15 Easy Tips on How to Start Investing in Stocks and Bonds in 2018
After years of a riding a bull market, economic influences have investors on a wild ride where peaks and dips are part of daily investing, MarketWatch reports. What should the average investor do, especially if you are new to the market?
Market volatility is scary, but should not deter investors. “No one likes to lose money,” Eric Roberge, a certified financial planner told CNN. “But it’s important to take a long-term view and not make decisions in short-term volatility.” Not sure where to start? We’ve got your back.
1. Know the difference between stocks and bonds
Stocks are shares of interest ownership in a company, whereas bonds are a debt agreement where the company pays the principal amount on a set date, according to Accounting Coach.
Investors earn dividends on stocks as long as the company declares one and bonds pay fixed interest typically every six months. You are likely to see more return but higher risk with stocks.
Next: Government bonds are safer but may produce less return.
2. Consider government bonds
U.S. government issued bonds are treasuries or “T-bills.” State or local governments issue municipal bonds or “munis.”
Treasury bonds are considered to be very safe, nearly risk-free in countries with a stable government. While municipal bonds are riskier than treasuries, bondholders are free from federal tax, some being triple-tax free, meaning the bond is tax exempt on the federal, state, and municipal level.
Next: Corporate bonds may have a higher return.
3. Corporations issue most bonds
Major corporations issue corporate bonds, which pay higher yields than government bonds, but present a higher risk, according to Investopedia. Terms vary and bonds can have fixed or variable interest rates. High-rated companies issue investment grade bonds and low-rated company bonds are called junk or high-yield. Investors should also explore convertible and callable bonds as well.
Next: Asset-backed securities offer both some risk and security.
4. Financially backed bonds
Banks and financial sector entities offer asset-backed securities (ABS), according to Investopedia. ABS assets include loans, leases, and credit cards. Mortgage-backed securities are similar to asset-backed, but are supported by mortgages.
ABS are relatively secure and rate based on the company’s ability to pay interest and principal, according to Investing in Bonds. The highest rating is a triple A, often assigned to most ABS, which makes this investment one of the more secure options.
Next: Which brings us to stocks.
5. Common stock
Common stocks make up most stock offerings, are based on the profits and provide an investor vote, according to Investopedia. Investors may earn higher stock yields over bonds, but they are a riskier investment in case the company fails or goes out of business. Common stock has variable dividends declared by the company’s board of directors.
Next: This is still a stock, but less risky.
6. Preferred stock
Preferred stocks act more like a bond because investors are guaranteed a fixed dividend in perpetuity, Investopedia reports. Preferred stockholders are paid off before common stockholders if the company fails, plus the company can re-purchase stocks back from preferred stockholders, typically at a premium.
Next: Not sure where to begin?
7. Start with a small investment
Begin with a $1,000 investment, especially if you are just starting or re-entering the market, according to Investopedia. Some brokerage firms require a higher amount, so discount brokers may be the way to go because they tend to be more flexible. Discount brokers also have lower fees and allow for lower investment amounts, but you drive the investment. So you’ll need to do your homework.
Next: Select the right broker.
8. Discount versus full-service brokerage
Full-service or traditional brokerage firms offer just that: full service, which includes buying and selling, portfolio updates, tax, and retirement planning advice, Nerdwallet reports. Traditional firms charge fees for their service, but may also be a decent option for the new investor or someone who doesn’t want to handle their own investments.
Discount brokerage firms are a cost-effective option, Nerdwallet reports, but you are on your own regarding help or advice. You can access a discount firm online too.
Next: Have an honest talk with yourself.
9. Assess your tolerance for risk
Stocks and bonds come with reward and risk, usually the higher the reward, the higher the risk. Younger investors can often afford more risk because their time in the market is longer than someone with a decade or less away from retirement.
Before you invest, assess your current financial situation. This includes a deep dive into your retirement account, assets such as real estate, your emergency savings and other interest bearing accounts.
Next: Automatically build your safe investments.
10. Automate your savings
Build your retirement account, which can reduce your exposure to stock dips. The best approach is to automate your savings if you haven’t already established this at work, Time reports. People who directly deposit money from their paycheck into their 401(k) or other retirement savings vehicle are more likely to head comfortably into retirement than those who do not automate.
Shoot for a stretch goal of saving 15% of your paycheck, which can always be adjusted based on your income and lifestyle.
Next: If you feel ambitious…
11. Consider the 90/10 rule if you are feeling bullish
Warren Buffett is known for his 90% stock and 10% bond investment strategy. But is this wise for someone close to retirement? While this move may produce the most return, it also exposes you to the most risk, CNN reports.
A finance professor applied Buffett’s strategy for a 30-year market period, using the 4% rule, where you withdraw 4% of the total value and then hike future withdrawals based on inflation, according to CNN. The 30-year portfolio produced far higher returns over someone who invested only 50% or 60% in stocks.
Next: But being bullish works best in a strong market.
12. Diversify if you are risk averse
While the name of the game is to boost your ROI, you don’t want to lose your shirt, especially in a volatile market. If you are closer to retirement and saved a considerable amount in assets and other retirement accounts, you may want to play it safer with more of a 60% stock to 40% bond, 40% stock to 60% bond or even 50% stock to 50% bond mix.
Going a safer route may perform just as well as the 90/10 rule, especially in a bumpy market, CNN reports. A larger piece of the bond pie provides support when stocks drop.
Next: Don’t go all in.
13. Buy incrementally
Shop around for the best price rather than plunking down all your dough right away, according to The Street’s personal finance expert, Jim Cramer. Rather than going all in on a single stock, buy in smaller amounts over a period of time and shoot for the best possible price possible with each purchase. While your broker may balk at taking several smaller orders over a period of time, you end up winning on price.
Next: Sell sunken investments.
14. Trust your gut
Your broker may encourage you to hang onto loser investments, hoping the sinking stock may rebound, Cramer said. Unfortunately, some investors hold loser stocks and offset their losses by selling hot stocks, which Cramer says you should never do. Hold your winners and sell losing stocks. If the stock rebounds you can always repurchase it.
Next: You may stumble, but as long as you get up, you’ll be fine.
15. Learn from mistakes
Every stock or bond pick can’t always be a winner, but you can learn from bad picks and become a better investor. Write down errors you make so you don’t repeat the same mistake again in the future, Warren Buffett advised in Business Insider.
Also, Buffett said to understand when you purchase stock you are buying part of a company, don’t get too concerned over every stock headline, make investments you actually understand and, invest in yourself.
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