Each day, you step into your closet full of clothes to get dressed. Whether your style is classic, boho chic, athleisure, or Gorpcore (a.k.a. the new Normcore), you select pieces that fit that particular trend.
The fashion runway may feel miles away from Wall Street. But as it turns out, you can think of investing as similar to choosing what to wear. When you invest, you have a financial goal in mind and you purchase specific things — whether they’re stocks, bonds, or mutual funds — to help you attain it. That’s not wholly unlike buying a puffer coat and a fleece zip-up to create the perfect Gorpcore look.
Investments and clothing differ significantly, however, when it comes to what’s at stake. As Heidi Klum says on Project Runway, with fashion, one day you’re “in” and the next day, you’re “out.” But, typically, you want your investments to build long-term wealth and financial security.
When you’ve got some money set aside and are ready to play the market, here’s a primer to help you discover what style best suits you and your investment portfolio.
Stocks can be a good place to start.
Stocks — also called equities — are an essential building block of investing. (Consider them the “little black dress” of your portfolio.)
Companies issue shares of stock; investors buy and sell them. Owning stock means you own a percentage of the company.
Now, that doesn’t mean you get the same perks as a business’s CEO. (There’s no corner office with your name on it or a seven-figure annual bonus waiting in the wings.) But you do get a share of the company’s assets and earnings. So when a stock’s share price goes higher than what you paid for it, that’s money in your pocket (assuming you sell your shares).
Stocks can be risky, though. It’s just as easy to lose money as it is to make it if a stock’s price takes a nosedive.
Tens of thousands of stocks are available for you to invest in. Before you start throwing darts at the wall to pick a stock, however, think about your financial goals.
Stocks typically fall into two categories: growth and income. If you want to own stocks that go up in value, the growth route is the way to go. On the other hand, if you want stocks that offer a steady stream of income, you might prefer ones that pay dividends. (When a company pays dividends, it’s basically cutting off a slice of the profit pie and handing it straight to you.)
Once you’re clear on your goal, it’s time to purchase your stocks. The easiest way to do this, according to the Wall Street pros, is to go with what you know. In other words, invest in the companies that you know and spend money with.
If you can’t make it through the day without a morning frappe fix, for instance, you might research investing in companies that sell lattes or coffee beans. Or if you’re a sucker for name brand fashion, you might choose to look closely at a publicly traded clothing retailer instead.
Picking stocks is the hard part; buying them is easy. With Ally Invest, you can purchase stocks from your mobile device as easily as you upload your latest selfie to Instagram. However, fixing a mistake is not as easy as deleting the wrong photo from your feed. It’s best to do your research and carefully consider your stock purchase before you click any buttons. Remember, there is much more at stake with a stock trade than a few of your followers seeing a photo with bad lighting.
Move on to mutual funds.
It’s not a great idea to put all your money into stocks, however. If the market dips and your stocks follow suit (fashion pun intended), your portfolio could be left gasping for air. Mutual funds help you balance the risk and make it easy to diversify, which is a strategy of spreading investments across a number of different securities to reduce the risk of putting all your eggs in one basket.
When you invest in a mutual fund, you pool your money with other investors to buy shares of stock, bonds (more on these in a minute), and other securities. All these different investments are wrapped up in one neat package: a mutual fund.
But how to choose a mutual fund? That’s where you have to do your homework.
Different types of mutual funds exist. There are index funds, which track a market index (like the S&P 500); equity funds, which invest exclusively in stocks; and specialty funds, which follow certain sectors, like real estate or healthcare.
You likely wouldn’t buy a stock that’s on a losing streak and the same goes for mutual funds. Check out a fund’s performance for the last five to 10 years before you buy. Just as with any investment asset, past history doesn’t guarantee what a fund might do in the future, but it does give you an idea of what kind of return you can expect.
When you’re scoping out funds, see what assets they hold. Just like with fashion, you want your investments to complement one another, not clash, so make sure you’re spreading your dollars over different types of stocks, bonds, and other securities within the fund.
It’s easy to get caught up in the variety of fund choices — but don’t forget about cost. The easiest way to check the price tag on a mutual fund is to look at the expense ratio. This is an annual management fee the fund charges and is expressed as a percentage.
In 2017, the average expense ratio for an actively managed fund was 0.78 percent1. The lower the expense ratio, the more of your investment earnings you get to keep.
(And if you’re looking for a bargain on fees, check out exchange-traded funds. ETFs trade on an exchange like stocks but are a more diversified investment and tend to have lower expense ratios than traditional mutual funds.)
Cover your bases with bonds.
Why buy bonds? It’s simple. They bring stability to your portfolio by offering predictable income stream. (They’re the jeans and white t-shirt of the investing world — it’s hard to go wrong.) Bonds can help you avoid panic mode if stock prices drop.
Think of a bond as a loan you make to someone else, usually a corporation, a government agency, or municipality. That entity gets to use your money for a set period of time and then pays that money back to you with interest.
Numerous types of bonds are available to purchase. For example, there are U.S. Treasury bonds, mortgage bonds, municipal bonds, corporate bonds, and emerging market bonds. Bonds can be a great way to support local and state initiatives if that’s something you’re interested in. Your investment dollars might help to build a new school or fix those pothole-filled roads you’re tired of driving over every day on your way to work.
Two big factors for choosing bonds are maturity and yield. Maturity determines how long you have to wait to collect your original investment, plus the interest earned. Yield is the return on your investment. Buying bonds with different yields and maturities adds another layer of diversification. But if you want to keep it simple, you could always stick with a bond fund or bond ETF.
Before you buy, be sure to check a bond’s rating. It can tell you how likely a company or a government agency is to make good on the money you’ve lent them.
Know your investment style.
Just like you build a wardrobe complete with pieces that reflect your personal style and life stage, you want to create a portfolio that takes into consideration your personal risk tolerance and financial goals. Go too risky with your investments and you could lose money. Play it too safe and you may curb your growth potential. Have some fun and take our Invest Animal Spirit Quiz to find more about your investing style.
If you’re still unsure which investments match up to your taste for risk, a professionally-managed portfolio, where the investment assets are picked for you, may be the right fit for you.