Investing is one of the most important topics for any new business owner. It builds up your asset base and will help you create future revenue streams. While the majority of people think that it is all about picking stocks, there are many other ways to invest that can benefit your business.
Investing for beginners is all about finding the right investments for your needs. Whether you are looking to boost your current income or become more profitable in the long run, investing can be your ticket there.
A robo-advisor
Maybe you’re on this page to eat your peas, so to speak: You know you’re supposed to invest, you’ve managed to scrape together a little bit of money to do so, but you would really rather wash your hands of the whole situation.
There’s good news: You largely can, thanks to robo-advisors. These services manage your investments for you using computer algorithms. Due to low overhead, they charge low fees relative to human investment managers — a robo-advisor typically costs 0.25% to 0.50% of your account balance per year, and many allow you to open an account with no minimum.
They’re a great way for beginners to get started investing because they often require very little money and they do most of the work for you. That’s not to say you shouldn’t keep eyes on your account — this is your money; you never want to be completely hands-off — but a robo-advisor will do the heavy lifting.
And if you’re interested in learning how to invest, but you need a little help getting up to speed, robo-advisors can help there, too. It’s useful to see how the service constructs a portfolio and what investments are used. Some services also offer educational content and tools, and a few even allow you to customize your portfolio to a degree if you wish to experiment a bit in the future.
» Need help investing? Learn about robo-advisors
Index funds
Index funds are like mutual funds on autopilot: Rather than employing a professional manager to build and maintain the fund’s portfolio of investments, index funds track a market index.
A market index is a selection of investments that represent a portion of the market. For example, the S&P 500 is a market index that holds the stocks of roughly 500 of the largest companies in the U.S. An S&P 500 index fund would aim to mirror the performance of the S&P 500, buying the stocks in that index.
Because index funds take a passive approach to investing by tracking a market index rather than using professional portfolio management, they tend to carry lower expense ratios — a fee charged based on the amount you have invested — than mutual funds. But like mutual funds, investors in index funds are buying a chunk of the market in one transaction.
Index funds can have minimum investment requirements, but some brokerage firms, including Fidelity and Charles Schwab, offer a selection of index funds with no minimum. That means you can begin investing in an index fund for less than $100.
» Learn more: A beginner’s guide to index funds
A 401(k) or other employer retirement plan
If you have a 401(k) or another retirement plan at work, it’s very likely the first place you should put your money — especially if your company matches a portion of your contributions. That match is free money and a guaranteed return on your investment.
You can contribute up to $19,500 to a 401(k) in 2020 (or $26,000 if you’re 50 or older), but that doesn’t mean you have to contribute that much. The beauty of a 401(k) is that there typically isn’t an investment minimum.
That means you can start with as little as 1% of each paycheck, though it’s a good idea to aim for contributing at least as much as your employer match. For example, a common matching arrangement is 50% of the first 6% of your salary you contribute. To capture the full match in that scenario, you would have to contribute 6% of your salary each year. But you can work your way up to that over time.
When you elect to contribute to a 401(k), the money will go directly from your paycheck into the account without ever making it to your bank. Most 401(k) contributions are made pretax. Some 401(k)s today will place your funds by default in a target-date fund — more on those below — but you may have other choices. Here’s how to invest in your 401(k).
To sign up for your 401(k) or learn more about your specific plan, contact your HR department.
Exchange-traded funds (ETFs)
ETFs operate in many of the same ways as index funds: They typically track a market index and take a passive approach to investing. They also tend to have lower fees than mutual funds. Just like an index fund, you can buy an ETF that tracks a market index like the S&P 500.
The main difference between ETFs and index funds is that rather than carrying a minimum investment, ETFs are traded throughout the day and investors buy them for a share price, which like a stock price, can fluctuate. That share price is essentially the ETF’s investment minimum, and depending on the fund, it can range from under $100 to $300 or more.
