Sincerely, Paula
Dear Paula,
I’m so glad you decided to start building wealth by investing! This is a long-term journey, so the first thing to do is to keep your emotions in check when it comes to investing. Just because the market is down doesn’t mean you should quit, and just because the markets are up doesn’t mean you can rest. That said, how do you begin? First, you’ll need to open up a brokerage account. You’ve mentioned Edward Jones, but the best brokerage depends on you and the kinds of investments you want to make. Take a look at our list of best investment apps for your research. You’ve mentioned index funds and along with exchange-traded funds (ETFs), these are great places to start for a beginner. So how do they work? Index funds track market indices—like the S&P 500 (an index of the 500 biggest companies in the United States)—and try to mimic the performance of the index. An exchange-traded fund is a basket of companies grouped together, sometimes based on a theme, or industry. For example, if you want to invest in the technology sector as a whole, you can purchase shares of a technology ETF. That ETF will have shares of all sorts of technology companies within it. The benefit is that your risk is spread out among all the stocks or securities inside the fund, so even if one company or asset isn’t doing well, the whole fund is boosted by the rest of the assets in the collection. The downside? Like your risk, your returns are spread out, too. So if one company’s stock is up 50% for the year, your gain will be moderated by another asset that might only have a 5% return. But index funds and ETFs are fairly simple and don’t require you to know too much about any one specific company or asset. They’re a great place for a beginner to start investing. I’m not a stock picker, so I won’t tell you which index funds or ETFs to choose, but I like to say invest in what you know. That way, you’ll be more familiar with the companies, trends, and headlines that are impacting a sector or industry that you decide to invest in. If you’re an avid traveler, consider a travel-based ETF. If you believe in the strength of the U.S. economy, invest in an S&P 500 index. On our website, you can research top index funds and the best ETFs. You’ve asked about bitcoin, and while I won’t tell you to ignore cryptocurrency in your portfolio, I would recommend having a basic understanding of bitcoin and the differences among other coins, because it is such a risky asset. Cryptocurrencies are notoriously volatile, and since last year, the value of bitcoin has tumbled over 66%. But no matter what you decide to invest in, be consistent, and try to invest the same amount, on the same investments, each month. This is called dollar-cost averaging and if you do this, over time, it won’t matter whether the markets are up or down on that day. How much you choose to invest depends on you and your finances, but since you’re trying to build wealth, invest as much as your budget allows, while still setting aside money for savings, paying your bills, and any other expenses. -Kristin If you have questions about money, Kristin is here to help. Submit an anonymous question and she may answer it in a future column.
