Investing in the stock market can seem daunting and complex to a first-time investor, but that does not have to be the case. Putting money into financial markets is the most common way for Americans to build wealth and save for long-term goals. Because of this, there are numerous resources available to help invest money wisely along this journey.

Although investing does not have to be as complex as it may appear in media, that does not mean it doesn’t require research and practice. If an investor makes a financial decision without proper due diligence, there is a higher likelihood for that investment to go south.

To help investors make smarter decisions, here is a beginner’s guide to creating a personalized investment plan for any age, any portfolio size.

How to Invest Money Wisely

1. Identify Your Risk Tolerance

To invest money wisely, an investor should begin with a personalized investment plan. This plan should include your investing goals, when you would like to achieve them, and your comfort level with risk. Every investor is going to have a different time frame, a unique personal finance situation, and a variety of goals. It is important to have an understanding of your own situation when building an investment strategy.

An investor’s risk tolerance is a measure of the amount of loss an investor is willing and prepared to endure within their portfolio. In other words, it refers to an investor’s willingness to take risks in exchange for rewards.

There are three major risk tolerance levels:

1. Conservative
2. Moderate
3. Aggressive

Conservative investors are the most risk-averse. They are willing to take on little to no volatility in their portfolios and are fine with seeing more moderate returns. Because of this, they generally target investments that are guaranteed and highly liquid. Most new investors are conservative – they stick to more stable investments and prioritize loss prevention generally due to lack of experience as well as less net worth.

Moderate investors are willing to take on some risk to their principal, but often adopt a balanced approach with intermediate time horizons (5-10 years). The risk that moderate investors are willing to take is often strategic with a percentage loss they are willing to endure in exchange for growth. A moderate portfolio is more diverse than conservative investors but is balanced between risky and safe assets.

Aggressive investors are usually those who are well-versed enough in the market to make calculated risks. A deeper understanding of securities and markets allows investors to purchase more volatile investment vehicles based on market speculation, potentially leading to higher returns. Aggressive investors are still likely to maintain a base of low-risk investments so as to not risk their entire principal investment.

How to Determine Risk Tolerance

Individual risk tolerance is determined by five factors:

1. Financial goals – saving for retirement, college tuition, down payment on a house, emergency fund, nest egg, etc. Investors should ask themselves what they would like to use this future wealth for. Some investors prefer the freedom provided by liquid investments that allow for consistent withdrawals without penalty. Others are willing to forgo liquidity and prioritize consistent growth over a long period.
2. Age – in a general sense, younger individuals are going to have a longer time horizon on investments and therefore are able to take on greater risk than older investors with a shorter time horizon. Age alone, however, should not be the determining factor.
3. Portfolio size – those with a higher net worth and more disposable income can typically afford to take on greater risks with their investments.
4. Time horizon – although often associated with age, time horizon speaks more specifically to an investor’s specific financial goals. A young individual may be investing for the short-term, such as for their own education or a down payment. Similarly, an older person could make long-term investments if they are investing in a trust for their children or grandchildren.
5. Comfort level/Experience – Someone new to trading is likely going to be less comfortable making high-risk investments compared to someone who has been investing for decades or someone who has worked in the financial industry. Along with experience often comes an increased comfort level with complex and speculative investments. On the other hand, some people are simply just more risk-averse than others. An individual’s comfort with risk should always be taken into account.

The two main factors are timeline and comfort level. That said, even if you’re comfortable with big risks if you’re working on a short timeline (less than 10 years) your portfolio should be more conservative as there is less time to recoup potential losses.

2. Know Your Investment Budget

When you are opening an investment account, it is important to know how much money you are willing and able to invest. Although investment budget is often tied to risk tolerance, it is not necessarily. An investment budget refers specifically to the amount of money that you are able to invest while maintaining a comfortable level of liquidity.

There are various methods for determining a budget, but the simplest option is to use a budgeting tool or app. There are a number of free tools available online. These tools will compile information on an investor’s income, expenses, and risk tolerance to aid in determining a realistic investment budget.

If your investment budget is small, don’t be discouraged. Starting with even $5 a month can jumpstart a long and successful investing journey. A small investment held for a long amount of time will grow much faster than if it was sitting in cash or a savings account. This is because of compound interest.