Because ETFs are traded like stocks, brokers used to charge a commission to buy or sell them. The good news: Most brokers, including the ones on this list of the best ETF brokers, have dropped trading costs to $0 for ETFs. If you plan to regularly invest in an ETF — as many investors do, by making automatic investments each month or week — you should choose a commission-free ETF so you aren’t paying a commission each time.
» Learn more: ETFs for beginners
Target-date mutual funds
These are kind of like the robo-advisor of yore, though they’re still widely used and incredibly popular, especially in employer retirement plans. Target-date mutual funds are retirement investments that automatically invest with your estimated retirement year in mind.
Let’s back up a little and explain what a mutual fund is: essentially, a basket of investments. Investors buy a share in the fund and in doing so, they invest in all of the fund’s holdings with one transaction.
A professional manager typically chooses how the fund is invested, but there will be some kind of general theme: For example, a U.S. equity mutual fund will invest in U.S. stocks (also called equities).
A target-date mutual fund often holds a mix of stocks and bonds. If you plan to retire in 30 years, you could choose a target-date fund with 2050 in the name. That fund will initially hold mostly stocks since your retirement date is far away, and stock returns tend to be higher over the long term.
Over time, it will slowly shift some of your money toward bonds, following the general guideline that you want to take a bit less risk as you approach retirement.
» View the best brokers for mutual funds for beginners
Investment apps
Several investing apps target beginner investors.
One is Acorns, which rounds up your purchases on linked debit or credit cards and invests the change in a diversified portfolio of ETFs. On that end, it works like a robo-advisor, managing that portfolio for you. There is no minimum to open an Acorns account, and the service will start investing for you once you’ve accumulated at least $5 in round-ups. You can also make lump-sum deposits.
Acorns charges $1 a month for a standard investment account and $2 a month for an individual retirement account. Our unsolicited advice: Max out that IRA account before you start using the standard investment account — there are tax perks to the IRA that you don’t want to miss. (Learn more about IRAs here.)
Another app option is Stash, which helps teach beginner investors how to build their own portfolios out of ETFs and individual stocks. Stash carries just a $5 account minimum and has a similar fee structure to Acorns, though balances that top $5,000 are charged 0.25% of that balance per year, rather than the flat fee.
Best app for automated investing
Betterment
- Minimum deposit and balanceMinimum deposit and balance requirements may vary depending on the investment vehicle selected. For Betterment Digital Investing, $0 minimum balance; Premium Investing requires a $100,000 minimum balance
- FeesFees may vary depending on the investment vehicle selected. For Betterment Digital Investing, 0.25% of your fund balance as an annual account fee; Premium Investing has a 0.40% annual fee
- BonusUp to one year of free management service with a qualifying deposit within 45 days of signup. Valid only for new individual investment accounts with Betterment LLC
- Investment vehiclesRobo-advisor: Betterment Digital Investing IRA: Betterment Traditional, Roth and SEP IRAs 401(k): Betterment 401(k) for employers
- Investment optionsStocks, bonds, ETFs and cash
- Educational resourcesBetterment RetireGuide™ helps users plan for retirement
See our methodology, terms apply.
Pros
- $0 minimum deposit
- No trade or transfer fees
- Good for automated investing
- Customizes users’ portfolios around their financial goals, timeline and risk tolerance
- Users can assign specific investing goals (short- and long-term) to each portfolio and invest using different strategies (less and more risk)
- Quick and easy to set up account
- Able to sync external retirement accounts to your Betterment retirement goal so all your accounts are in one place
- Premium plan users get unlimited access to a financial advisor (otherwise, one-time advisor consultations cost a fee ranging from $199 to $299)
- Advanced features include automatic rebalancing, tax-saving strategies and socially responsible investing
- Betterment RetireGuide™ helps users plan for retirement
Cons
- 0.25% annual account fee
- 0.40% annual account fee for upgraded premium plan
- Premium plan requires $100,000 minimum balance
Who’s this for? Betterment is a pioneer in the robo-advising space, so it’s likely you’ve heard the name before. It’s a good choice for those who want to be hands-off with their investments, though more advanced investors have the option to customize through flexible portfolios.
