Investment Strategies for Beginners

It’s never too early to start saving – and it’s never too late. That means no matter what your age or where you are in your career, if you haven’t started investing, now is the time. While there’s no “right” path to investment success, many new investors find a hierarchy helpful to decide how to invest their money. So here are some tips for beginners that shows how to potentially maximize tax benefits as you invest.

Step 1: Start with your 401(k)

Many people start with a 401(k) as part of a benefits package at work since those funds are considered “pre-tax” dollars, which means you don’t pay income tax on them.

Even if you don’t want to contribute the maximum amount you’re allowed, you may want to deposit at least up to your company’s “match.” This means your workplace offers to match a percentage of the amount you have contributed. For example, they might match $0.50 of every dollar you put in, up to 5% of your salary. However, it’s important to note that this money should be kept there for the long haul – if you withdraw funds before age 59 ½, you’ll owe a penalty plus the taxes you would ordinarily pay (except in certain circumstances).

Step 2: Consider an IRA.

If you’re able to invest in addition to a 401k, you could consider an individual retirement account (IRA).

There are two kinds of IRAs: A traditional IRA allows you to deposit money tax-free, much like a 401(k) plan, and then you will pay tax when you eventually make withdrawals. By contrast, a Roth IRA requires you to pay the taxes today and then withdraw your funds tax-free when you reach retirement age. That can be a benefit if you believe you may be in a lower tax bracket when you retire than you are today. Both types of IRAs are subject to deposit limits (in 2022 that limit is $6,000 if you are under age 50 while workers age 50 and older can put in an additional $1,000), and the Roth IRA also has income limits based on your tax filing status.

Since you’ve already paid taxes on the money in a Roth IRA, you can withdraw it any time, but with a traditional IRA, you’ll again have to wait until you’re at least 59 ½ to make withdrawals without incurring penalties.

Step 3: Choose other investment vehicles.

Another option is to invest in the stock market. While these investments don’t offer any tax savings, you can remove your money penalty-free any time you choose – however, you will be subject to capital gains tax on any gains you realize.

Common investment types include:

• Stocks, which are like buying shares in an individual company
• Bonds, which are like a “loan” you give to the government or a corporation that promises to pay you back with interest at a specific time
• Index funds, which aim to “match” the performance of the market
• Mutual funds, which are essentially a basket of stocks that an investment manager picks with the aim of outperforming the market.

The decision about how much into the stock market and where you want to invest should be based on factors such as:

• Your risk tolerance, or how equipped you are to deal with market highs and lows. Often the more money you could potentially make from an investment, the more you have to potentially lose.

• Your time horizon, or how long you have until you need to tap your investments. The longer your time horizon, the more volatility you may be able to absorb because if the market turns down, you’ll have more time to recoup your investment.
• Diversification: Buying investment products in various industries or categories can be wise as one sector, like retail, might temporarily go down, while another, technology for example, is rising.
• Fees: Watch for the fees you pay on funds or other investments, as they can quickly eat up your returns depending on market performance.

General investing tips:

• Think long-term: The most successful investors put their money in the market and leave it…what’s called buy and hold. However, that means it’s not a place to park funds you need in the short-term – a good rule of thumb is not to invest money you’ll need within the next five years at a minimum.
• Have a cash cushion: Therefore it’s wise to stash some emergency cash that’s readily available for unexpected bills. A savings account is a great way to ensure it’s at the ready when you need it, without incurring penalties or needing to pay capital gains.
• Don’t worry about timing the market. You’ve probably heard the saying, “Buy low, sell high.” And of course, wouldn’t that be ideal? But even the savviest advisors know it’s impossible to time the market. The best time to invest is today – whether the market is up or down. In fact, many people might shy away from a down market, worried it might keep plunging. Yet that could be the best time to buy as you may be able to invest in specific stocks at a lower price.

If you’re interested in learning more about market conditions, be sure to check out our Market Commentaries here – a new one is posted each week. Lastly, it should be noted that this blog post is for educational purpose only and is not considered tax or investing advice.  For more information on investment strategies, we at Valley Strong’s Retirement and Wealth Management Group are here to help you pursue your goals. Contact us today.