5 Steps to Start Investing for Good Times and Bad
Be prepared to invest in good times and bad by paying down your debt and adding to your emergency fund.
Put together an investing strategy that is true to your risk tolerance level
Build your portfolio with Index Funds that spread your risk and match market indexes.
Build your financial strategy with a low-cost, online robo-advisor
Track all your results in one place to understand your progress
Two questions have been buzzing through the Hive:
How do I get started with investing?
And, how do I protect my investments if (or when) the economy goes into recession?
The answer to both questions is how to be prepared to invest for good times and bad.
1. Pay off your debts and start an emergency fund
Before you start investing make sure to pay down (or off) your debts. High interest rates on things like credit cards siphon off money you could be saving or investing. Your emergency fund should cover three to six months of living expenses. Knowing you’re covered for some time should free you up to invest with more confidence.
Dollar Cost Averaging
When you do invest, use dollar cost averaging. You’ll buy the same dollar amount of an investment on a regular time frame (with each paycheck, monthly, etc). Your purchases will happen no matter the asset’s price, meaning you’ll buy some at a high price, some at a lower price, but overall you’re investments will average out. This way you’re not “timing” the market -- deciding what is the right time to buy -- and takes some of the worry out of investing.
2. Understand how much risk you’re willing to take
When building your investment strategy understand that your portfolio will fluctuate over time. There will be up markets and down markets.
With a balanced portfolio you should see growth in the long term, but how much fluctuation can you stand? Would you panic if you lost 20% of the value of your investments one year if on the other hand, they may go up 30% over five years? Or would a 10% drop in one year make you get out of the market completely.
That’s your risk tolerance. An aggressive style will mean a larger risk. A potentially very big payoff could also result in a very big loss. Decide if you want to be Aggressive, Moderate or Conservative in your investing strategy.
Generally, the longer you have to invest, the greater opportunity you have to be aggressive – but you don’t have to be a daredevil!
3. Select your investing options
When starting out, it’s a good idea to look at Index funds. Index Funds are a portfolio of stocks or bonds designed to match the make-up and performance of a market index like the S&P 500 Index.
These funds generally have lower expenses and fees than actively managed funds and are built to match the risk and return of the market based on the theory that long-term the market will outperform any single stock. Because the fund spreads your risk over a broader set of securities you won’t get the highest of high returns, you will be protected from very low returns.
4. Find a Robo Investing Option
If you already have an employer-sponsored account, like a 401K, you may have a number of investment choices available to you. A separate individual retirement account or a brokerage account will give you even more options.
Think about Robo-Investing. These on-line investing advisors are a low-cost, automated investment opportunity. You can simply go online and set up a customized, diverse portfolio. Plus, you may have access to wealth management services previously reserved for the ultra-wealthy like tax-loss harvesting and even access to a certified financial planner.
5. Track Your Investments
Tracking your financial results on a regular basis lets you understand how your strategy is working and allows you to make confident decisions based on facts.
A robo-advisor uses technology to help investors with their money. Once you provide your personal information, investment goals and risk tolerance, the Robo – using algorithms -- will create a portfolio for you and manage it, making sure it stays on true to your investing profile over time.
A number of Robo-Advisors provide an online dashboard that allows you to view all of your investment accounts in one place. With all your data at your fingertips, you can make informed decisions about your financial strategies. They generally have a low initial account opening balance and have lower fees than traditional advisors. They offer popular investment options and a number of portfolio management features.
Be prepared to invest in good times and bad by paying down your debt, adding to your emergency fund. Then put together an investing strategy that is true to your risk tolerance level built with funds that spread your risk and match market indexes. Build and track your financial strategy with a robo-advisor and you’ll be ready no matter what happens in the market.
Considering robo-advisors but don't know where to look? Here are a few options: