Investing for Beginners: Everything Experts Want You to Know for 2022
This story is part of CNET’s coverage of Power Money Moves, CNET’s Smart Money Decisions for Today’s Changing World.
From stocks to mutual funds to cryptocurrencies, there are many ways to invest your money in 2022. Whether you have $100 or $10,000, you can take advantage of startups like Robinhood, DIY investment platforms (including robo-advisors), and traditional financial companies like Vanguard and Fidelity.
But the prevalence of choices means more choices to make, not to mention more voices vying for your attention (and money). And now that anyone can broadcast their investment advice from a smartphone, it is hard to identify trustworthy advice, and following the wrong TikTok financial guru or Twitter crypto brother can prove costly. the stakes are high.
So, how can we navigate today’s investment landscape wisely? To find out, CNET spoke to some investment experts, who explained how to balance tried-and-tested strategies with new opportunities to support your investment goals. Here are best practices to help you get started investing – both time-tested and fresh – for 2022.
Don’t skip this step: Figure out what you want to do with your money
Choosing a stock, choosing a mutual fund, or buying bitcoin can be the really easy part. But no particular investment, strategy or philosophy is as important as knowing why You are investing in the first place. In other words, what do you want to do with your money?
James Lee, certified financial planner and elected president of the Financial Planning Association, always starts working with his clients on their life goals even before they start talking about investment strategies.
“I ask them what goals they have that will require financial resources in the future,” Lee said. “Understanding what your goals are is important to inform your timeline and build a portfolio that takes on the appropriate risk and return characteristics to meet those goals.”
Although everyone has their reasons for investing, most of us have similar goals: saving for retirement, buying a home and perhaps paying off student loans, starting a business or funding your child’s college education. Your goals may evolve as well, and the macroeconomic picture should influence your outlook. For example, right now you may be worried about strengthening your nest egg against rising inflation and rising interest rates.
While it can be challenging to articulate your life goals or envision your future, doing so is an important first step in investing. Establishing clear objectives, and revisiting them annually, will help inform your timing, strategy, and appetite for risk.
Your goals can include external and even non-financial considerations. According to Anjali Jariwala, Certified Financial Planner and Founder of Fit Advisors, socially conscious investing has become an important benchmark for many. Similarly, given the importance of climate change, an increasing number of investors are reconfiguring or reconfiguring their portfolios to support companies that are more environmentally friendly.
automate it. And always have ‘free’ money
For most of us, a major investment goal is building a nest for retirement. According to CNET Money editor at large, Farnosh Torabi, achieving financial independence in order to retire comfortably is a top priority for most people. But according to a recent survey published by Personal Capital, an online wealth management platform, only 57% of Americans have some form of retirement savings.
If you work for a company that offers a 401(k) or employer-sponsored retirement account, there are two good reasons to choose. First, a percentage of each paycheck will go to that investment, making contributions regular and automatic. Second, your employer may match all or all of your contributions.
For example, if you earn a gross of $4,000 a month and your employer matches up to 4% of your salary, you’ll need to contribute $160 to get the full employer match. Including your and your employer’s contributions, this would be $320 per month, or $3,840 per year. And you can always contribute more — in 2022, individuals can put up to $20,500 in a 401(k). As a general rule of thumb, Jariwala suggests you invest at least as much as your employer matches so you don’t miss out on the “free” money.
And if you have more money to invest after maxing out your 401(k), you can open an IRA, a special class of savings account that offers some protection from taxes. A traditional IRA lets you make pretax contributions during your working years, and your money is taxed as ordinary income when you withdraw it in retirement.
With a Roth IRA, your money is taxed in the account, allowing you to take it 100% tax-free once you retire. This arrangement makes it ideal for young workers who are earlier in their careers, or in a lower tax bracket. The caveat is that “there are income limits, and so once you reach a certain income level, you can’t contribute any more,” Jariwala said. “When you’re young, it’s a really great time to get as many dollars in that Roth IRA as you can.”