The Betterment Portfolio is made up of low-cost, diversified ETFs. Users cannot buy individual stocks or invest in individual funds, so if that’s what you’re looking for, consider another app on this list.
There is no minimum balance required to invest with Betterment, and the annual account fee is a low 0.25% of your fund balance. Investors with a balance of $100,000 can upgrade to the premium plan, which gives you access to real-life financial advisors for an annual fee of 0.40% of your fund balance.
Betterment’s app is available to download for free in both the App Store (for iOS), where it has 4.8/5 stars, and on Google Play (for Android), where is has 4.6/5 stars at the time this article was written.
Acorns (Best app for micro-investing)
- Minimum deposit and balanceMinimum deposit and balance requirements may vary depending on the investment vehicle selected. No minimum required to open an account, $5 minimum to start investing
- FeesFees may vary depending on the investment vehicle selected. Monthly plans include: Personal ($3 per month) and Family ($5 per month)
- BonusNone
- Investment vehiclesRobo-advisor: Acorns Invest IRA: Acorns Later includes Traditional, Roth, SEP IRAs, 401(k) Rollover Investment accounts for kids: Acorns Early
- Investment optionsDiversified ETFs which include more than 7,000 stocks & bonds
- Educational resources“Money Basics” blog and Grow + CNBC website
See our methodology, terms apply.
Pros
- $0 minimum deposit to open an account
- Invests your spare change from everyday purchases
- Customizes users’ portfolios around their financial goals, timeline and risk tolerance
- Automatically rebalances portfolio
- Offers Acorns Sustainable Portfolios for ESG investing
- Access to educational articles and videos to learn about investing
Cons
- Monthly fee can be steep if you’re not investing much
- No bonus offered
- Investment options are limited
Who’s this for? Acorns is a financial app that gives you access to a robo-advisor, IRAs and even a checking account. It made our list because it’s a good choice for novice investors looking to start small through micro-investing.
Micro-investing simply means you’re investing small amounts of money in the market consistently so that over time your contributions add up. It’s a good strategy for newbies who want to dip their toe into the investing pool before diving all in.
Acorns allows users to micro-invest using the Acorns’ Round-Ups® feature, which takes users’ spare change and puts it into diversified ETFs. Users link their credit or debit card account to their Acorns account, and the app will do a sweep of the accounts when purchases are made to round up the costs to the nearest dollar and then invest the difference.
The spare change collected from your linked cards are set aside until you hit a $5 threshold, at which point is then transferred into your Acorns Invest account. According to Acorns’ website, the average user invests more than $30 per month through the Round-Ups feature.
You can also set up a recurring transfer (daily, weekly or monthly) from your linked bank account to your Acorns investment accounts starting at as little as $5 a month.
The Acorns Invests account is a robo-advisor, which suggests managed portfolios (made up of various ETFs) based on an investor’s risk level. Investors cannot buy or sell individual stocks through Acorns.
Acorns offers two plans:
- Personal plan for $3 per month: The Personal plan includes a checking account, investment account and retirement account.
- Family plan for $5 per month: The Family plan includes the three accounts that you get with the Personal plan, plus additional investment accounts for your kids.
While the Acorns Round-Ups feature is a great way to get started investing, it’s important to make sure you’re putting away enough each month to justify the fees. At $3 a month, the fee can quickly eat up a big chunk of your returns if you’re only investing a few bucks a month.
Acorn’s app is available to download for free in both the App Store (for iOS), where it has 4.7/5 stars, and on Google Play (for Android), where is has 4.3/5 stars at the time this article was written.
Disclosure: NBCUniversal and Comcast are investors in Acorns.
Conclusion
Investing is a rewarding hobby for those who have the patience and determination to learn the necessary skills. There are no shortcuts to becoming an excellent investor other than educating yourself. The best way to learn what works for successful investing is to do it.