Best Investment Strategies for Beginners

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Contributor, Benzinga
July 3, 2023

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Embarking on your investment journey as a beginner can be overwhelming. The allure of instant riches and the rush to keep pace with trending investments, like meme stocks or penny stocks, can often lead down a path of high risk and disappointment.

Especially for beginners, it's vital to remember that genuine investing isn't a sprint but a marathon, and not every investment story is a get-rich-quick scheme. It's not just about avoiding the pitfalls; it's about cultivating an investment mindset that emphasizes long-term growth, risk management and financial education.

By focusing on practical, evidence-based investment strategies, this guide will provide you with the tools and knowledge needed to understand the investment landscape and make decisions that align with your financial goals. Here's all you need to know about the best investment strategies for beginners. 

Why Investing is Important at Any Age

Nobody wants to work forever, and that's why people save for retirement. Putting away some money consistently can create a nest egg for you to enjoy during your golden years.

However, there is a nagging variable at play here: inflation. Your money in a few years will be worth less than it is today, as the cost of goods and services increases steadily. To offset this, you need to invest your money to make it grow 

At its core, investing is about growing your wealth and creating financial security. It allows your money to work for you, taking advantage of the power of compounding to accumulate wealth over time. Think of it as getting rich slowly.

While young investors have the benefit of a long time horizon to compound their investments and recover from losses, older investors can also reap the benefits by aggressively saving and investing consistently, especially if they have a higher income. 

Whether it's to supplement your retirement income, leave a legacy for your family or engage in an intellectually stimulating activity, investing can offer significant benefits. No matter your age or financial circumstances, investing can play a crucial role in securing your financial future.

How to Get Started in Investing

Investing can be a lucrative way to build wealth over time, but for a novice, getting started might seem daunting. Here's a step-by-step guide on how to kick-start your journey.

  • Define your investment goals: Start by figuring out exactly what you're hoping to achieve through investing. Are you saving for retirement, a down payment or a child's college tuition? Your goals will guide your investment strategy and time horizon, which in turn spells out how much risk you can afford to take and what degree of returns you need.
  • Determine your risk tolerance: To earn a return, you have to take on risk — which is the possibility of facing losses and fluctuations in your investment. Figuring out your risk tolerance is crucial. How much loss and volatility are you willing and able to bear without panic-selling or derailing your plans? Keep in mind that this can change over time.
  • Open a brokerage account: To start investing, you'll need a brokerage account, which allows you to buy and sell different investments on a self-directed basis. If this is too much work, you can also opt for a robo-advisor or a portfolio managed on your behalf by a professional financial advisor.
  • Set your asset allocation: This concept refers to what types of investments you hold in your portfolio and what proportion relative to each other you hold them in. It should be tailored to your risk tolerance and goals. For example, a younger investor with a high risk tolerance looking for growth may opt for 100% stocks, while a retiree with a low risk tolerance looking for a balance of safety and income may choose 50% stocks, 30% bonds and 20% cash. Your asset allocation can change over time, so review it frequently.
  • Manage your portfolio: Once your asset allocation is determined, you can proceed to create a portfolio, whether by buying individual stocks or by investing in mutual funds or exchange-traded funds (ETFs). When your portfolio is complete, you'll have to attend to it periodically to reinvest dividends and rebalance it back to your target asset allocation. 

6 Investment Strategies for New Investors

With the right guidance and a few time-tested strategies, beginners can navigate the financial markets with confidence. Here are six investment strategies that beginners might find particularly helpful and easy to implement. 

1. Invest in a Target-Date Fund

Target-date funds are a great hands-off way of investing long-term. These funds hold a predetermined mixture of stocks and bonds and automatically adjust this proportion based on how far away or close they are to a target retirement date. For example, a target-date fund for 2060 may be 90% stocks and 10% bonds in 2023. By 2060, the same fund may shift to become 60% stocks and 40% bonds, thus becoming more conservative. Beginners can easily find the right target-date fund by figuring out their planned retirement date. 

2. Invest in an S&P 500 Index Fund

An S&P 500 index fund is a mutual fund that tracks the returns of the famous S&P 500 index, which holds 500 large and mid-sized U.S. companies selected to be representative of the U.S. market. By buying an S&P 500 index fund, beginner investors can obtain the returns of the largest U.S. companies without having to pick individual stocks. The S&P 500 index has historically been hard to beat, and S&P 500 index funds are widely available in most retirement plans at a low cost. 

