You’ve probably heard that wise investing is the key to building wealth. After all, stashing your hard-earned money in a normal bank account only yields a tiny amount of interest, at best. But when you’re new to investing, the fear of financial loss can seem overwhelming. You’re certainly not alone. The fear of losing money prevents many would-be investors from getting in on the game, but the biggest mistake you can make is not investing at all. This quick guide makes online investing a little less scary, so you can dive right in and start building your own portfolio.
The Earlier, The Better
You don’t need to invest a huge sum to get started, but you do need to stop procrastinating. The magic of compound interest can transform a small amount like $100 a month into hundreds of thousands of dollars over the course of several decades.
Many beginners want to put off investing until they’ve saved a large amount of money. In reality, you can start investing with as little as $50 in a brokerage account or even less if you start by investing in online money market accounts. You could even start by investing $25 every month in an individual retirement account (IRA). It doesn’t matter how you start as long as you start now.
Practice Before You Make the Leap
You know that old saying, “Practice makes perfect?” It applies to online investing as much as anything else in life. Online Investing for Dummies recommends doing a few dry runs with fake money before you start investing actual dollars on online investing platforms. A few resources to use include Investopedia’s Stock Market Game, a free simulation that lets you use $100,000 in virtual money, connect with other traders and learn about other investors’ strategies and methods. It works as a great learning tool for understanding the challenges you could face when investing real money.
Before you start investing online, reflect on your own comfort level with potential risk. If you want the safest route with little risk of losing any money, you might want to stick with cash equivalents like corporate bonds, certificates of deposit (CDs) and money market accounts. These investments offer stability with limited risk — but they also don’t make a lot of money. Investing in the stock market comes with more risk, but it can help you build more wealth. Short-term stock market investments carry the most risk, but if you plan to keep your money in the market 10 years or more, the volatility of the market is less important.
Choose Between Short-Term and Long-Term Investments
Time matters when it comes to deciding where to invest your money. For example, if you plan to invest money for three months, you don’t want to put it in the stock market. On the other hand, if you’re investing for a long-term goal, you should avoid putting the money in a savings account, which only yields a very small annual percentage.
If you expect to need the money in less than two years, many experts suggest putting it in an online money market or savings account that yields one percent or more, carries low risk and gives you a better return than a traditional bank. If you can wait longer to access your money, you could invest in peer-to-peer loans. These loans typically come with moderate risk in return for a potential interest rate of around five percent.
Diversify Your Portfolio
If you’re investing for the long haul, experts suggest creating a portfolio that spreads your money across various types of investments, including stocks, bonds, CDs, mutual funds, money market accounts and more. Known as diversification, this practice tends to yield good financial returns, as higher risk investments sometimes result in large profits, while lower risk investments provide stability during periods of market volatility.