Investing for Beginners

Investing is a great first step toward building wealth for yourself and your family to meet your future goals. An investment can include any asset that you purchase with the intention of generating a return on your money, typically in the form of income, an increase in value or both. But because there are so many options for how to invest—and your choices should be tailored to your personal preferences—putting your money to work can feel a little overwhelming.

Here, we’ll give you the basics on how to start investing and show you why talking to your advisor for help is so important.

How to start investing

As you begin exploring the basics of investing—and how your investments can make you money—it’s important that we dispel the common misconception that you need to have a lot of money in order to invest. The truth is you can begin investing with any amount of money. And thanks to the concept of compound interest, even small amounts can grow over time.

To begin investing, the best way to start is to decide what you’re trying to accomplish and when. Working with your Northwestern Mutual financial advisor will help you build a plan to get there. They’ll help you think about things like the following:

Risk tolerance and time horizon

Now that we’ve defined the main types of investments, let’s talk about what you’ll want to know as you start building your portfolio (the collection of investments you own).

These important concepts will impact how you invest. There is no single best way to invest that will apply to each person and situation. Your ideal investment strategy should be based on your goals, time horizon and risk tolerance.

Risk tolerance is basically your emotional ability to deal with losing money. If you invested $1,000 today, could you deal with it being worth just $500 for a period of time? That’s possible if you invest heavily in stocks, which tend to increase in value over time but can be volatile from one day to the next. If you answered ‘yes’ to the previous question, then you may have a high risk tolerance.

When it comes to investing, there are at least nine types of risk that you should keep in mind. The key to managing investment risks is to build a well-diversified financial plan that is tailored to you. Your Northwestern Mutual advisor can show you how a range of financial options—including a mix of traditional and nontraditional investments—can help grow your wealth over time while also managing risks.

Your time horizon is the amount of time before you want to use your money. If you’re planning to use the money to make a down payment on a home within the next three years, you have a short time horizon and would likely have less risk tolerance because you need confidence the money will be there in the short term. If you’re not planning to use the money until you retire—let’s say in 30 years—then you have a long time horizon and can afford to take on more risk.

Balancing your investment mix

Asset allocation and diversification are about putting yourself in a position to grow your money in a smart way.

Asset allocation is the percentage of stocks, bonds or cash you own that make up your portfolio. If you have a high risk tolerance and long time horizon, you’re likely to want a larger percentage of stocks because you’ll be able to weather the ups and downs of the market and have an opportunity to make more money over the long term. On the other hand, if you have a low risk tolerance and short time horizon, you probably want more cash and bonds so that you don’t lose money right before you need it.

Diversification splits your investments among different groupings or asset classes to reduce risk. That includes your asset allocation, but it also includes where you invest within asset classes. For instance, you might diversify between stocks in companies located within the U.S. and internationally, and you might choose to invest in different sectors, like technology and manufacturing.

Different sectors and geographies within the global economy do better at different times—and it can be tough to predict which one will do well in any given year. So, when you diversify and own stocks across different sectors and locations, you are positioning yourself to make money on whatever sector is performing well at the time.

Rebalancing

If you’ve done a good job with asset allocation and diversifying, you still have to check in on your portfolio, which may drift away from the original allocation when one asset class performs better than another. For instance, let’s say you wanted 10 percent of your stocks to be in companies in Asia. If companies in Asia have a great year, those companies may now make up 15 percent of your stocks. In that case you’ll want to sell some of those stocks and use that money to buy more stocks (or even bonds) in parts of your portfolio that didn’t do as well.

You might also decide to rebalance your portfolio if your risk tolerance or investment timeline has changed—possibly as you get closer to retirement.

Either way, it’s a good idea to rebalance your portfolio at least once a year and possibly more often.

Once you’re ready, there are several ways to invest and different types of accounts that get different tax treatment.

Places for beginners to invest

You could invest directly through your retirement plan if you have one at work and haven’t already taken advantage of it. Typically, work-sponsored retirement plans have limited options that usually consist of funds, which are collections of stocks or bonds. Some funds are professionally managed. Others are designed to mimic a particular index like the S&P 500, offering automatic diversification across varying sectors and industries. This reduces the risk associated with individual stock investments. Index funds also usually have lower management fees, making them a cost-effective choice for long-term growth.

Target-date funds are also popular. Target-date funds automatically rebalance to a less risky allocation as you approach the end of the target date (which is typically close to the year you want your money—for example, the year you’re planning to retire).

