Before you’ve dipped your toe into market waters, the idea of pooling your money into an investment portfolio might feel intimidating. Luckily, investing doesn’t have to be all or nothing: You can start small — even just a few dollars — and grow your portfolio as you get more comfortable. All it takes is making a few initial steps, and soon enough, you’ll be navigating the investment world swimmingly. Wondering what those first steps are, exactly? Read on for one, two and three.
Step 1: Secure your knowledge of securities.
You wouldn’t spend cash on something if you didn’t know what you were buying, so before you fund an investment portfolio, you should know what your money is actually going toward. First off, all types of investment vehicles that provide proof of ownership are often referred to as securities.
As a newer investor, you will likely start by investing in the following basic securities (rather than something physical, such as gold and real estate, or security derivatives like options):
Stocks: When you invest in the stock of a publicly traded company, you purchase a share of ownership in that company. Stocks are sometimes referred to as “equities” Why? Because buying a share of a company's stock implies that you have equity (i.e. ownership) in the company. They’re a tradeable asset, meaning you can buy and sell stocks on an exchange like the New York Stock Exchange.
Bonds: You can think of bonds as a loan agreement between you and the bond issuer. When you invest in a bond, the issuer receives the money and in exchange you are paid interest until the bond reaches maturity. At that point, the issuer pays you back your initial investment. Bonds are considered a fixed-income security.
Mutual funds: If you invest in a mutual fund, you might invest in stocks and bonds at the same time. That’s because mutual funds are baskets of securities that pool together money of investors to invest in many underlying securities. So if you own a share of a mutual fund, you own a fraction of all the securities within the fund. Typically, these kinds are actively managed by a manager who picks the securities within the fund. Mutual funds are tradeable, but only post their price once per day.
ETFs: Exchange-traded funds (ETFs) are similar to mutual funds in that they are baskets of securities. But they trade throughout the day on an exchange, much like a stock. Many ETFs are passively managed — meaning they aim to replicate the performance of an index, like the S&P 500.
Step 2: Get to know portfolio management.
Now that you know the basics of what goes into an investment portfolio, it’s important to understand a few critical concepts that can help keep yours in tip-top shape.
The first one is called diversification. It’s a risk management strategy that aims to reduce overexposure to one security or market segment by investing in a variety of different types of securities and sectors.
Next, it’s a good idea to wrap your head around rebalancing, which is a necessity every so often to ensure the balance of the securities within your portfolio stays in line with your goals. Wondering why? Even if you build a diversified portfolio when you initially start investing, some securities may make greater returns than others — gradually making up a larger percentage of your overall investments.
With diversification and portfolio balance top-of-mind, you are better equipped to make more strategic and thoughtful investments. And remember, the inner makeup of your portfolio doesn’t always have to stay the same and should change as your goals and risk tolerance shift. For example, you might choose to start off with a low-risk portfolio of mainly fixed-income securities, and then begin to add other securities like stocks and ETFs — maybe even trying your hand at options — as you gain confidence in the market.
Step 3: Pick a management style to reach your financial goals.
With a solid understanding of what goes into investing and how to keep your portfolio in good shape, it’s time to choose an approach that works for you. It comes down to one big question: Do you want to do it yourself, pick your own securities and maintain your portfolio balance over time? Or would you prefer taking a more hands-off route, in which a robo-advisor chooses investments and automatically manages your portfolio for you?
The good news is that we offer investment choices at Ally Invest. Whether you want to put your knowledge to work in a Self-Directed Trading account or let our technology and human experts guide your strategy through a Robo Portfolio, you can get started investing your way in just minutes with no fees.
Don’t wait to make your move in the market.
For many, the hardest part of investing is getting started because it can be nerve-wracking to put your money toward something you don’t know a lot about. But starting with as much time as you can is key, as time is an important aspect of compounding interest. Take a look at what the power of compounding interest can do for your portfolio:
Now that you have some of the basics down, if you take the time to put them into practice, you’ll be several steps ahead of where you were. Once you take that first step of opening account, start small and put your newfound knowledge into action — and watch the power of compounding come to life. Now, enjoy a little story:
Brian Overby is a widely sought-after resource for his option trading knowledge and market insights. He has contributed to numerous articles for the Wall Street Journal, Reuters, and Bloomberg, and has had frequent appearances on CNBC Fast Money and Fox Business News. A veteran of the financial industry since 1992, Brian continually seeks to improve the understanding of the retail investor. He has given thousands of option trading seminars worldwide, written hundreds of articles on investing, and is the author of the popular trading resource The Options Playbook. Brian was a senior staff instructor for the Chicago Board Options Exchange (CBOE) and managed the training department for one of the world’s largest market makers, Knight Trading Group.