If you are thinking about investing, you probably have a million and one questions you want to ask. It’s a natural reaction when you’re contemplating investing your hard-earned dollars. There’s far more at risk than squirreling it away in a savings or checking account, and you should know as much as you can. Don’t be embarrassed about having the jitters. Let’s settle your mind with the answers to the top 10 investing questions for beginners.
1. What are the Best Investments for the Average Person?
For many people, stocks are often the first choice when it comes to investing and making money. However, there are other excellent options for you to consider. An index fund can be an excellent place to start because it means you’ll be investing in securities in indexes such as the S&P 500.
Bonds are another type of investment for the average Joe. These investments involve loaning money to a corporation or government, for which you receive a fixed interest rate. Returns are a little lower than stocks, but investing in bonds is less risky.
Other investment options include real estate investing and commodities. Real estate investments aren’t just bricks and mortar, and REITs, or real estate investment trusts, are another option. You could consider REITs as passive income.
With commodities, you’re not buying bars of gold, barrels of oil, or coffee. You’re buying ETFs or exchange-traded funds.
One further option worth mentioning is the mutual fund. Mutual funds are a way of diversifying your investment portfolio because they can be made up of all the above. A money market accounts manager is responsible for this type of actively managed funds.
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2. Who Can Offer the Best Investment Advice?
If you don’t have any investment management experience, this is a very valid question. Investing your hard-earned money can be scary. Spend some time looking online for tips and advice, and you’ll realize how many people there are willing to help. Unfortunately, with so much available, knowing who and what to take into account is confusing. So where should you go for the best advice?
If you prefer to deal face-to-face with a person, look for a financial adviser who is a member of the National Association of Personal Financial Advisors. Visit the website, type in your zip code or location, and you can choose an investment advisor in your local area. A professional like this can also help with asset allocation, and if you want to rebalance your portfolio.
Another option of the digital kind is a Robo-adviser. A Robo-adviser isn’t a robot or a real person, but a tool you can use to help you make your financial decisions. This digital tool uses algorithms to help you make your investments. You input your preference, risk tolerance, and answer a series of other investment-related questions. The Robo-advisor works it all out for you.
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3. What’s the Best Retirement Investment?
There are thousands of different investment options available. We’ve narrowed the list down to the five most popular asset classes.
Stocks are what most people think about when considering their investment options. You can benefit from stock investments in two ways. The first is the increase in the price of the stock, and the second is by receiving dividends.
Stock prices change continuously, and trying to predict the market is demanding. So many factors can affect future results, both positively and negatively.
The advantage of investing in stocks is that they’re easy to buy and sell, in other words, liquid.
Financial information is readily available, so this makes it a very transparent investment. However, to be a successful stock investor, you have to be knowledgeable and able to devote the time to analyze the markets.
A mutual fund is a managed portfolio of stocks and bonds. Funds generally have a specific purpose in mind. For example, a portfolio can be made up of high growth, high income, high or low risk, or a combination of them all.
The Securities Exchange Commission registers mutual funds. The regulation comes under the Investment Company Act of 1940. The establishment of the first mutual fund was in 1924, and they’ve become an essential part of peoples’ retirement plans.
A bond is a loan to either a government or corporation. You and the organization reach an agreement on the fixed sum of interest. You get the interest paid to you every six months.
Market values of bond funds vary according to their interest rate and market conditions.
The advantage of investing in bonds is their known return. If you hold the bond until maturity, the corporation or government returns your principal to you. You will receive your principal if you keep the bond until maturity. If you want one of the safest investments in the world, look to treasury bonds and bills issued by the U.S. Government. They have virtually no credit risk.
It’s possible to purchase ETFs via brokerage firms. They are an asset management portfolio designed to track stock or bond index movements. Indexes include the Nasdaq-100, S&P 500, or the iShares Core S&P Total US Stock Market. One of the advantages of this type of investment is that administration costs are usually low. There are less taxable capital gains, and you can expect a more efficient return on investment.
An annuity is a contract between an insurance company and a policyholder. The insurance company guarantees a specific or variable return on the capital invested. Take your payments immediately, or defer them until you retire.
A significant disadvantage of annuities is that purchase commissions can be as high as 10%. There are also high charges if you take any withdrawals early.
4. Can I Use an App to Help Me Make My Investments?
Nowadays, we use apps for almost everything. Therefore, it should come as no surprise that the answer to this question is yes. There are plenty of investing apps from which to choose.
Gone are the days of having to pick up the phone and call your broker. Now it’s a case of picking up your phone, and with a few clicks, you can be trading right away. The even better news is that your apps can help you save money.
5. How do I Get Started?
For the complete beginner, investing can seem complicated. Follow a few simple steps, and you’ll find it more manageable.
