As legendary investor Warren Buffett once said, "Someone's sitting in the shade today because someone planted a tree a long time ago." In other words, the sooner you start investing, the better your long-term prospects.
While there are no hard and fast rules for how someone should invest their money, the good news is that getting started has never been easier.
Here are eight excellent ways to begin investing right now.
1. Stock Market Investments
Historically, investing in stocks has been one of the fastest, most efficient, and effective ways to increase wealth over time.
"If a new investor is willing to take on risk and does not need the funds right away, their portfolio should be heavily weighted in stocks," said Emily Cozad, portfolio manager and research analyst at Buckingham Advisors.
The data support that sentiment. According to officialdata.org, from the beginning of the Great Depression in 1930 to 2023, stocks returned an average of 5.8% per year. Stocks are securities issued by corporations to fund operations or expansion. They represent an individual's ownership interest in a company.
"If you're a new investor, you're most likely in the wealth accumulation phase of life, not wealth preservation," said James Beckett, a financial coach and investment analyst at MoneyStocker.com. "If this is true, you should be 100% in stocks."
Although stocks are occasionally volatile, they provide greater financial returns than other investments. "As a new investor, the volatility is less important as you likely have the time (even decades) to ride out any bumps in the market," Beckett said.
Diversify your portfolio
However, new investors should diversify their investments beyond one asset class. Once a new investor has established an active investment portfolio, it is prudent to ensure that it is adequately protected against investment risk.
Diversifying your portfolio can do the job for you. New investors may want to consider investing in an index fund, which offers diversification across multiple companies.
"This spreads out the risk to hundreds of holdings and removes the risk of one company causing dramatic losses in an investment portfolio," said Aaron Ritsema, senior portfolio manager at the private wealth management firm LaFleur & Godfrey in Grand Rapids, Michigan.
If you're determined to own individual companies, consider a "core & explore" strategy that includes an index fund as the core holding and a set amount to "explore" by purchasing individual stocks.
"A reasonable place to start is having 80% to 90% of the portfolio in a core index fund and using 10% to 20% to invest in individual stocks," she said. "Keep in mind it's important to do your own research and know what you're buying, whether it's an index fund or an individual stock."
2. Real Estate Investments
Investing in real estate is costly, but the potential returns are attractive.
According to the National Association of Realtors, the median US home sale will surpass $400,000 for the first time in 2022. This represented a 14.2% increase over the previous year.
"Investing in real estate can be effective for a beginning investor," stated Steve Davis, CEO of Total Wealth Academy, a Houston-based real estate advisory firm. "The barriers to entry are very low, and the returns are much higher than speculating with stocks and such."
"Speculating in the stock market only makes money one way, appreciation, and you lose that in a crash," he said. "With real estate, you may lose value, but you don't lose cash flow or equity build-up."
One drawback of real estate investing is that it requires extensive educational knowledge, which takes time and guidance. "Find a mentor or group of investors and take whatever classes they have before you ever put one dollar in a real estate deal," he said.
3. Mutual Funds and ETFs.
When investing in stocks, a new investor should avoid putting all of their eggs in one basket. Mutual funds and exchange-traded funds (ETFs) can help in this situation.
Mutual funds are investment companies that pool investor money to buy securities like stocks or bonds, and are managed by professional fund managers. ETFs are pooled investments that are priced and traded on stock exchanges. They typically track index funds or other asset classes.
Such funds allow new investors to diversify their investments across hundreds of different securities, eliminating the need to rely on the performance of a single stock to make money. Both types of funds are professionally managed by experienced fund managers who charge a set fee for their services.
"New investors, along with having no experience, often have little knowledge about individual stocks and bonds and/or a smaller portfolio as they are starting out," according to Cozad. "To spread the risk out, mutual funds or ETFs might be the best option for a new investor."
Choosing between mutual funds and ETFs is not always easy, but the former may be more advantageous for new investors.
"If an investor makes small or regular contributions, it may be more advantageous to invest in mutual funds that will invest the entire deposit down to the dollar." Cozad stated that mutual funds are traded in dollars rather than shares. "Additionally, if an investor is more interested in an actively managed fund, it may be more beneficial to purchase mutual funds."
If an investor wants to invest in the entire market or a variety of asset classes at a low cost, an ETF may be a better option. "If the account is a typical taxable brokerage account, it might be more beneficial to invest in ETFs rather than mutual funds," Cozad said.
4. Bonds and Fixed Income Investments
Government and corporate bonds, also known as fixed-income investments, are typically conservative investments that can help manage risk in an investment portfolio.
Reducing risk is important for all investors at some point, but it is especially important for new investors who can benefit from the money preservation qualities that bonds provide.
