Investing for Beginners

Dave Humphreys is an assistant director of advisory investments at Northwestern Mutual Wealth Management Company.

Investing is a great first step toward building wealth for yourself and your family. Investments can include any assets that you purchase with the intention of generating a return on your money. That can happen when you sell an asset for more than you paid for it. Some investments can also provide recurring income. With so many options and the need to personalize your strategy, putting your money to work may feel overwhelming.

For beginners, knowledge is power, and we’re here to help. Let’s unpack the basics of how to start investing and talk about why working with your financial advisor 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 to debunk the misconception that you need to have a lot of money to get started. In fact, you can begin investing with any amount. And thanks to the power of compound interest, even small amounts can grow over time.

One of the most important investment strategies for beginners is to clarify your goals and timeline. In other words, what are you trying to accomplish and when? That might be building your nest egg ahead of retirement or saving for your child’s college education. Either way, working with your Northwestern Mutual financial advisor can help you build a plan to get there.

Personalizing your investment strategy

Investment strategies for beginners can vary based on your goals, time horizon and risk tolerance. These are important factors that will impact how you invest.

Risk tolerance

Risk tolerance refers to the level of investment risk you feel comfortable with. For example, if you invested $1,000 today, how would you feel if the value dropped to $500 for a period? Would you be tempted to cut your losses and withdraw, or would you ride things out? If you invest heavily in stocks, which tend to increase in value over time, market volatility is unavoidable.

When it comes to investing, there are many types of risk that you should keep in mind. The key to managing these risks is to build a well-diversified financial plan that’s tailored to you. Your Northwestern Mutual advisor can show you how investing in a wide range of assets can help mitigate risk and grow your wealth over time.

Time horizon

This refers to when you see yourself cashing in your investments. If you plan on using this money to make a down payment on a home within the next three years, you’ll have a short time horizon. You may also have a low risk tolerance since you won’t have time to bounce back from potential market swings. But if you’re not planning to use the money until you retire in 30 years, you have a long time horizon and can probably afford to take on more risk in your portfolio.

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

Asset allocation refers to the percentage of stocks, bonds, cash and other investments that make up your portfolio. For example, a 60/40 portfolio consists of 60 percent stocks and 40 percent bonds.

If you have a high risk tolerance and long time horizon, you’ll likely want to hold a larger percentage of stocks because you have time to weather market ups and downs. That could potentially lead to larger gains over the long term. In contrast, if you have a low risk tolerance and short time horizon, you’ll probably want to hold more cash and bonds so that you don’t lose money right before you need it.

Diversification

This is the process of investing across a variety of different asset classes to help reduce risk. It’s not keeping all your eggs in one basket. For instance, you might diversify by holding both domestic and international stocks. You can also go a step further by investing in different sectors—like technology and manufacturing—or other categories like bonds.

Different sectors and industries of the U.S. and global economy can perform better at different times, and it can be tough to predict which will do well in any given year. By diversifying your portfolio, you can better position yourself for whatever lies ahead.

Rebalancing

The value of your investments can change over time, causing your portfolio to shift from your ideal position. Rebalancing involves buying and selling assets to restore your desired asset allocation.

For example, let’s say you want 10 percent of your stocks to be in companies in Asia. If those companies have a great year, they may now make up 15 percent of your stocks. In that case, you’d want to sell some of those shares and use that money to shore up 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 have changed. That may happen if you’re getting closer to retirement or experience a major life event, such as selling a business or getting divorced. It’s a good idea to rebalance your portfolio at least once a year.

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. Employer-sponsored retirement plans typically 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 stock market index, such as the S&P 500.

These plans can offer automatic diversification across sectors and industries, reducing the risk associated with individual stock investments. Index funds also tend to have lower management fees, making them a cost-effective choice for long-term growth.

Target-date funds are another popular option. These funds automatically rebalance to become less risky as you approach the target date—which is often tied to the year you’re planning to retire.

You could also invest directly through a broker. That would require opening an online brokerage account that you manage yourself or by working with your advisor.

Types of investment accounts

Some retirement accounts receive favorable tax treatment. These include 401(k)s, 403(b)s, IRAs and Roth accounts. The trade-off is that there are limits on who can use them and how much you can contribute.

Nonqualified accounts, such as regular brokerage accounts, don’t get special tax treatment. This means you can invest as much as you’d like. However, investment growth is subject to capital gains tax during the year gains are realized.

Common investing mistakes 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 avoid emotional decisions.

Here are some common mistakes investors make early on.

Not being familiar with basic terms

If you’re new to investing, learning the basics can help you make informed choices and build confidence in your financial future.

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

1. Funds (like mutual funds) hold multiple stocks, bonds or other investments. They allow you to make a single, often diversified investment, which makes funds generally less risky than individual stocks or bonds. Mutual funds are more likely to be actively managed, meaning a professional periodically adjusts their holdings based on the fund’s goals. IRAs, 401(k)s and 403(b)s are often invested in mutual funds.
2. Exchange-traded funds, or ETFs, are collections of securities (stocks, bonds, commodities) that can be traded in a single transaction. They often have lower fees than mutual funds, particularly if not actively managed, and they can be bought or sold during market hours like stocks. Common types of ETFs track a market index (like the S&P 500) or stocks in a specific sector (for example, technology).
3. Stocks are shares of publicly traded companies. Individual stocks tend to carry more risk than funds because they don’t have built-in diversification, but they may offer greater potential returns.
4. Bonds are debt securities that can be issued by a company, local municipality or the federal government. These are often safer investments that typically offer lower returns than stocks.
5. Cash and cash equivalents are readily available money. That can include money you have in a high-yield savings account and short-term investments like certificates of deposit (CDs). These are the safest investments but typically return the lowest profit over time.

Investing emotionally

It’s easy for investors to react when they see their portfolios rising and falling. Constantly checking on your investments can set your mind racing—and taking money out of the market too soon can rob you of future growth. Your advisor can offer perspective, relieve financial stress and help you 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 lose 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. Staying invested can often lead to growth over time.

Investing in trendy (and risky) asset types

If you see investors online claiming to make huge profits quickly, proceed with caution. Alternative investments like cryptocurrency and viral trends like “meme stocks” are known for their volatility—and can rapidly lose value.

While it’s okay to be aware of trends and take more risks with extra cash, limit your short-term, high-risk investments to small slices of your total portfolio. This approach can help mitigate any losses and ensure you don’t compromise funds that are 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 usually isn’t a wise strategy. Doing so could mean risking it all or underperformance. Instead, focus on building a portfolio that includes various types of investments and asset classes. By diversifying, you create a balanced portfolio that can better navigate market fluctuations.

Find the right investment strategy

You don’t need to know everything about the market and how to invest, especially when you’re just starting out. Your Northwestern Mutual financial advisor can provide sound advice on investment options for beginners. This includes helping establish an investment strategy that supports your goals, risk tolerance and timeline. Your advisor also may manage your money for you, taking a task off your shoulders.

Even if you’re just dipping your toes, there’s no better time to start investing. The longer your money is invested, the more time it has to grow.

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