Financial Tips for New Investors

If you’re new to investing, you might wonder where to begin. With so many choices available, the process of setting up an investment account and making your first transactions can feel overwhelming. Here are some tips to get you started.

Take Care of the Basics

As you start thinking about investing, make sure you’re also taking steps to put your basic financial needs in order. This means having enough money available to pay your bills, as well as funds saved to cover an emergency. Without an emergency fund—ideally enough to cover three to six months of expenses—you might have to dip into your investments if unexpected costs arise. It’s also a smart move to pay off any high-interest debt, such as credit card balances, before investing. The interest you pay on certain debt like credit cards is often higher than the potential rate of return on an investment.

Set Clear Goals

The first step before opening an investment account is to define what you’re investing for (your investment objective or goal) and when you’ll need the money (your time horizon). For example, are you saving for a down payment on a house, retirement or a loved one’s education? Consider both short- and long-term goals, as the types of investments you choose can vary widely depending on your objectives and time horizon.

Once you’ve figured out your goals and when you’ll need the money, it’s time to determine your risk tolerance level. How comfortable are you with market fluctuations, and how much money can you afford to lose? Do you need access to the funds soon, or do you have a longer timeline? Markets can be volatile—in other words, they can go up and down—and every investment carries some risk. Having an idea of how much risk you’re willing and able to handle, and whether you have enough time to recover from potential losses, can help you choose investments that match your situation and comfort level.

Educate Yourself

Start learning about investment products, including how they’re bought and sold, and how to evaluate whether a particular product is right for you. You might want to consider talking with an investment professional, who can provide personalized guidance and help you understand the benefits and risks of different investments. You can use FINRA’s free BrokerCheck tool to help you research the background and experience of investment professionals.

If you’re making your investment decisions without the help of a professional, or if you want more information on your investments, doing research (or “due diligence”) can help you decide if certain products are right for you. Learn more about performing due diligence for stocks or bonds.

Diversify Your Investments

Diversification is spreading your investments across different types of asset classes—such as allocating a certain percentage among stocks and bonds—as well as within those asset classes. This might involve investing among different equity sectors or bond types, for example. Different asset classes generally don’t move in lockstep, and diversifying your investments can help to reduce your risk if an individual security or sector doesn’t perform well, potentially smoothing out your portfolio’s overall volatility. Investing in mutual funds and exchange-traded funds (ETFs) might also help diversify your portfolio, as they can hold a range of securities across different industries or asset classes.

Pay Attention to Costs and Fees

There are always costs and fees associated with investing, most often in the form of transaction costs, advisory fees and/or ongoing expenses. Some investments have higher costs than others, which can add up. Before investing, it’s important to know and understand the fees associated with your account and with each investment. Even a small percentage difference in fees can eat away a big chunk of your overall investment returns over time.

For example, mutual funds and ETFs both charge annual fund operating expenses, also known as expense ratios. These fees vary from fund to fund—while some funds can provide cost-effective diversification, others don’t—so learn about a fund’s fees before investing. FINRA provides an online Fund Analyzer that allows you to compare expenses among these types of investments.

In addition, different types of investment accounts charge different types of fees. For example, some online trading platforms might offer lower fees than you’d pay with a full-service brokerage firm, including low or zero commission trading. However, they might not offer all of the same benefits, such as assistance in making investment decisions. And even zero commission trading doesn’t mean free investing, as other fees and charges might apply.

Before opening an account, make sure you understand what you’ll pay and what you’ll get for your money. You can learn about a firm’s services, fees and costs, and other key information by reading its customer relationship summary, Form CRS.

Take Advantage of Tax-Advantaged Accounts

There are different types of tax-advantaged accounts to help you save money for specific purposes, including retirement, education or healthcare. In addition to offering potential tax benefits, these accounts encourage saving over the long term, and many employers offer matching contributions to some plans.

As implied by their name, tax-deferred accounts—such as traditional 401(k) and 403(b) accounts and individual retirement arrangements (IRAs)—typically postpone taxes until you withdraw the funds. Tax-exempt retirement accounts such as Roth IRAs offer tax-free withdrawals as long as the relevant account rules are followed. When it comes to saving for college, 529 plans and Coverdell Education Savings Accounts offer both tax-free growth and withdrawals when used for qualified education expenses. Health savings accounts (HSAs) also offer these benefits for qualified medical expenses but with certain restrictions.

A tax professional can help you understand the implications for your personal situation.

Invest Regularly if Practical

One way to start investing, if practical given your financial situation, is with small amounts at regular intervals. This investment strategy is referred to as dollar-cost averaging. Setting up automatic contributions can help remove the pressure of when to buy (and reduce the risk of trying to time the market) while potentially helping smooth out the price fluctuations of your investments. Additionally, even small investments can grow over time and benefit from compounding, which is basically the interest earned upon interest. Use the Securities and Exchange Commission's calculator to determine how much your money can grow using the power of compound interest.

Stay On Top of Your Investments

Once you’ve started investing, it’s a good idea to monitor your holdings, which can help keep your goals on track. In addition, most firms will send you monthly or quarterly statements that you can review for critical information about your investments.

Whichever way you choose to invest, it helps to be informed about financial and economic news that might affect market prices that can also positively or negatively impact your investments. Over time, changes in the market can shift the balance of your portfolio. Rebalancing helps keep your investments aligned with your financial goals and time horizon.

As you begin your investment journey, remember that everyone's financial situation is different, and what works for others might not be right for you. Be skeptical of investment fads or “hot tips,” do your research and stay focused on your goals.

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