"Because they typically pay a fixed payment amount over a fixed period of time, bonds are sensitive to interest rates, which are much higher these days," said Bradley Thompson, a money manager at New Canaan Group in Stamford, Connecticut. As demand for fixed-income products increases during a period of high interest rates, many bonds may become more expensive to own.
To balance the risk and keep the purchase costs low, new investors may consider investing in a bond fund to help reduce volatility and save money up front.
"Historically, bonds have averaged less than stocks but with less volatility," she said. "Consider funds that offer a low-cost way of investing in stocks and bonds and can be used as core holdings in an investment portfolio."
5. High-yielding savings accounts
Even though newer investors are typically younger and have a longer investment horizon, they should have a dependable place to store cash for short-term savings needs. This is where high-yield savings accounts come in useful.
High-yield savings accounts provide all of the safety benefits of a traditional bank account (the US Federal Deposit Insurance Corporation insures all US bank and credit union deposit account funds up to $250,000).
Most banks and credit unions offer high-yield savings accounts, making them easily accessible. And, with interest rates so high in 2024, high-yield savings accounts are providing historically high returns.
As of March 2024, many banks' high-yield savings account rates are at 4% or above. In comparison, traditional bank savings accounts earned an average return of 0.46% over the same time period.
6. P2P lending
When banks or other financial creditors refuse to lend money to borrowers, peer-to-peer lenders can step in. Peer-to-peer lenders use an online loan platform to lend money to borrowers who would otherwise be unable to obtain a loan.
Peer-to-peer loans allow new investors to provide a loan to borrowers at an agreed-upon interest rate paid to the lender. This provides the borrower with the necessary funds through a personal loan while also allowing peer-to-peer lenders to generate solid investment returns without actively managing the investment.
Peer-to-peer loans can provide new investors with a good income. The average annual percentage rate for a 24-month peer-to-peer loan was 12.4% in November 2023.
As a new investor, it's best to work with an established online peer-to-peer lender who strives to keep both borrowers and lenders happy with their peer-to-peer loan experience.
7. Launch a new business or invest in an existing one.
The Small Business Administration estimates that 99.9% of active US businesses are small. Furthermore, the SBA estimates that small businesses employ roughly half of all US workers.
With such a large employment market, it may make sense for new investors with a great business idea and the determination to see it through to the end to invest in an existing business or start their own.
Advancements in technology have made it much easier to start and run a small business while earning a healthy profit. However, you will still need to research your market and competitors, hire qualified employees, develop and implement a solid business plan, and raise the initial funds required to launch your new company.
Opening or investing in a small business is not for the faint of heart, but being your own boss has its benefits—and financial rewards. However, according to Bureau of Labor Statistics data, approximately one in every five new businesses fails within the first year, with nearly half failing by the fifth year.
8. Investing in precious metal
Every beginner portfolio should include a "hedge" asset that protects it and adds much-needed portfolio versatility when market conditions worsen.
Investing in precious metals, particularly gold, can help balance a new investment portfolio.
When markets are volatile and the global economy is unstable, gold provides investors with numerous benefits. Gold, for example, can be used as a hedge against inflation or a falling dollar, as well as a safe haven during times of geopolitical and financial market instability.
Because gold is constantly in demand and has a limited global supply, it can provide both safety and growth to a new portfolio. When the economy turns down, precious metals can serve as a "safe haven" for investors. For example, from October 2007 to June 2009, the price of gold increased by nearly 24%, while stocks lost half their value during the Great Recession.
Gold can also serve as a store of value, providing a hedge against runaway inflation. It can also help with portfolio diversification and protect against catastrophic economic events.
The yellow metal also has appealing characteristics that make it a unique investment. Most importantly, it is uncommon because it is difficult and costly to mine. Output rarely exceeds 2% per year, and all of the gold ever discovered, plus what we know is still in the ground, would fit into a cube 23 meters wide on each side and weighing approximately 244,000 metric tons — roughly the size of an Olympic swimming pool and seven stories tall.
Furthermore, it is nearly indestructible. Gold will never lose quality or decay structurally. It is malleable, which means it can be easily formed into various shapes and sizes, increasing its value in the consumer market.
Given these characteristics, gold prices rose in 2023 as the US economy became more volatile and inflation continued to erode household budgets. At the start of the year, gold was selling for around $1,830 per ounce. By the end of the year, gold prices had risen to approximately $2,060 per ounce.
If the economy goes into recession, as some economists predict, precious metals could be a good defensive addition to a beginner's portfolio.
Expert advice for beginning investors
Spread the wealth.
"Diversification is a technique of investing in different asset classes, such as technology, energy, oil, or Fortune 500 companies, to spread out the risk of a potential downtrend in one or two areas of the market," explained Kris Whipple, partner and financial advisor at Kristopher Curtis Financial in Nashville, Tennessee. "This allows your portfolio to have a balanced approach versus putting all your chips on red."
