Investments for Beginners

Learn about investments for beginners to kick-start your investment portfolio and build a solid financial management foundation.

Before Getting Started

Let us say that you have heard about something regarding investments, which would make you a lot of money. You also want to make money just like the people whom you’ve seen on the internet.

I hate to burst your bubble, but investments don’t work in such a way. I mean it doesn’t work like you just put in some money so that you can earn a lot of money overnight.

The process of investing can be quite complex and require a lot of time and expertise.

Never trust someone who says that they made money through trading or investing and became millionaires in just a few hours or a few days. Social media is very far from reality, and it also applies to investments.

Even professionals make mistakes while they are investing, and you are no different. Although this might sound disappointing, this is the fact, and let nobody say any different.

First of all, it is important for you to understand that investment should be used as a tool for growing your wealth. It should increase your chances of improving your financial situation rather than imposing more difficulties.

You should pay attention to the basic yet advantageous aspects such as compounding or reinvesting.

Start small and opt for low-risk investment opportunities before going for something complex. This will allow you to make it into a habit before you can actually get immersed into a complex investments.

Even though such aspects may seem small, they are known to make people more successful.

Before getting into investments for beginners, it is essential to assess your investment goals as well as your financial situation.

Only after doing so, you will be able to invest in a successful manner and achieve the best possible returns.

Another major aspect to be taken into consideration is the diversification of an investment portfolio. With the successful diversification of an investment portfolio, an individual can achieve the best returns.

Such advantageous returns can be obtained even when there are factors influencing the investment portfolio such as sector-specific or geography-specific issues.

Best Investments for Beginners

Remember that the investment opportunities provided in this article are just generally good for beginners.

However, an experienced financial advisor or investment manager can assess your situation and suggest better options.

High-Yield Savings Accounts

If you wish to have better returns on your savings but feel hesitant about investments, a high-yield savings account (HYSA) is the best.

With a HYSA, you can enjoy a significantly higher Annual Percentage Yield (APY) on par with a regular savings account. These types of accounts allow you to maximize your earnings without taking investment risks.

When shopping for a HYSA, it’s essential to compare different financial institutions available to you.

Anyhow, it’s crucial to note that the accounts offering the highest APY might not always be the best choice.

Carefully read the terms of each HYSA you’re selecting and pay attention to details such as minimum balances or annual fees. This will help you select the best HYSA for your financial goals.

Let us know the various advantages of HYSAs and how they are advantageous to beginner-level investors.

• Less Risky

High-yield savings accounts come under low-risk investment options. Insured by government agencies, they provide a certain level of safety for your money.

• Easily Accessible

Opening a high-yield savings account is a straightforward process and easier than one might think. This makes them easily accessible to beginner-level investors who may not have experience in complex investments.

• No Necessity for Investment Knowledge

Unlike other mainstream investment vehicles like stocks or bonds, high-yield savings accounts do not require any investment knowledge. You don’t have to be an investment expert to make money with a HYSA.

• Higher Returns

High-yield savings accounts offer better interest allowing your money to grow at a faster rate. This means it is better to go ahead with a HYSA to get higher returns rather than a traditional savings account.

• Liquidity

The money in high-yield savings accounts is liquid and can be withdrawn without penalties. Unlike some investments, there is no lock-in period for HYSAs, and therefore, you can access your funds whenever need them. Thus, HYSAs are a good investment while providing flexibility in managing your finances.

That is why high-yield savings accounts are a great option for building an emergency fund.

• Automatic Savings

With some high-yield savings accounts, you get access to automatic deposits. This makes it easy for beginners to develop a disciplined saving habit that’ll prove to be helpful throughout one’s life.

Certificates of Deposit (CDs)

A certificate of deposit (CD) is another type of savings account variant that provides a higher APY than a savings account.

If you opt for a CD, you deposit a lump sum amount for a specified period, which is agreed upon beforehand.

Throughout the term of a CD, you cannot withdraw the funds without incurring a penalty.

Upon reaching the maturity date, you have the option to withdraw the funds or reinvest them into a new CD or do anything else.

