4 Tips for the First Time Investor

Roth IRA (Photo credit: Philip Taylor PT)

If I was to give someone my best advice on investing I would tell them not wait for anything. Take whatever amount you have put aside to invest and open an account today. Starting to invest when you have a time frame of forty years is the best move you could ever make. Every year you wait you are throwing away the magic of compound interest, your shrinking the size that your account could someday become.

1. Starting early and saving 5%-10% of your earnings and gradually increasing that amount over time not only helps your bottom line but also gets you in the habit of saving early.

2. Using savings plans such as 401(k)s and IRAs, offer powerful tax advantaged growth. Using Roth IRAs, in which contributions are made using after-tax funds but withdrawals are tax-free keep the tax man away and keeps all your money working for you.

3. Asset allocation is the percentage of your holdings you want to have in stocks and what percentage you want in bonds. An appropriate asset allocation strategy depends on several factors, such as your time horizon — if you’re saving for a retirement that’s decades away, you’d lean more toward stocks — and your tolerance for risk; the more likely it is that you’d panic and sell if stocks drop, the more you’d lean toward bonds.

For the young investor consider an allocation of 20% bonds, 50% domestic stocks and 30% international stocks. A portfolio heavily weighted in stocks offers plenty of long-term growth potential, while the bond allocation offers a cushion for market downturns.

4. New investors run into the problem of not knowing what investments to pick. When not sure what stock or mutual fund to pick it’s better skipping individual stocks and starting with low-cost index funds and ETFs. Reason: Funds and ETFs offer quick and easy diversification (the investing equivalent of not putting all your eggs in one basket) that’s harder to accomplish with individual stocks. Salvini offers a few recommendations: Vanguard Total Stock Market (ticker symbol: VTI); Vanguard FTSE All-World ex-U.S. (ticker: VEU); and Vanguard Total Bond Market (ticker: BND).