3. Invest in a Total Stock Market Index Fund

A popular alternative to the S&P 500 index fund is the total stock market index fund. Whereas the S&P 500 only holds 500 companies, a total stock market index fund can hold thousands of stocks that represent the entire U.S. market. By investing in a total stock market index fund, you're essentially buying a tiny slice of every publicly traded company in the U.S. These funds offer high diversification and also charge low fees, which makes them great for beginners. 

4. Invest in a Total International Stock Market Index Fund

To complement an S&P 500 index fund or a total stock market index fund, beginner investors can also buy a total international stock market index fund. This approach allows you to diversify your stock portfolio globally, capturing stocks from countries other than the U.S. This choice can help when the U.S. market stagnates or underperforms. 

5. Invest in a Nasdaq 100 Index ETF

Beginner investors with a higher risk tolerance and a desire to invest more heavily in large companies may favor index funds tracking the Nasdaq 100. This index holds 100 of the largest non-financial companies listed on the Nasdaq exchange. Historically and recently, the index has featured a very high allocation to major tech companies. ETFs tracking the Nasdaq 100 index are easily purchased in most brokerage accounts and charge relatively low fees. 

6. Invest in an Asset Allocation ETF

An alternative to the target-date fund is the asset allocation ETF. These ETFs invest in a mixture of different asset classes, such as stocks, bonds and sometimes real estate or commodities depending on different goals. For instance, a growth asset allocation ETF may feature 80% in stocks and 20% in bonds, while a conservative asset allocation ETF may hold 40% in stocks and 60% in bonds. However, they do not adjust their allocation to become more conservative over time like target-date funds do. They offer the same hands-off experience, low fees and high diversification, which makes them great for beginners. 

Saving vs. Investing

As a beginner investor, it's important to not invest all of your money. Because investing is a long-term journey, it can tie up crucial funds required to fund day-to-day needs, cover emergency spending or finance large near-term purchases.

Thus, beginner investors should also pay attention to saving. This is the process of keeping some money tucked away for short-term needs. Savings should be kept in safe investments that can be easily cashed out, such as a money market account or high-yield savings account. 

In a good financial plan, saving and investing work hand in hand. Savings provide a financial safety net and fund short-term goals, while investing helps grow your wealth over the long term. Start by building an emergency fund and saving for short-term goals, then move on to investing

Best Brokerage Accounts for Beginner Investors

Not all brokers are suitable for investors. Some tend to offer advanced features of high fee structures that can hinder instead of help. To help beginner investors find the best brokers, Benzinga has compiled a curated list. Read on below for our rankings of the best brokerage accounts for investors.

Charting Your Path to Financial Prosperity

Embarking on the investment journey as a beginner may seem overwhelming at first, but with the right strategies and understanding, it can lead to significant wealth accumulation. Defining clear investment goals, assessing risk tolerance, understanding different investment vehicles and regularly reviewing your portfolio are initial key steps in successful investing.

Remember, investment isn't a race; it's a personal journey that requires patience, discipline and continual learning. Starting with beginner-friendly strategies like target-date funds, S&P 500 index funds or total stock market index funds can help you gain confidence while you learn the ropes.

No matter your age or financial circumstances, it's never too late to start investing. With the right approach and mindset, you can navigate the financial markets, making your money work harder for you and laying the foundation for a secure financial future.

Frequently Asked Questions 

Q

What are 4 types of investments?

A

The four types of investments in terms of asset classes are equities (stocks), fixed-income (bonds), cash and cash-like instruments and alternatives (which can include precious metals, commodities and hedge funds).

Q

What is the simplest investment strategy?

A

The simplest investment strategy is the buy-and-hold strategy. With this approach, an investor selects a highly diversified, low-cost investment like a total stock market index fund or target-date fund, and proceeds to hold it long term, while reinvesting dividends and making consistent contributions.

Q

Which is the best strategy for a beginning investor?

A

The best strategy for a beginning investor ultimately depends on their personal financial circumstances, which include their risk tolerance, objectives and time horizon. In general, the best strategy for a beginner investor is one that they understand and can stick to consistently for the long term.

About Tony Dong

Tony Dong, MSc, CETF®, is a seasoned investment writer and financial analyst with a wealth of expertise in ETF and mutual fund analysis. With a background in risk management, Tony graduated from Columbia University in 2023, showcasing his commitment to continuous learning and professional development. His insightful contributions have been featured in reputable publications such as U.S. News & World Report, USA Today, Benzinga, The Motley Fool, and TheStreet. Tony’s dedication to providing valuable insights into the world of investing has earned him recognition as a trusted source in the finance industry. Through his writing, he aims to empower investors with the knowledge and tools needed to make informed financial decisions.