Investing your hard-earned money is an important decision that requires research and planning. As a beginner, it can be overwhelming trying to choose investment strategies that match your financial goals and risk tolerance.
This comprehensive guide outlines the top 10 investing strategies suitable for beginners. It compares key factors like risk level, potential returns, investment timeframe and ease of entry across popular options like stocks, ETFs, mutual funds, and more. Read on to find the ideal approaches to grow your wealth. Investment Strategies for Beginners
Overview of Top 10 Beginner Investment Strategies
| Investment Type | Description |
| Savings Accounts | Accounts offering modest interest rates with no risk to your principal investment amount. |
| Certificates of Deposit (CDs) | Low-risk savings certificates issued by banks for a fixed period with guaranteed returns. |
| Money Market Funds | Mutual funds investing in short-term debt instruments like T-bills and commercial paper. |
| Municipal Bonds | Debt securities issued by local governments to fund projects and services. |
| Index Funds | Funds tracking market indexes like the S&P 500 for broad market exposure. |
| Target Date Funds | Mutual funds with pre-set investment mixes adjusting automatically as you near retirement. |
| Blue Chip Stocks | Shares of large, reputable companies with consistent earnings and dividends. |
| Dividend Stocks | Stocks generating steady income from dividend payouts in addition to potential share price gains. |
| ETFs (Exchange Traded Funds) | Baskets of securities like index funds trading on stock exchanges. |
| REITs (Real Estate Investment Trusts) | Companies owning and operating real estate assets that trade on major exchanges. |
Now that you have an overview of the most beginner-friendly investing options, let’s explore each strategy in more detail.
1. Savings Accounts
Savings accounts offered by banks and credit unions provide new investors a completely risk-free way to earn modest interest on spare cash. The FDIC insures traditional savings accounts for up to $250,000 per depositor, per insured bank.
Key Features:
- Very low risk – Your principal deposit amount does not fluctuate.
- Liquid – Access your money anytime without penalties.
- Low minimum deposits – Many savings accounts offer no minimum or very low opening deposit requirements.
- Modest returns – Interest rates vary but generally sit below 1% as of late 2022.
Saving accounts suit first-time investors wanting to build an easily-accessible cash reserve as part of an emergency fund before venturing into riskier strategies. The liquidity and very low-risk profile make them an ideal starting point for novice investors new to managing money.
2. Certificates of Deposit (Investment Strategies for Beginners)
Certificates of deposit (CDs) offered by commercial banks provide fixed returns over set periods, usually between 3 months and 5 years. The bank pays a guaranteed, predetermined interest rate for the CD’s duration once you deposit the minimum funds to purchase one.
In exchange for keeping your money locked up in the CD over its term, you earn higher interest than a regular savings account. Know that withdrawing early results in penalties—you forfeit a number of months’ worth of interest.
Key Features:
- Low risk – CDs guarantee your rate of return over its term.
- Fixed, predictable returns – Interest rates on 3-months to 5-year CDs range from 0.50% up to around 3.00% APY currently.
- FDIC insured – Principal up to $250,000 per depositor, per bank is protected.
- Early withdrawal penalties apply – Expect to pay 1-6 months’ worth of interest to cash out before maturity.
CDs appeal to first-time investors prioritizing safety of principal over liquidity and higher returns. When starting out, you can ladder CDs with staggered maturity dates to access some funds each year if needed.
3. Money Market Funds
Money market mutual funds invest in highly liquid, low-risk securities like commercial paper, certificates of deposit, and short-term Treasury bills. Instead of fixed returns though, money market funds fluctuate in value.
Key Features:
- Lowest risk mutual fund option – Principal values have extremely low volatility.
- Daily liquidity – You can write checks or transfer money at any time without penalties.
- Typical returns between 0.50% to 1.50% as of 2022 depending on interest rate environment.
- Not FDIC insured, but considered very safe – Only 2 money market funds have ever “broken the buck” with losses since 1971.
For first-time or wary investors, money market funds offer excellent stability, daily access to your money, and returns that slightly exceed savings accounts. The ability to write checks makes them work well like bank checking accounts too.
4. Municipal Bonds
Municipal bonds (or “munis”) are debt securities local city and state governments issue to fund infrastructure projects like roads, schools, hospitals and other public works. These bonds pay periodic interest exempt from federal taxes and sometimes state and local taxes too.
Key Features:
- Relatively low risk – Historically, munis have had lower default rates than corporate bonds.
- Regular interest payments – Terms range from 1 to 30+ years for ‘muni’ bonds.
- Federal tax-exempt – No federal taxes applied to interest earned for buyers in that municipality.
- State tax exemption – No state taxes either if you live in the issuing locality.
- Yields ranging 2-4% generally.
Municipal bonds offer beginners a relatively safe fixed income stream at yields exceeding savings products. Getting exposure to public projects in your locality also appeals to certain investors. Those in high tax brackets benefit most from the tax perks.
