Many people never take the plunge of investing over fears their inexperience or lack of knowledge will cause them to fail, but everyone has to start somewhere. Here are some tips for dipping your toe into the water.
Every journey begins with the first small step. While you shouldn’t do anything blindly, you don’t need to be an expert on investing in getting started either. Talk to family or friends, people who already have investment experience, and ask them for their advice on how you can start small.
Starting small allows you to “get in the game” and pick up some experience without taking a huge risk.
Historically, all three major US stock indexes have trended upward since their inception, according to Marketplace.org.
On average, the market rises about 10 percent every year, according to Business Insider.
A great way for beginners to get started is through a long-term strategy known as “passive investing,” which employs buying and holding a diversified mix of assets in an effort to match, not beat the market simply.
The idea is to spread your investments around, known as “diversifying your portfolio,” so that you do not have a majority of your money invested in any one thing. With this strategy of matching the market, your overall returns can be fairly well predicted and should mirror the market.
In other words, the whole idea is to take advantage of the market’s average returns. This is where investing in index funds makes it an easy process.
You need money to invest. For most people, that is only possible through putting away some of the money they earned into savings.
Naturally, one needs to have savings as an emergency fund in case of things like unemployment or unforeseen events.
Therefore, a second savings account must be established to accumulate investment money.
At the root of all, this is a strategy that allows you to pay your monthly bills with money left over for personal savings and investment savings.
For many people, the road to accomplishing this means reducing expenses. That might mean downsizing or living more frugally. Taking a bagged lunch instead of eating out. Brewing your own coffee and carrying a thermos. Whatever it takes.
A good target goal is finding a way to put aside 20% of your income specifically for investing. However, some people may need to start lower at a minimum of 10 percent.
Another reason for putting away personal savings is to have extra money to deal with increased expenses and inflation. At the same time, investing your money in the market is another way to build up a hedge against inflation.
When considering inflation, many people only look at the consumer price index (CPI) as a gauge of inflation.
However, whatever the CPI cites as overall inflation may not be the number you are dealing with personally.
Your personal inflation rate is the amount of inflation that affects you personally. Everyone has a different lifestyle and spending habits that are unique to them. This means your personal inflation rate could be higher than actual inflation. If you are only considering the CPI, you could be coming up short in your estimates.
A good way to determine your personal inflation rate is to use an personal inflation rate online calculator as a way of gauging your costs. You may want to do this on a monthly basis to see if your personal inflation is increasing or decreasing.