of 10 percent. After 30 years, you would have approximately $226,000 saved up, of which $190,000 is the interest earned on your $36,000 investment.

Now, let’s say you wait 15 years to start investing. However, you invest $200 monthly in the same investment that gives you a 10 percent return. In this example, even though your investment per month is double, the total value of your investment at the end of 15 years is only $83,000, out of which only $47,000 is earned interest.

This example shows how important it is to start investing early, even with a small amount. The sooner you start, the more time your money has to grow.

Why Did We Choose a 10% Return Rate?

The average annualized rate of return for the S&P 500 from 2001 to 2021 is around 9.9%. For the past ten years (since 2012), it has been 11.82%. One of the fundamental rules of investing is that past returns don’t guarantee future returns, so keep that in mind when planning your investments. These returns don’t account for inflation (negative) and dividends (positive).

Investing for Beginners: 6 Important Considerations

1. Age

Generally speaking, the younger you are, the more time you have to take advantage of compound growth. You should consider investing more aggressively if you’re just starting out. As you get closer to retirement, you may want to shift your focus to preserving your savings and begin investing more conservatively.

Age is also important because it can impact your ability to tolerate risk. When you’re young, you have a longer time until you retire. If your investments experience ups and downs, you’ll have plenty of time to recover before retirement.

However, if you’re nearing retirement age, you may not have as much time to compensate for any losses. Therefore, it’s important to consider your age when deciding how to invest.

2. Income

Another important consideration is your income. If you have a higher income, you may be able to afford to take on more risk. That is because you’ll have more money to cushion any losses. On the other hand, if you have a lower income, you may want to invest more conservatively.

Whatever your income level, it is essential to invest regularly. Your future self will be glad you invested, whether you can afford to invest $100 a month or $1,000.

3. Financial Goals

Your financial goals are also an important consideration. What are you hoping to achieve by investing? Are you trying to save for retirement, or are you looking to generate income? Your goals will impact how you invest.

For example, if you’re saving for retirement, you may want to focus on growth investments that can help you build a nest egg. On the other hand, if your goal is to generate income from your investments, you may want to focus on dividend-paying stocks or interest-bearing bonds.

Regardless of your goals, it’s important to consider them when deciding how to invest.

4. Risk Tolerance

Another critical consideration is risk tolerance, which refers to your willingness to take risks. Some people are more risk-averse than others. If you’re risk-averse, you may want to focus on preservation and invest more conservatively. On the other hand, if you’re willing to take on more risk, you may be able to afford to invest more aggressively.

Your risk tolerance is a personal preference, and there’s no right or wrong answer. It’s essential to consider this when deciding how to invest. As a general principle, the younger you are, the more risk your portfolio can tolerate due to the longer time horizon of investment.

5. Taxes

Different investments are taxed differently. For example, dividends from stocks get taxed at a lower rate than interest from bonds. This is something to keep in mind when choosing investments. You may want to select investments that are tax-efficient so you can keep more of your investment returns.

There are various options like 401(K), 529 college savings accounts, municipal bonds, etc. Investment taxes can be complex, so it’s vital to seek professional advice if you’re unsure how they will impact your situation.

6. Portfolio Diversification

Diversification is an essential consideration for any investor. This refers to investing in various assets to spread out your risk. For example, you may want to invest in stocks, bonds, and cash. By diversifying your portfolio, you can help protect yourself from losses in any single type of investment.

There are many ways to diversify your portfolio. You may want to seek professional advice to make sure you’ve diversified appropriately for your situation.

How Much Money Do You Need to Start Investing?

This is a common question for new investors. The answer varies depending on your investment goals and the type of investments you’re considering. The good news is that you don’t need much money to start.

While we recommend investing in a quality index fund with at least $100 a month, you can even purchase individual stocks or fractional shares for as low as $10.

The important thing is to start investing sooner rather than later. The earlier you start, the more time your money will have to grow.

One important consideration for new investors is fees. Investment fees can eat into your returns, so choosing investments with low fees is essential.

Many low-fee or zero-fee investment options are available, so research before investing. In general, ETFs have lower management fees than mutual funds or other actively managed investments, but it’s essential to carry out your due diligence.

Investment Options

The best investment for you will depend on your goals and objectives. However, here are a few good options:

  1. High-yield savings accounts
  2. Certificates of deposit (CDs)
  3. 401(k) or another workplace retirement plan
  4. Traditional or Roth Individual Retirement Account (IRA)
  5. Exchange-traded funds (ETFs)
  6. Mutual funds
  7. Treasury bonds
  8. Corporate bonds
  9. Individual stocks

Each of these investment choices has different risks and rewards. Be sure to do your research before investing so you can choose the option that’s right for you.

Investments that require trading stocks, bonds, or funds need a brokerage account to get started. As a beginner, we recommend opening a low or zero-fee brokerage account to keep your expenses down.

Investment Help

Figuring out where to invest your money as a beginner can get complicated. If you want to pick stocks or day trade, it requires in-depth technical analysis and knowledge.

As a beginner, we recommend:

  1. Invest in Index Tracking Exchange Traded Funds: These do the hard work for you and track the whole index or specialize in specific industries/areas of the market.
  2. Get professional stock advice: Services like Motley Fool or Morningstar rely on expert analysis to recommend stocks that are expected to perform well in the future.
  3. Subscribe to a robo-advisor: Leverage AI technology to set alerts, perform analysis and recommend investments with a high probability of generating returns.
  4. Hire a financial planner: These professionals can manage your investment portfolio and provide expert advice.

Start Investing Today

Investing is a great way to grow your money over time. However, it’s essential to do your research and understand the risks before taking action. This guide has provided some basic information on investing for beginners. However, there are many other considerations when choosing investments. Be sure to seek professional advice if you’re unsure where to start.

That said, the best way to learn about investing is to start investing. The more experience you have, the better equipped you’ll be to make informed investment decisions.

This post was produced by Savoteur.

Ash & Pri are the Founders of where they empower others to make smart money decisions across all aspects of life. They achieved financial freedom in their 30's and have traveled to over 30 countries, thanks to a disciplined approach to money management. Both hold an MBA degree and have 13+ years of experience in financial services, consulting, and telecommunications.