Do you think it’s time to get into investing but don’t know where to start?
It’s completely fine — knowing where to park your money right now isn’t easy. With inflation running rampant and the stock market topsy-turvy, it can be quite hard to make the right call.
The amount of available investing information can be overwhelming. You might easily find yourself sifting through ill-advised investment picks and market news that’s always full of drama.
That’s why we’ve rounded up some of the best investment options for 2023 to help you protect your wealth and financial future.
But before looking at different investment options, let’s first see what could be your beginner investing strategy.
How to start investing for the first time?
Well, for starters, investing doesn’t have to be complicated or confusing. On the contrary, investing in your future might be one of the best long-term decisions you will ever make, especially if you’re a few decades from retirement.
So, if you think you’re ready to start investing in 2023, here are a few steps to consider before taking a deep dive:
Step #1: Make sure you have an emergency fund
Before you start investing, set aside some money in your rainy day a.k.a emergency fund, and keep it separately from the money you are planning to invest.
Investing is a long-term venture, and while it may look like it’s easy to get in and earn a lot of money within weeks or even days, it’s not how investing usually works.
Sometimes, when your investment is not doing great, you will have to wait for it to recover or sell it at a loss. It can happen that you’ll need money asap and won’t be able to wait through the downturn in your investment.
That’s why experts recommend that you have 3 to 6 months worth of expenses put aside in your emergency savings account before you start investing seriously in assets like stocks, bonds, precious metals, crypto, etc.
Here’s an example:
If you spend an average of $2,500 per month on housing and day-to-day expenses, your emergency fund should be around $7,500-$15,000.
But it’s better to put your emergency cash in a savings account that pays you some interest so you don’t lose too much money to inflation.
Because, if the inflation rate exceeds the interest earned on a savings, then you lose money.
It doesn’t mean, however, that you should stop growing your emergency fund after 6 months. It’s really up to you as you can choose to have up to 1 year of expenses saved up. In the end, your emergency budget is supposed to act as a “safety net” that will protect you if something happens to your primary source of income.
At the same time, you shouldn’t have too much money locked away and not working for you, because, as we learned in one of our previous spotlights, inflation slowly but surely reduces the value of money sitting in your savings account. So, in general 3-6 months of savings should be enough to protect you in emergency situations.
Now, once you’ve taken care of your emergency fund, it’s time to set up the budget you would like to invest.
Step #2: Consider your budget and investment strategy
After you have enough money set aside in your rainy day fund, review your budget and invest as much as you can or feel comfortable doing.
Keep in mind that even $5 can sometimes be enough to invest. Small amounts add up over time, but it's important to be consistent and start investing as soon as you can.
There are two simple investment strategies you can start using straight away:
As the name implies, this strategy entails investing a large amount of money at one time.
If you happened to win a large sum via an inheritance, a tax refund, or just good luck, you can put the entire sum to work all at once. This would allow you to see a quicker and more sizeable return on your investment
But keep in mind that this strategy can be quite nerve-wracking and even lead to steep losses in the short term.
Dollar-cost averaging (DCA) strategy
This strategy simply means buying a certain amount of an asset at regular intervals, regardless of its price.
Some market analysts suggest this strategy might be your best bet this year, especially after the recent stock market turmoil:
“Dollar-cost averaging has demonstrated that it actually performs better during a period of high market crashes. And the frequency of market crashes is more than ever,” says Rebecka Zavaleta, creator of the investing community First Milli.
You can learn more about the DCA strategy here.
But in reality, it’s important to remember that this doesn't have to be an either/or decision. For some investors, a combination of lump-sum investing and dollar-cost averaging might be a good choice.
So, whichever strategy you choose, it should be the one that works best for you and your investment goals.
Step #3: Determine your risk tolerance
Before putting all your money in, say, stocks or cryptocurrency, you may want to first know your risk tolerance.
Simply put, risk tolerance is a combination of two things:
- how well you can sleep at night during periods of market volatility.
- and how long until you need the money.
That’s why the construction of your portfolio (the mix of stocks, bonds, crypto, precious metals etc.) should reflect that risk tolerance.