5. Index Funds
Index mutual funds and ETFs aim to mimic the performance of market benchmarks like the S&P 500 rather than beat them. They hold the same securities as the index they track in similar weightings.
Key Features:
- Broad diversification – Exposure to 500 large US companies in a S&P 500 Index fund, for instance.
- Low costs – Index funds do not require extensive active management and overhead.
- Market returns – Closely match overall gains/losses for the index.
- Low initial buy-ins – Many brokerages offer no minimum purchases on certain index funds.
Index funds reduce risks for first-time investors through instant diversification across entire markets. Tracking indexes eliminates the skill needed to pick individual stocks that beat the markets. Hands-off index investing makes this a top set-it-and-forget-it choice.
6. Target Date Funds
Target date funds offer beginners a highly diversified, professionally managed portfolio aligned to a chosen retirement timeframe. They adjust their asset mix automatically, holding more stocks early on for growth then shifting to more conservative bonds as the target year approaches.
Key Features:
- Broad, automated diversification suited to time horizon.
- Professional oversight of asset mix as you near retirement.
- Average returns historically in line with markets.
- Low initial investments – Many target date funds have no minimum buy-in.
- Higher expense ratios around 0.75% compared to index funds.
Target date funds enable first-time investors to own a personalized, diversified portfolio matching their retirement plans with no expertise needed to select investments. The ‘set it and forget it’ ease makes target date funds very popular beginner choices for retirement planning.
7. Blue Chip Stocks
Blue chip stocks refer companies recognized as industry leaders with strong public brands, decades of successful operations and consistent financial performance. Examples include iconic names like Disney, Microsoft, IBM and Procter & Gamble.
Key Features:
- Lower volatility – Share prices tend to fluctuate less than smaller companies.
- Reputable history – Long track records of steady growth and profits across economic cycles.
- Dividend payments – Most blue chips issue regular shareholder payouts.
- Prone to some losses – Share prices ultimately correlate strongly to overall market direction.
The sheer size and consumer dominance of blue chip companies inspires investor confidence. While generally less prone to extreme stock drops, buying individual companies still raises risks for first-timers compared to diversified funds.
8. Dividend Stocks
Companies listed on the S&P 500 and other indexes issue regular cash payments known as dividends based on quarterly earnings and outlook. Historically, dividends account for 30-40% of total stock market returns.
Key Features:
- Reliable income – Dividends get paid regularly as long as company stays profitable.
- Share price gains too – Solid dividend-paying stocks tend to demonstrate sustained growth overall.
- 2-6%+ dividend yields based on stock/industry averages.
- Risks from individual stocks – Particular companies can cut or suspend dividends in lean times.
Dividend stocks suit investors wanting recurring income from their holdings plus potential share price upside over time. Starting out, consider diversified ETFs tracking indexes focused on US dividend-paying companies.
9. ETFs (Exchange Traded Funds)
Like mutual funds, ETFs contain bundles of stocks tracking various indexes, sectors and commodities. Unlike mutual funds though, ETFs trade actively on stock exchanges just like regular company shares. This gives them unique tax advantages.
Key Features:
- Diversification – Exposure to many securities through one ticker purchase.
- Index tracking – Most ETFs map to popular benchmarks like the S&P 500.
- Lower costs – Fund oversight is minimal since ETFs are passively managed.
- Trading flexibility – Buy/sell anytime during exchange hours unlike mutual funds.
ETFs make excellent starter investments, providing built-in diversification, exposure to certain assets cheaper than buying them outright, and tax efficiency. Many online brokerages enable no-commission ETF purchases now too.
10. REITs (Real Estate Investment Trusts)
REITs are companies owning and managing real estate portfolios including office buildings, hospitals, apartment complexes, retail centers and other property types. Anyone can gain exposure to rental income, property appreciation and lucrative tax breaks through REITs trading on major stock exchanges.
Key Features:
- Solid dividends – REITs must pay 90% of taxable income as shareholder dividends.
- Professional management – Access to top real estate portfolio managers through publicly traded REITs.
- Tax advantages – 20% deduction applied towards REIT dividends for tax purposes.
- Diversification – Some REITs own hundreds of properties spread across regions.
Beginners stand to earn steady dividend income plus potential for share price gains over longer terms by investing in REITs. The high diversification reduces risks associated with owning just one property outright.
Now that you understand the unique risk, return and ease-of-entry considerations for the top 10 beginner investment strategies, how do you select the right approach for your needs?
Keep reading for a detailed comparison chart looking at key factors across savings vehicles, stocks, funds and alternative assets.