Certificates of Deposit (CDs) can be a suitable investment option for beginner investors. Here are some aspects:

• Low Risk

CDs come under the category of low-risk investments as they are mostly offered by banks and credit unions. At the same time, they are insured by the government (up to certain limits) in most countries.

This means your principal is under protection, and you can receive your initial investment back at the end of the CD term.

• Predictable Returns

CDs provide fixed interest rates for a particular period, so you can be clear on how much interest you will earn. This sense of predictability can be attractive to those who prefer safe and consistent returns.

• Short-Term or Long-Term flexibility

CDs come with various term lengths, ranging from a few months (short-term) to several years (long-term).

For beginner-level investors who may not want to commit to long-term investments, shorter-term CDs are better. They offer an opportunity to earn higher interest rates without locking in funds for an extended period.

Otherwise, you can just go ahead with long-term CDs that may prove to be beneficial based on your specific goals.

• Limited Liquidity

One downside of CDs is their limited liquidity as you cannot easily access them without paying an early withdrawal penalty.

For beginner-level investors who need an emergency fund or don’t have specific financial needs, this lack of flexibility can be a downturn.

• Lower Returns

Even though CDs offer stable returns, the trade-off is that the interest rates are generally lower, especially when compared to other investment options like stocks or mutual funds.

For investors seeking higher returns or to mitigate inflation, CDs are not the most suitable choice.

Retirement Accounts

If you have an employer-sponsored retirement plan, it should be your top priority for investing your money. This is particularly beneficial if your company offers a matching contribution.

Retirement accounts, such as Individual Retirement Accounts (IRAs) and 401(k)s, offer significant tax benefits in the U.S.

In the UK, you can get access to workplace pensions or Self-Invested Pension Plans (SIPPs).

In Canada, you have a Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA).

In Australia, Superannuation and Self-Managed Super Funds (SMSF) are the retirement accounts for individuals.

In Germany, there are Riester-Rente and Betriebliche Altersvorsorge (BAV).

In Japan, the retirement accounts are Employees’ Pension Insurance (Kosei Nenkin) and National Pension (Kokumin Nenkin).

Like this, each country has its very own retirement accounts that are the best option to begin investing.

Now let us have a look at the important aspects of retirement accounts and how they are beneficial for beginners.

• Tax Advantages

Retirement accounts offer tax-deferred growth, meaning you won’t pay taxes on the contributions and earnings until you withdraw.

Something like Roth retirement accounts, on the other hand, allow for tax-free withdrawals in retirement. This is because the contributions are made with after-tax money from the employees.

• Automatic Contributions

In general, Retirement accounts allow automatic contributions. This aspect can help beginner-level investors develop consistent saving and investing habits.

Regular contributions can add up over time and benefit from compound interest, even if they look insignificant right now.

• Diversification

Retirement accounts typically offer a wide range of investment opportunities for investors, which include:
— Funds
— Index Funds
— Exchange-Traded Funds (ETFs)
— Other securities

Such diversification can assist in mitigating the risk involved and provide exposure to various asset classes.

• Long-Term Horizon

Retirement accounts are designed in such a way that they are beneficial if used for long-term investing. This helps them to stay in line with the investment strategy of buying and holding assets for extended periods.

Beginner-level investors can benefit from this long-term approach as it allows investments more time to grow.

Furthermore, long-term investment strategies allow investment assets to recover from market fluctuations.

• Employer Contributions

If you have access to something like a 401(k) account offered by your employer, they may offer matching contributions. This is a kind of free money added to your retirement savings, which would be extremely advantageous.

If you take advantage of employer matching your contributions, then it can significantly boost your retirement savings.

Nonetheless, it’s important for beginner investors to understand investing basics like risk tolerance and asset allocation.

• Restriction on early withdrawal

Even though retirement accounts come with great benefits, they are meant to be used for long-term goals. Because of that reason, they generally have penalties for early withdrawals before reaching retirement age.

Just like any other investment, it’s crucial to consider your financial goals and consult with a financial advisor if necessary.

Money Market Accounts

A money market account (MMA) is another low-risk alternative, which is similar to a savings account. But money market accounts are known to come with a higher APY.