The first step is to determine your financial goals. In other words, what do you want to achieve, either in the long or short term? Let’s give you a few examples. You might be saving retirement funds, building wealth, an emergency fund, or saving to help pay for your kid’s college education. You might have a bucket list trip planned in the future. If you want a retirement nest egg, this is another reason to consider investing your cash.
The next thing to decide is whether you want to leave the investment decisions to someone else or take a more hands-on approach.
With the answer to these two critical questions, you’re all set to start investing.
6. I’m Worried About Investing and Paying Taxes. What Do I Do?
Nobody wants to get in trouble with the taxman, so you’re right to be worried about paying tax. The money you make from your investments is taxable. Let’s look at some of the ways you’ll be paying tax.
- Capital gains tax – pick the right investment, and its value should increase over time. This increase is a capital gain. You have to pay taxes on this, but not until you sell your investment and realize your personal capital gains. The amount you pay depends on the length of time you hold onto your investment. For the first year, you pay tax at the regular income tax rate. After one year, the capital gains rate is 15%.
- Tax on your dividends – another way you earn money from your investments is in the form of dividends. Dividends are a form of profit sharing. Taxes on these payouts are due in the same year you receive them. The rate is the standard income tax rate.
Income from other forms of investment is also liable for tax. Retirement accounts, for example, are either tax-free or pre-tax. Pre-tax means there is a tax break in the year you make your contributions. The government considers withdrawals as ordinary income, which means that they are taxable. With a Roth IRA, withdrawals are tax-free, but you pay tax on your contributions. If your investment is a brokerage account, you pay tax on your earnings, every time you sell something, in the form of capital gains.
7. What Are Mutual Funds and ETFs?
A mutual fund is a selection of investments in a mix of bonds, stocks, and other investments. It’s a great way of diversifying your investment. It works in much the same way as a group of friends pooling together to buy something they wouldn’t be able to afford on their own. However, in this case, a money manager generally manages the fund.
ETF stands for exchange-traded funds. They work in much the same way as mutual funds, only the fees, both up-front and ongoing, tend to be lower. There’s a good reason for the lower fees. Less work is required because an ETF tracks an index that is already in existence.
8. Should I Pay Off My Debts Before I Invest?
People often ask this question. After all, we live in a world where debt is so commonplace.
Before answering this question, you first have to determine how much your debt is costing you. List your creditors, how much you owe, the interest rates, and your monthly payments.
Once you’ve done this, you can decide whether the potential return on your investment is higher than the cost of your debt.
You should only consider investing if you have extra cash to hand. In other words, if you’re paying the minimum on your debts, covering all your other expenses and have money left over at the end.
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9. How Important is Diversification?
You can ask any professional investment adviser about diversification, and they’ll sing its praises from the rooftops. Not having all your investing eggs in one basket is crucial. As you know, investing is a risky business. If your portfolio is diverse, it means it’s less likely to go bust.
If one of your investments fails, you have others to fall back on. It’s much better to make many small investments, rather than invest 100% in one thing.
As well as investing in a mix of stocks, bonds, mutual funds, and other types of investments, look into diversifying across industries and sectors of the economy.
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10. How Easy is it to Evaluate an Investment?
The reason you’re investing is that you want to make money. Nobody is going to argue with that. When looking at the various opportunities, you’re going to be weighing up the potential for making money with the risk. Not so very long ago, your only option would have been to invest in an individual company or companies.
Nowadays, however, you can get around such a difficult choice by investing in mutual funds or exchange-traded funds (ETFs). With this kind of investment choice, you’re investing in a portfolio of companies. Such an option is perfect for those with little knowledge of the stock market, or those with limited time. The risk involved is also much less because you have spread your money around.
If you like the sounds of a mutual fund or ETF, there are certain factors to bear in mind. There are around 300 index mutual funds and more than 700 ETFs, which means there are lots from which to choose. Consider the following:
- Type of investment – for long-term growth, look for stocks. If you prefer stability, bonds are a better option.
- Mutual fund vs. ETF – ETFs have lower fees, but buying and selling them can be expensive. They’re also better if your investment strategy is more long-term. If you plan to be making regular contributions or withdrawals, a mutual fund is the better option.
- Fees – you might have to pay annual fees. These fees are usually a percentage of your investment.
- Past performance – how well the fund has performed in the past doesn’t guarantee future performance. However, it can be a good indicator. Check out whether the value has fallen or grown over recent years and whether there’s an overall trend.
Now you have the answers to the top 10 investing questions. You’re in an advantageous position. Investing the money you’ve worked hard for is something to take very seriously. It doesn’t matter why you choose to invest money. It could be to provide for your retirement, help provide for your kids, or because you want to be able to treat yourself to a dream vacation now and again. Making sound investments is an excellent approach. It’s also crucial that you learn how to invest your money well.
Have you just started your investment journey? Have you been investing for years and have some advice to share? Whatever your situation, please take a few moments to leave us a comment.