Comparison of Key Factors for Beginner Investment Strategies
| Risk Level | Potential Returns | Investment Time Frame | Ease of Entry | |
|---|---|---|---|---|
| Savings Accounts | Low | Low | Short Term | High |
| Certificates of Deposit | Low | Low | Short Term | High |
| Money Market Funds | Low | Low | Short Term | High |
| Municipal Bonds | Moderate | Low to Moderate | Medium to Long Term | High |
| Index Funds | Moderate | Moderate | Long Term | High |
| Target Date Funds | Moderate | Moderate | Long Term | High |
| Blue Chip Stocks | High | High | Long Term | Moderate |
| Dividend Stocks | High | Moderate to High | Long Term | Moderate |
| ETFs | Moderate | Moderate | Short, Medium or Long Term | High |
| REITs | Moderate to High | High | Long Term | Moderate |
Key Takeaways from Comparison Analysis:
- Savings vehicles like savings accounts, CDs and money market funds all offer novice investors principal protection with guaranteed, albeit modest returns. Limited risk paired with liquidity or short locking periods makes them ideal “starter” investments.
- Funds and ETFs enjoy high ownership rates among first-time investors thanks to broad diversification, affordable buy-ins, higher yield potential than savings over the long-term and mostly passive oversight requirements.
- Individual stocks have higher risks that may exceed beginner risk tolerances. However, many new investors pick a few names they closely follow like Apple, Disney, or household brands they feel confident can generate solid returns over 5-10+ year timeframes.
- Alternative assets like munis, REITs and dividend stocks provide additional diversity and income streams less correlated to stock/bond market fluctuations. But some come with higher fees, elongated holding periods and analysis requirements less suitable for absolute beginners.
Common Beginner Investor Mistakes to Avoid
While easy to grasp in theory, navigating markets for the first time leads all investors to make certain mistakes. Being aware of the most common pitfalls listed below helps you steer clear of them.
- Not defining your timelines and return needs – Having clear targets for how much money you want to earn over specific periods ensures you pick suitable savings vehicles, stocks and funds to achieve those outcomes. Don’t just blindly follow trends or tips.
- Overlooking fees and taxes – Things like exchange fees, account maintenance fees, transaction fees and various taxes seem “small” but eat into your net returns substantially over years.
- Trying to “time the market” – Even professionals have enormous difficulty predicting short-term market tops and bottoms to make timely buys/sells. Stay invested through ups and downs if investing for longer terms.
- Lacking diversification – Portfolios overly concentrated in just one sector or asset class expose you to more extreme losses when those areas inevitably fluctuate downwards for periods.
- Letting emotions override plans – Irrational exuberance when markets rise for years leads to buying high, while market plunges produce panicked selling low. Stick to your strategy.
- Chasing unattainable returns – Everyone wants big, fast stock gains but try to remain realistic about historical market return rates for sane comparisons.
- Underestimating taxes – Earnings and account types all have differing tax implications. Understand how interest income, dividends and capital gains get treated at tax time.
Now that you know how to pick starter investments suited to your needs and avoid common mishaps, let’s wrap up with some key questions beginner investors often ask.
FAQs on Getting Started Investing as a Beginner
What is the best investment for beginners in their 20’s?
Types: Index funds, target date funds
Reasons: Offer instant diversification, low buy-ins, high growth potential over long terms still ahead for 20-somethings to ride out inevitable market fluctuations until older.
What return rate is realistic for a beginner to expect?
S&P 500 historical average returns sit between 7% to 10% over decades. Subtract fees, taxes and inflation, most investors should set 5-8% annualized return expectations starting out.
How much money do you need to start investing?
Many online brokers offer commission-free trades on certain funds and stocks now. This allows minimum investments as low as the $1 it takes to buy a single share of a given company stock or ETF. Open with what you can afford then keep contributing over time.
What percentage of income should go towards investments?
Aim to invest 10-15% of your gross yearly household income. Boost this during peak earning years or whenever possible. Automate transfers from your paychecks if necessary to enforce consistent investing habit month after month.
When is the best time of day or year start investing?
Markets move randomly, making precise timing impossible. The earlier in life you invest money you won’t need for 5+ years the better thanks to the power of compound interest over long time horizons. Invest spare cash as soon as you have it instead of overthinking perfect entry points!
Key Takeaways on Getting Started Investing:
- Seek low buy-in, diverse funds like index and target date ETFs/mutual funds best suited for beginners. Consider blue chips and a few dividend payers once you know basics.
- Expect average annual returns between 5% to 8% accounting for fees, taxes and inflation from historical benchmarks.
- Automate recurring transfers from your income, building up to investing 10% to 15% a year working up towards maxing out annual retirement contribution limits through vehicles like 401(k)s and Roth IRAs long-term.
- Don’t overthink timing or wait for a mythical “best” entry point. Market movements are unpredictable. Invest for long run growth goals.
With the right realistic return expectations, automated investing habits, diversity across asset types and watchful avoidance of common beginner missteps, you can confidently enter markets and secure your financial future.