It provides added advantages, including the ability to access funds using a debit card or checks when required.

This makes a money market account a secure choice for saving with the potential for better returns.

Let us have a look at some of the important aspects of money market accounts.

• Low Risk

Money Market Accounts (MMAs) also come under the category of low-risk investments. This makes them suitable for those who want to preserve their capital and avoid significant fluctuations in their account balance.

Generally, they are backed by stable financial institutions and offer insurance (up to a certain limit). This makes money market accounts come with an added layer of security for the investors

• Higher APY

Compared to savings accounts, MMAs come with higher APYs, which means your money can grow faster over time.

Therefore, MMAs can be a good option for beginner-level investors while providing better returns on your savings.

• Liquidity

While MMAs have some restrictions on withdrawals, they are still more liquid than long-term investments, specially compared to investments such as certificates of deposit (CDs) or fixed deposits (FDs).

This means you can access your funds in a faster way without locking them up for extended periods.

Many accounts offer features such as check-writing and debit cards, which is not common with most other investments. This provides you with the flexibility to withdraw money for emergencies or other purposes without facing penalties.

• Diversification

For beginner-level investors, diversification is crucial. By adding a money market account to your investment portfolio, you can balance risk and diversify your holdings.

• Easy to Open

In general, MMAs are generally simple to open, and many financial institutions offer them with low or no minimum balance requirements. This accessibility makes it easier for beginners to start saving and investing.

• Limitations

MMAs may have limitations on the number of transactions per month.

At the same time, the interest rates offered with MMAs can be subject to change based on market conditions.

Mutual Funds

Mutual funds pool money from various investors to purchase a diversified portfolio of assets. These pooled funds are managed by a professional fund manager, which is a professional in these aspects.

This approach allows you to spread your investments across various assets, reducing the risk associated with lesser diversification.

In your younger years, mutual funds should have a higher allocation towards stocks, which are more volatile. Even though they are volatile, they offer greater long-term growth potential based on your risk tolerance.

As you approach retirement, the fund’s investment mix should shift towards a higher proportion of bonds, which are less risky. Even though they provide less returns, they provide a stable income during retirement.

Target-date mutual funds are particularly useful in this context, as they are designed to align with your retirement date. They will emphasize stocks while you’re young and gradually transition to bonds as you approach your retirement age.

Index Funds

Index funds work in a way that is similar to mutual funds, with a notable difference in their investment strategy.

Rather than a fund manager making decisions on where to invest, index funds follow a specific market index and invests accordingly. For instance, an S&P 500 index fund would invest in the stocks listed in this market index. This would be comprising approximately 500 top-performing U.S. companies.

Some index funds may have a minimum investment requirement. Certain well-known brokerage platforms are known to require a lot higher minimum requirements.

Exchange-Traded Funds

Exchange-traded funds, also known as ETFs, are similar to index funds as they follow specific market indices like the S&P 500.

Anyhow, the key difference lies in the way ETFs are bought and sold, similar to individual stocks on a stock exchange. Investors can purchase ETFs at fluctuating share prices throughout the day.

On par with mutual funds, ETFs are usually more cost-effective both in terms of purchase and management fees. With some brokerage firms, you may even get access to ETFs with $0 commission.

Bottom Line

As a beginner-level investor, it is wise to start with investments that involve a lower level of risk, unless you have a trusted financial advisor for you.

The assets that best suit your needs can only be determined through a thorough evaluation of your individual circumstances.

Over the years, I have helped numerous individuals achieve financial independence by addressing their unique investment needs.

If you are looking to invest as an expat or high-net-worth individual, which is what I specialize in, you can email me (advice@adamfayed.com) or WhatsApp (+44-7393-450-837).

This includes if you are looking for a second opinion or alternative investments.

Some of the facts might change from the time of writing, and nothing written here is financial, legal, tax or any kind of individual advice, nor a solicitation to invest.

Adam is an internationally recognised author on financial matters with over 830million answer views on Quora, a widely sold book on Amazon, and a contributor on Forbes.