Choose the right strategy to achieve your goals
After decades of relative stability, the economic landscape is now changing. Earlier this month, inflation hit a 40-year high and we are likely to see a series of interest rate hikes as a result. Finding inflation resistant investment opportunities has become increasingly important. Rising prices can spoil your portfolio, as the same $100 will buy less than the day before. But some types of assets are more affected by inflation than others. This is a moment to locate assets that will help protect your portfolio, including certain retirement accounts, real estate, and Treasury inflation-protected securities, a type of government bond that counterbalances against inflation.
Today, “investing” is often associated with actively trading stocks at Robinhood or another brokerage. It implies making repeated buying and selling based on the analysis of the market. But making a reliable return through active investing is notoriously difficult — even for professionals — and, for most people, it’s not the most practical or effective way to manage money.
Passive methods of investing, such as index funds and ETFs, are a better choice for most people. Unlike active investing – where you (or your portfolio manager or broker) regularly buy and sell individual investments – passive investing usually means buying and holding assets for a longer period of time.
As markets fluctuate and flow, index funds are designed to deliver market-average returns, tracking the performance of set market benchmarks such as the Standard & Poor’s 500 or the Nasdaq Composite. The logic is that in the long run, the market usually outperforms a single investment. Research shows that index funds regularly perform better than actively managed funds. Passive investing through mutual funds has been especially useful for generations of young people who have decades to build wealth early in their careers.
Even Warren Buffett, one of the world’s richest people and the chairman and CEO of Berkshire Hathaway, is a fan of index funds. Quoted in The Little Book of Common Sense Investing, Buffett said in an interview: “A low-cost index fund is the most sensible equity investment for most investors. By investing periodically in an index fund, an investor knowing nothing can actually outperform most investment professionals.”
Better yet, index funds are less risky and typically cost less than other types of investments — unneeded fees can erode your portfolio over time. Although buying into an index fund on its own isn’t particularly complicated, a robo-advisor can help identify which one makes the most sense for you and manage your portfolio.
Don’t put more than you can afford to lose in high-risk investments
Once you’ve covered the basics like retirement, long-term investments and an emergency fund, you can branch out into riskier ventures — or ones that prove less proven. High-risk investments often come with high returns…if the investment pays off (and that’s a big one).
There is an option to explore cryptocurrency. You can invest in crypto by buying tokens like bitcoin and ethereum on an exchange like Coinbase or Binance. But it is important to understand that crypto remains unregulated and highly volatile. This is not true for everyone: you will need a high risk tolerance and financial tools to withstand market downturns. You also need to make sure that you can stand to lose money and still pay your bills.
Lee recommends investing in crypto only if you have “an asset with which you can speculate, meaning the asset may be void, and it will not affect your ability to reach your financial goals.”
Even if you decide to dip your toes in the crypto waters, it is wise to start small. For beginners, Jariwala recommends allocating no more than 1% to 3% of your total portfolio.
Learn the Fundamentals, but Don’t Ignore the Changing Financial World
Of course, a single article or piece of advice can take you that far. That’s why it’s important to be proactive when it comes to your financial future. Part of that is following the news of the day — whether it’s the pandemic’s impact on the supply chain or how war might affect gasoline prices — and understanding how it affects your bottom line.
Finance books like Rich Dad, Poor Dad, The Total Money Makeover or The Little Book of Common Sense Investing can enhance your understanding of the fundamentals. (Maybe start with Blinkest, which provides an in-depth summary of more than 5,000 books.)
You can also get professional help, and it may not be as expensive as you think. A certified financial planner can help you build a portfolio, manage your finances, and help with your taxes. You can consult the Financial Planning Association’s Planner Search to find one in your area. Keep in mind that advisors typically charge a similar fee or a percentage of your portfolio in exchange for providing their services. And make sure your advisor is a fiduciary, which means they are legally obligated to put your financial interests first.
There is no one-size-fits-all approach to investing. But there has never been more self-service tools and resources to help you get started.
For more information, check out our guide on how to invest in crypto in 2022 and our list of the best robo-advisors.
