Investing is often seen as a daunting task. After all, many of us think that investing = stock picking. But that’s not how it has to be at all. You might be surprised that you can get started in investing fairly easily, and that it doesn’t have to be all that complicated. Here are some ideas that the wary beginner can use to get started:
1. Contribute to a Retirement Account
Many of us don’t think about a retirement account as an investment account. However, that’s exactly what it is. In the United States, you can open an IRA, or contribute to a 401(k) or 403(b) offered by your company. In Canada, you can contribute to a RRSP, or even use a TFSA. All of these accounts come with tax advantages. And, in many cases, the options that you have are fairly straightforward and easy to understand.
2. Invest in an Index Fund
If you want to start investing, but are worried about stock picking, and index fund can be a solid way to learn a little bit more about what goes into the process. An index fund follows the assets on a particular index, so as long as the index does well, so do you. And, if you really want to reduce your risk, you can go for an all-market index fund. That way, your returns reflect the overall performance of the market. You can also find index funds that follow bonds, as well as those that can provide income by following dividend stock indexes.
Exchange-traded funds are a lot like index funds. However, they trade like stocks on exchanges, rather than operating like a mutual fund (an index fund is a mutual fund). If you are a little more adventurous, you can branch out from index ETFs and consider commodity and currency ETFs. They make interesting additions to your portfolio — if you have the risk tolerance for it.
4. Money Market Account
If you want to ensure that your money is safe, you can open a money market account. These accounts, offered by banks and credit unions, provide a way for you to earn a reasonable yield on your cash. However, your rate of return will be relatively small, though. It’s the price you pay for having your investment kept relatively safe. You can write a very limited number of checks from your money market account. However, most of them have minimum requirements of between $1,000 and $5,000. You could be charged a fee if you drop below the minimum.
5. GICs (for Canadians)
Canadians have an interesting choice in Guaranteed Investment Certificates (GICs). These are timed investments that offer a competitive yield over a fixed term. There are four main types of GICs:
- Cashable: You can access your money when you need it, but you will receive a lower rate of return in exchange for this flexibility.
- Non-redeemable: This type of GIC comes with a higher rate of return than the cashable variety, but you have to keep your funds tied up until maturity.
- Index-linked: Your GIC is linked to specific index, and you have the potential for greater growth. Your principal remains protected, but you could see better returns than you would see with more “regular” GICs.
- Market-linked: Once again, your GIC is linked to market assets, so you have a higher potential for returns. And, as with other types of GICs, your principal is protected.
GICs provide a way for the beginning investor to see true protection of principal, and earn a return. You can see a guaranteed lower yield, or you can take a chance with something linked to other assets, and possibly see even better returns.
There are a number of opportunities out there for every type of investor. However, it’s important to understand that the safer the investment is, the lower your potential return. If you want to build wealth more effectively, you will need to take a couple of risks. The good news is that most of the beginner investments above are considered to come with acceptable risks for most people.
So, how do you invest?