What to Know Before You Make Your First Investment

Set realistic expectations by understanding investing basics

Investor tracking first investments on a financial report
Photo: Avalon_Studio / Getty Images

Socrates said, "To know thyself is the beginning of wisdom." Knowing yourself should also be the starting point before you make your first investment. Next, you have to understand investing basics so you can combine investments to achieve the right combination of safety, income, and growth—known as building a portfolio.

Only once you know yourself and understand the basics of investing can you pick the perfect investment for you. In a perfect world, the perfect investment would be safe, provide income, and grow. It is the unicorn of investing that everyone is seeking. Unfortunately, it doesn't exist, but there are investments that will be a benefit to you.

What's Most Important to You?

The first step to investing is to determine which of the following results are most important to you at this stage of your life:

  • Safety
  • Growth
  • Income

If you are just starting your adult financial life and have no emergency fund, you probably want to focus on safety first. If you have a cushion saved up, and you are investing for retirement 20 years or more down the road, growth would be most important. If you're about to retire, you'll want to focus on income.

Of course, the ideal investment would provide them all. It would be completely safe, it would provide you with a sufficient level of income to keep pace with inflation, and your principal would grow.

That perfect investment does not exist. Instead, think of the investing world like a triangle. As you move toward one corner of the triangle, you move away from the other two.

If you want a safe investment, you have to be willing to accept less income and growth—as defined by the market value of the investment. If you want an investment that produces a consistent income, you have to understand that it will not grow much. If you want an investment that grows, you have to be willing to accept less safety.

Determine Your Time Horizon

Your time horizon is when you will potentially need the sum you are investing for other uses. These uses—known as goals—include saving for education, saving to buy a home, and saving for retirement.

  • Short-term: money you will potentially need within one to two years. For short-term money, you should choose safe investments like savings accounts and certificates of deposits (CDs) offered by most banks and credit unions.
  • Mid-term: money you will potentially need within three to nine years. For mid-term money, consider a balanced fund.
  • Long-term: money you will not need for 10+ years. For long-term money, choose growth investments, like index mutual funds that invest in stocks.

Keep in mind, even if you will need income from your investments within a few years, your big-picture time horizon is your life expectancy, so a portion of your investments would still be allocated toward growth.

To invest with discipline, you must understand what investments provide, which results, and combine them in the right proportions. Like cooking, if you know what you are doing when you put the ingredients together in the right proportion, you get an outcome with which you are happy. Once you have the recipe right, all you have to do is follow it.

Get Started

You'll need to decide if you are comfortable investing yourself, or if you should seek professional guidance. Your choices are:

  • Do it yourself.
  • Do it with someone to guide you.
  • Let someone do it for you.

Many people are comfortable with setting up accounts online or through their employer's retirement plan. The kits provided by employer plans usually provide excellent educational information and will walk you through the actions required to establish an account and start putting money into investments. You can even read books and listen to investing podcasts to learn more.

Some of you will want some hand-holding. It is where the services of a good financial advisor can be quite valuable. An advisor or financial planner can help you determine what types of accounts to use, how much to save, what types of insurance you need, and what investments to use. When you find a good financial advisor, you'll also find they will teach you about investing, so you learn as you go.

Unless you have advanced knowledge and experience as an investor, you should probably seek help. Statistically, individual investors will find it hard to create sustainable, tax-efficient growth without the help of a professional.

Your retirement savings isn't a place for financial experimentation. If you want to learn how markets work and start investing, use a virtual account that trades with fake money. Later, you could commit a small amount of real money to an account outside of your retirement funds.

Frequently Asked Questions (FAQs)

What steps do you need to take to make your first investment?

Aside from the considerations mentioned above, the first step you need to take to invest is to gain access to markets. One of the simplest ways to do that is to open a brokerage account. Once your brokerage account is open, you need to link an existing bank account so that you can fund your brokerage account. After you transfer in funds, you can use those funds to invest in stocks, bonds, ETFs, and more.

How do you buy your first investment property?

There are several methods of financing an investment property when you can't buy it outright. You can apply for a conventional loan. You can also look for a special, short-term loan for flipping houses known as a "fix-and-flip loan." If you own a home that you live in, you can use your equity in your home, such as through a home equity line of credit or a cash-out refinance.

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