For example, the S&P 500 has an annualized return of 10.5%. If you were to invest $5 per month for 5 years in an S&P 500 index fund, you would end that time period with $378.21. If you leave that sum invested with a 10.5% rate of return for 50 years, your ending balance would be over $55,000.

3. Decide How Actively You Want to Trade

Once you have your financial goals, you can begin to decide on the specifics of how you would like to invest. An investor has lots of choices to make – from picking the type of account to the platform to the specific investment products. These decisions can all be made by the individual investor with proper due diligence.

If an investor is looking for more direction, there are numerous platforms available depending on how much advice and help they want. Many investors prefer having a financial professional invest their money for them. Investment advisors can be pricey, but they also can be affordable since the adoption of automated portfolio management services: robo-advisors.

Traditional banks and investment firms generally offer discretionary management services run by a professional financial advisor. Robo-advisors use computer algorithms to build and manage investment portfolios. Robo-advisors vary in product and service offerings, offering everything from automatic rebalancing to tax optimization. Most also offer human help when needed.

4. Pick an Investment Account

To begin trading, investors must create an investment account. To understand the differences, just think of types of bank accounts. Checking, saving, CDs, and money market accounts all serve different purposes. Investment accounts are the same.

Some accounts are chosen for tax advantages while others are chosen for a financial goal. If you are investing in retirement, for example, a retirement account such as a 401(k) or Traditional or roth IRA would both apply to that purpose. If you are saving for college tuition, a 529 account would be the proper channel. This is where knowing your financial goals is helpful in determining how to invest.

5. Consider an Appropriate Mix of Investments

When starting out investing, some will start with just an online brokerage account. This can be a useful way to get low-cost exposure to markets and begin learning about wall street, but if you would like to invest for the long term, experts recommend diversifying assets.

Diversifying across asset classes can help mitigate portfolio volatility based on market conditions. This is because historically different assets have varying returns based on market conditions. By investing across multiple categories, an investor reduces the risk of losing money and overall return if a single asset class begins to fall.

Asset allocation is important for financial planning and meeting investment goals. Asset allocation refers to the practice of dividing an investment portfolio among different asset categories such as stocks and bonds.

6. Choose Investment Products

There is an abundance of investing advice online which can make picking individual investments overwhelming. It is important to keep in mind when choosing investments that products should be chosen based on goals and risk tolerance. Read more about how to diversify an investment portfolio here.

Common types of investments include:

• Stocks – Individual share of ownership in a publicly-traded company.
• Bonds – Debt instruments that allow a corporation or government to borrow capital and pay regular interest payments back to investors. The borrower then returns the principal on a set maturity date. Bond prices have an inverse relationship with interest rates.
• Mutual Funds and Exchange-Traded Funds (ETFs) – Funds allow an investor to purchase an array of stocks, bonds, or other investments at the same time. Funds are managed by financial professionals which gets investors off the hook for picking individual stocks. Mutual funds build diversification by pooling money and purchasing a basket of vehicles that align with the fund’s goal. Funds can be either actively or passively managed.
• Real Estate – the largest asset class in the world, real estate is seen as a way to diversify your portfolio away from traditional investments. Real estate investing can mean purchasing a property to rent out to tenets, or investing in REITs. REITs act as real estate mutual funds.
• Hard Assets – Hard assets such as commodities, collectibles, and fine art are all also useful ways to diversify your investment portfolio. Some hard asset investors choose investments based on personal passions. Although it is important to not let emotions dictate your investment plan, it can be enjoyable for investors to make some decisions based on personal interests. Read more about passion investing and how to do it here.

Understand an Investment Vehicle Before Investing

There may be an investment option that gets a lot of press, driving up investments. It can be tempting to join the crowd, but make sure to always understand how an investment works before purchasing.

Some stocks pay periodic dividends to shareholders, others do not. Bonds can vary in maturity, payout schedule, and yield. Some funds have different lock-up periods, different minimums, or other differing characteristics.

Thankfully, there are a number of free resources available to investors to learn about product specifics. If an investment is still confusing, you can always reach out to and work with a financial planner.

Ready to Begin Investing?

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This material is provided for informational purposes only and should not be relied on as investment advice.