As we’ve already mentioned above, lump-sum investing is not without risk, but it can be a good way to build wealth quickly after an unexpected jackpot.
The DCA strategy, on the other hand, is good for those who want to reduce risk and maximize returns over the long run. But with this strategy, the important thing is to really stick with the plan, no matter what is happening in the market on a particular day or week.
Now, as we’ve established some of the essential steps you should take to prepare yourself for investing, let’s look at some of the popular investments you could start with.
Where should I start investing?
In short, you start by knowing your options that very often depend on the country you live in and the amount of money you have available for investment.
For example, wealthy people have more opportunities to invest in start-ups or young companies, and can therefore make substantially more profit compared to everyday investors who have to wait until the company goes public (or, in other words, starts selling its shares on a public market).
Therefore, you will probably have to do your own research to see what are the options available to you considering your situation.
But here's a list of some of the generally available investment options:
Investing in stocks
It’s not a secret that stock investing, when done well, can be one of the most effective ways to build long-term wealth.
There are several ways to invest in the stock market:
- Individual stocks: You can invest in individual stocks but only if you are ready to spend some time thoroughly researching and evaluating stocks on a regular basis. But if doing moderate mathematical calculations or reading companies' quarterly earnings doesn’t sound appealing to you, there’s a more passive approach to stock investing.
- Index funds: these are investment funds that follow a benchmark index, such as the S&P 500 or the Nasdaq 100. Let’s use the S&P 500 as an example. The S&P 500 is one of the major indexes that tracks the performance of the 500 biggest U.S. companies. Investing in an S&P 500 fund means your investments are tied to the performance of a wide range of companies such as Microsoft Corporation, Apple Inc., or Amazon. The S&P 500 has historically generated nearly a 10% average annual return over time for investors. (But remember that future returns are never guaranteed).
- Robo-advisors: finally, another option is using a robo-advisor, which will invest in a handful of index funds based on your risk tolerance and investing goals, and will automatically rebalance your portfolio if market conditions change. Moreover, robo-advisors usually have much lower fees than traditional financial advisors.
So, as you see, there are several options when it comes to investing in stocks. But before you do, make sure you’ve done enough research and are well-informed on the stocks you buy or on the company you trust to buy stocks for you.
Most global stock markets have had a rough 2022, and it seems like 2023 will not be much better as inflation takes hold, recession looms, and global geopolitical turmoil rises.
In fact, 2022 was even the worst year since 2008 for the major U.S. indexes.
And, in general, it looks like the stock market is off for a choppy year, with geopolitical worries, inflation, and interest rates already spurring some wild swings on Wall Street.
Investing in bonds
Bonds are a way for an organization (for example, a company, a municipality, or a local government) to raise money.
Let’s say your local government asks you to invest a certain amount of money to fund a public project, such as the construction of a highway or school.
In return, your local government promises to pay you back that investment, plus interest, over a particular period of time, which could be 1 year, 10 years, 30 years or even 100 years! Then, as time elapses, the government will pay back the initial amount it borrowed at the agreed date.
Here’s an example: If a 30-year bond has an interest of 5%, and you invest $1,000 in that bond, this means that every year the government will pay you $50. And in 30 years, it will pay back the $1,000 you invested initially.
Bonds are generally considered a safe and conservative investment since they’re backed by the government, and pay you a fixed amount of interest several times a year.
At the same time, bonds require you to lock your money away for lengthy periods of time. Moreover, because bonds are a long-term investment, you’re facing the risk of interest rate changes.
For instance, if you buy a 30-year bond paying 3% interest and a month later, that same company issues bonds at 4% interest, your bond will fall in value.
And that’s something worth keeping in mind if you’re considering bonds as one of your investment options.
Investing in real estate
Real estate has been a popular investment over the last 50 years or so. It can bring an investor regular income if rented out, thus generating a positive cash flow.
Here are some of the ways to invest in real estate:
- Buy a property and rent it out.
- Invest in a real estate crowdfunding platform that pools money from different real estate investors to invest in rental properties or property developers.
