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There’s no denying that investing can be confusing and even intimidating for beginners. But as the saying goes, the longest journey begins with a single step. The question many have is, what should that first step be?
Popular online financial personality Anthony O’Neal aims to answer that question by offering a series of five basic strategies on his website. While targeted at beginning investors, they can help anyone begin to build a financial foundation. Here’s a look at what O’Neal has to say and how his suggestions can help you.
Open a Retirement Account
O’Neal sees retirement accounts as the foundation of any financial plan. Whether it’s an IRA, a 401(k) or some other type of retirement account, you’ll benefit in multiple ways from opening one.
For starters, you’ll get a tax deduction on most contributions to traditional retirement plans, and your money will grow tax-deferred. If you open a Roth account, you won’t get a tax deduction, but your distributions will be entirely tax-free.
A 401(k) plan provides the added benefits of higher contribution limits and employer matching contributions, which can rapidly boost your account value.
Retirement accounts are meant for long-term investing. The IRS imposes a 10% penalty on most withdrawals before age 59 ½, but that can actually work to your advantage. With less temptation to draw money out of the account, you’ll likely end up with a much higher retirement nest egg.
Learn About Compound Interest
Compound interest refers to the process of earning additional interest on money you’ve already earned. Over time, compound interest can do remarkable things, multiplying your account value beyond what you might imagine.
Imagine, for example, that you contribute $300 per month to a retirement account earning 8% annual interest, starting at age 25 and withdrawing the money in retirement at age 65.
Over those 40 years, the $144,000 you put into the account would be worth just over $1 million. But if you just earned simple interest on that money, instead of compounding it over time, you’d end up with just $373,920, or over $600,000 less than if you had let that money compound over time.
Thanks!
Start With Blue-Chip Stocks
As far as actual investments go, O’Neal suggests beginners start with blue-chip stocks. Blue-chip stocks are leaders in their industries with long-term track records, consistent dividend payments and multi-billion-dollar market capitalizations. In other words, they aren’t speculative, fly-by-night companies that boom and bust.
While they might not be exciting, most blue-chip stocks are likely to be around for the long haul, making them a great way for beginning investors to get their feet wet. Some of the blue-chip stocks O’Neal recommends include Oracle, Costco, Wells Fargo and JPMorgan Chase.
Use Robo-Advisors
A robo-advisor, in O’Neal’s view, is a way to have “a smart money manager right in your pocket.” Robo-advisors use algorithms to determine an appropriate portfolio of ETFs based on an investor’s self-reported objectives and risk tolerance. Most charge relatively small fees of 0.25% to 0.50% of assets per year and have small minimum investment requirements.
Some of the robo-advisors endorsed by O’Neal include M1 Finance, Betterment, Wealthfront and Merrill Guided.
Avoid Common Beginner Mistakes
Many beginning investors get in their own way and make mistakes that damage their investment returns. O’Neal cites four top investment mistakes to watch out for:
- Emotional trading
- Not having a clear plan
- Poor diversification
- Market timing
According to O’Neal, research shows that unnecessary trading or information overload are the way that most investors damage their portfolios. Ultimately, it’s your investment strategy that determines most of your success, not correctly timing the market. One study cited by O’Neal showed that 94% of portfolio returns came from investment strategy rather than successful market timing.
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