Small Steps for Beginning Investors

February 2022

Barbara O’Neill, Ph.D., CFP®
Distinguished Professor and Extension Financial Management Specialist Emeritus
Rutgers Cooperative Extension Beginning Investors

During the past two years of the COVID-19 pandemic, many people started to invest for the first time. Reasons for this include more time to navigate the process of investing, extra money from stimulus payments, encouragement from friends and family, and the growth of online trading apps.

As a result of these trends, stock ownership among U.S. households increased to 41% of their total financial assets in 2021, an all-time record high! With an increase in investing comes a need for investor education. Below are some time-tested tips for new investors:

1. Develop an "Investor's Mindset"- Adjust your expectations when switching from savings products (e.g., CDs and money market accounts) to investments (e.g., growth funds). Savers can expect no loss of principal and regular interest payments. Investors must accept a potential loss of principal and irregular payouts.
2. Expect Volatility- Be prepared for investment values to go up and down over time. Stocks and related products (e.g., mutual funds and exchange-traded funds or ETFs) can often lose value during short time frames. Bond prices go down when market interest rates go up.
3. Know Your Goals- Match the time frame of financial goals to investment characteristics. Stocks have historically outperformed other investments over long time periods and are good for long-term goals like retirement. For short-term goals, select cash-equivalent assets and short-term bonds.
4. Review Your Investment Risk Tolerance- Take the University of Missouri Investment Risk Tolerance Assessment and consider how much loss of principal you could stand without losing sleep. Never invest in products you don't understand or feel comfortable with. If you can't explain an investment simply, you don't understand it very well.
5. Dollar-Cost Average Investment Purchases- Invest a specific amount (e.g., $100) at a regular time interval (e.g., monthly) as you earn "new money." Payroll deductions for employer retirement savings plans and mutual fund automatic deposits are ideally suited for dollar-cost averaging.
6. Invest With Tax Breaks- Seek out tax-advantaged ways to invest. Examples include individual retirement accounts (IRAs), tax-deferred employer retirement plans (e.g., 401 (k)s), and tax-exempt securities, such as municipal bonds, if they provide a higher after-tax return than taxable securities.
7. Diversify Your Investment Portfolio- Purchase different types of investments (e.g., stocks, bonds, mutual funds) or shares of ETFs or mutual funds that contain many securities. To get a high degree of diversification in one investment, consider an index fund or target-date mutual fund.
8. Keep Learning- Increase your investment knowledge with blogs, podcasts, webinars, seminars, books, websites, and publications like Money (online) and The Wall Street Journal. Other information sources include certified financial planners, adult education courses, and investment clubs.
9. Start Small- Get started with small dollar amounts. Many mutual funds can also be purchased for $1,000 or less. Initial required investments are set by individual funds. With tax-deferred retirement plans, you can start with as little as 1% of your pay and deduct the amount saved on your federal tax return. Contributions and earnings grow tax-deferred until withdrawal.
10. "Kick It Up a Notch"- Invest a bit more if you are already investing. For example, deposit an additional 1% or more of your pay in an employer retirement savings account. The best times to invest more money are when your income increases or a household expense, like child care, ends.

Remember, time is as precious an investment resource as money is. Even small amounts of money, with compound interest over time, will grow to significant sums. For additional information for beginning investors, review the Cooperative Extension Investing for Your Future home study course. Module 8 is about investing with small dollar amounts.