- Buy a badly maintained house, fix it up and sell it for a higher price.
Over the past years, real estate prices have been on the rise. But we might soon see a slowdown as the Fed and other central banks around the world are planning to increase interest rates to fight runaway inflation.
Higher rates could mean less people and businesses will be able to qualify for loans, and this could effectively reduce demand for housing and therefore push real estate prices lower.
Investing in cryptocurrency
Cryptocurrencies have been increasingly popular as an investment, with Bitcoin being the world’s first modern digital money that combines blockchain technology, decentralized control, and user anonymity.
For quite a few years now, crypto fans have been arguing that bitcoin is set to replace gold as a store of value one day.
But this argument is still under debate, since, as you’ve probably noticed, crypto can be quite volatile and risky, unlike more conventional investments like stocks or safe-haven assets such as precious metals.
So, if you’re planning to get on the crypto rollercoaster any time soon, make sure you’re well-prepared for the potential risks ahead by going through this simple checklist:
- Remember to avoid buying or selling out of fear or FOMO.
- Make sure you store your crypto holdings in a secure place or exchange.
- Protect yourself from volatility by also investing in more stable assets such as gold.
Investing in gold and precious metals
In general, investors looking to start investing in precious metals have two main choices:
- Buying shares of a mutual fund or an ETF (also known as paper gold) that tracks the price of gold, or trade futures and options in the commodities market.
- Buying the physical asset.
Bars and coins are the most direct way to hold precious metals. It might come as a surprise to beginner investors, but paper gold assets aren’t always backed by the physical precious metal. Paper gold, such as ETFs and gold futures, usually only exist in digital form.
Here’s an example: Imagine you buy paper gold for $1,000, but the company you bought it from only has $500 worth of physical gold in their vaults to back the value of your paper gold. So if financial troubles arise, and everybody wants to cash out at once, this company (known as counterparty) might not be able to repay you the full value of your paper gold.
So although paper gold assets have several important advantages (the absence of shipping and storage fees, and the fact that they can be converted into cash quite easily through a broker), keep in mind that they can carry considerable counterparty risk.
This means that a company or a broker in charge of your ETFs could go bankrupt or fail to live up to their obligations, misrepresenting the true state of their portfolio.
With physical gold, on the other hand, you don’t rely on any third-party individual or company to hold and own your wealth for you.
And although there are several risks associated with investing in physical gold (for example, the costs and risks associated with storing and insuring your gold products), you can easily avoid them by choosing the right physical gold reseller. 😉
So what’s the bottom line?
We’ve established that, before you start investing, it’s important to nail down a few things.
First, think about your budget and emergency savings. Experts recommend that you have around 3-6 months worth of expenses in your emergency fund put aside before you start investing seriously in assets like stocks, bonds, real estate, crypto, etc.
It doesn’t necessarily mean you’ll have to wait until you get a full emergency fund to start investing. Your emergency fund is more like a “safety net” to keep you protected if the market goes down and you start losing on your investment.
Second, consider your budget and the amount of money you are willing (or able) to invest. Once you’ve done that, you can choose an investment strategy that works best for you and your investment goals.
Out of many strategies you could stick to, the most common ones are the lump-sum strategy and dollar-cost averaging (DCA) strategy.
The former entails depositing money in investment accounts in large amounts at one time, while the latter calls for spreading out deposits over time. Both approaches have pros and cons, but the lump sum strategy can be more risky and nerve-wracking.
Once all this is set (emergency savings, budget, and investment strategy) - congratulations - you’re ready to kick start your investing adventure!
The investment world is quite vast, but out of hundreds of choices available out there, we’ve picked 5 generally available investment options:
- Treasury bonds
- Real estate
- Gold and precious metals
Now it’s up to you to make your choice and see which mix of assets could work best for you.
Oh, just one little thing: make sure your investment portfolio is always well-diversified with a good mix of riskier and safe-haven assets for a perfect balance and protection from any potential market downturns.
Stay tuned for our own physical precious metals price forecast by our colleague Nicky Shiels, Head of Metals Strategy at MKS PAMP GROUP.
Good luck! 🍀