You could also invest directly through a broker. That could mean opening an online trading account that you manage yourself or working with your advisor.

Types of investment accounts

Tax-qualified accounts get favorable tax treatment. These include retirement accounts like 401(k)s, 403(b)s, IRAs and Roth accounts. Because these accounts get special treatment, there are typically limits on who can use them and how much someone can contribute.

Nonqualified accounts, such as regular brokerage accounts, don’t get special tax treatment. This means you’re free to invest as much as you would like in them. The trade-off is that any growth in these accounts is subject to capital gains tax, and contributions are made with post-income tax dollars, which may result in double taxation.

Common investing mistakes for beginners to avoid

Successful investing requires patience and discipline. It’s more of a marathon than a sprint. New investors might get overly eager for quick results, but it’s important to maintain an unemotional mindset.

Here are some common mistakes beginning investors make that you may want to try to avoid:

Still learning the terms

As a new investor, it’s important to understand the basic categories of investments and how they are different from one another. Knowing the differences will empower you to make informed decisions that build confidence in your financial future. Here’s a quick “Investing 101” to help you begin, starting with key definitions.

1. Funds (like mutual funds) hold multiple stocks, bonds or other investments. They allow you to make one investment and be diversified, which makes funds generally less risky than individual stocks or bonds. Mutual funds tend to be actively managed, meaning a professional is periodically adjusting their holdings depending on the fund’s goals and an analysis of the market. IRAs, 401(k)s and 403(b)s are often invested in mutual funds.
2. Exchange-traded funds are collections of securities (stocks, bonds, commodities) that can be traded in a single transaction during market hours. They function similar to mutual funds; however, they often have lower fees than mutual funds because they are not actively managed, and they can be traded throughout the day (like a stock).
3. Stocks are shares in a company. They tend to be riskier investments but may also offer more potential for profit over time.
4. Bonds are shares of debt issued by a business or government. These are safe investments, typically returning a lower profit than stocks do over time.
5. Cash and cash equivalents are readily available cash and short-term investments like certificates of deposit (CDs). These are the safest investments but typically return little profit over time.

These are the most common categories of investments—often referred to as asset classes. There are also alternatives like commodities or real estate that require more advanced knowledge.

Investing emotionally

It’s easy for nonprofessional investors, especially new investors, to react to their investment value rising and falling. Late-night checks of values can set your mind racing, and taking money out of the market too soon can result in lost growth potential. Your advisor can add perspective, relieve financial stress and help you stay calm and avoid the mistake of trying to time the market.

Trying to time the market

Every stock carries risk, and the markets can swing wildly. This means that experiencing fluctuations or having investments losing money may be inevitable, emphasizing the importance of maintaining a clear outlook. Smart investors stick with their strategy for the long term rather than waiting for a decline in the market to buy and an upswing to sell. Markets go up over a long period of time, so staying invested means you can bounce back.

Investing in risky asset types (e.g., “meme stocks”) due to trends

These investments suddenly turn up everywhere you look online, with some people claiming to make huge profits quickly. The volatility of assets like cryptocurrencies and meme stocks means they can rapidly lose value, leaving many investors “holding the bag” while only a few profit. While it’s okay to be aware of trends and have some fun with extra cash, limit such investments to no more than 1 to 5 percent of your total portfolio. This approach helps mitigate risk and ensures you don’t compromise funds earmarked for retirement or other important goals.

Lack of diversification

Putting all your investment dollars into a single type of stock or sector of the economy likely won’t yield the best results for your long-term financial health. It’s also crucial to consider the companies, industries and sectors behind assets and the impact they may have on the performance of your portfolio. Relying on just one investment means risking it all if it underperforms. Instead, build a portfolio that includes a variety of different types of investments and asset classes. By diversifying, you create a balanced portfolio that can better navigate market fluctuations, as other assets may perform well even if some don’t.

Finding the right investment strategy

Especially as you’re starting out, you don’t need to know everything about the market and how to invest. Instead, you can partner with your advisor, who can provide sound advice as to what investment options are most appropriate for you and your goals. They can take a look at your situation and help you establish an investment strategy that supports your goals. An advisor also may be able to help manage your investments for you—leaving all the heavy lifting to professionals.

Even if you just start dipping your toes in, there’s no better time than right now to start investing. You’ll be that much closer to reaching the financial goals you set for your future.

No investment strategy can guarantee a profit or protect against loss. All investing carries some risk, including loss of principal invested.