Trading and investing are more democratized than ever. People can have their entire portfolio managed by robots now. Trending can take place at any time of the day from any internet-connected device. That has pushed more and more people to get interested in investing, with many products catering to budding investors as well.
If you're just getting started, you might be intimidated by some of the options out there. However, some products are a better option for novices than others for a variety of reasons. Let's take a look at some of the best methods and financial instruments for first-time investors.
Working with a Robo Advisor
Robo Advisors are better than they've ever been and have tons of benefits to them. In short, a Robo advisor will analyze your profile pretty much as any financial advisor does. They will assess various things like the amount of money you have, the amount you want to invest, your risk tolerance, your objectives, etc. Then they will start generating a portfolio that fits these criteria.
You can use a Robo advisor to completely manage your portfolio. Some will start to divert investments from higher to lower risk as you get older, for instance. This would allow you to hop on higher risk investments with higher potential returns when you are still generating income and move to more stable investments as you get into retirement.
Another thing that makes Robo advisors such a good choice for beginners is that most will allow you to start with a small amount. This allow you to start investing with as little as $500 and they'll manage everything for you.
If there's one issue with Robo advisors it's the fees. The industry standard is at around 0.25%. So if you invest $20,000, that's $50. That might not seem like much but it can start adding up after a while es[pecially when considering that that's on top of the fees that are associated with trading certain assets.
One thing you could do, however, is use the Robo advisor to give you some ideas or to validate your choices. They could help you see why a certain investment would not be the best choice for your particular objectives or recommend options you may not have considered.
ETFs, or exchange-traded funds, are a relatively new class of asset that is another great option for new investors. While they share some similarities with mutual funds, they do have some fundamental differences. The main one is how they're traded.
ETFs, unlike mutual funds, are traded on the open market. This means that you can exchange ETFs throughout the day, unlike stocks. They're also much more liquid than mutual funds.
There are many different types of ETFs. You have ETFs that shadow the activity of a particular sector or market. This might be less intimidating and less demanding than having to pick every single individual stock you think might do good, but it also lets you take advantage of opportunities you may have missed.
Another fundamental difference with ETFs is that they're not managed by a human manager. They use algorithms instead. And because of that, management costs are much lower than on mutual funds, which makes them a sound option for budget-conscious investors.
If you want to learn more about exchange-traded funds, we suggest you check out WealthSimple. They have a nice little piece that goes in-depth into what ETFs are and why they're such a good option. They also touch on the different types of ETFs available, how to invest in them, and where to find exchange traded funds Canada among other things.
Mutual funds have plenty of good things going for them. For one, they offer a lot of stability and some people will love the idea of having an actual person taking care of their investment. Some are passively managed if you'd rather have technology taking care of it.
One of the strengths of mutual funds is how diversified they can be. Some hold thousands of stocks, like the Vanguard Total Stock Market Index Fund. You can also invest based on specific factors, like risk level, value, growth, and low volatility, among others.
Another thing you can do is invest in two different types of funds that will offset one another. For instance, you could invest in a value fund that will focus on promising stocks that have fallen slightly out of favor and a growth fund with companies that are expanding and have great earning potential.
One of the issues with mutual funds, however, are the fees. Not only will you have to pay annual fees, but many require a significant initial investment, upfront loads, and commissions on top of it. They're also not the most liquid asset there is. No matter what time of the day you buy a mutual fund, it will be the exact same price and you can't sell them as easily as other types of investments.
The bond market is another great option if you want something that will allow you to invest passively, safely, and still get a return. The way bonds work is pretty simple.
In short, bonds are a way for organizations to raise money by taking a loan from the public. The seller of the bond agrees to pay back the agreed amount when the bond reaches maturity.
Bonds can be sold by companies, countries, or municipalities. They also are ranked based on their level of risk, with AAA bonds being the safest. These, however, will not offer the same return. It's also not uncommon for the rating of a bond to change during its maturation period. For instance, if the credit situation of a bond issuer improves, then the bond could increase in value and you could sell it at profit.
Bonds are perfect for those who want to take it slow, but you can't expect to get as much as with other types of investment as the returns will be fixed. Also, it might be difficult for you to sell bonds for lesser-known or less credit within companies.
Cryptocurrency is another class of assets beginners tend to gravitate towards. While they are very accessible, they are not necessarily the best option for someone who's just starting.
That's because there's simply too much speculation and volatility in this case. While you can listen to analysts on bitcoin all day, the truth is that there's still a lot of guesswork and unanswered questions.
Yes, bitcoin could become the currency of the future. Or it could get supplanted by another one and fall into oblivion. That's something a lot of fanatics in the crypto sector won't admit, but they know that it's a possibility.
With that being said, cryptocurrency is always a good component in any portfolio, and it would be wise as long as you keep it to a minor percentage. We simply don't know at this time what will happen with the global financial markets, and bitcoin seems to be following the same trends as gold. This means that bitcoin could finally start to be recognized as a true store of value.
However, cryptocurrency is extremely unpredictable. While the highs might be exciting, the lows can be devastating. Keeping your crypto investments at around 10% of your total portfolio should allow you to hedge your bets.
Another issue with cryptocurrency is that it's not as liquid as the forex market. Transactions can take a while on the blockchain, and it can take a lot of time for a sell or buy order to be completed, so you could be losing a lot of money during that time. This makes it not the best option if you wanted to do something like scalping, for instance.
Saving and Investment Apps
If you have an extremely limited budget, but still want to have the little bit of money you do have working for you, then you might have considered investment apps. And they do have some benefits.
For one, some of these will allow you to start investing with close to nothing. Another benefit of those is how user-friendly they are. You don't really need to know much about stocks in general. These apps will invest your money in ETFs that match your chosen risk level. They make it easy for you to see how your investments are performing and will even allow you to see what kind of trajectory they're going to be taking in the future if you continue your monthly contributions.
One of the issues of these apps, however, is that they tend to be limited in their options. The fees are also an issue. If you invest too little, then you might not be left with much at the end of the month, so that's something you'll need to consider.
These are just some of the investment options that are open to you if you're just getting started. Make sure that you consider them all, but equally, make sure that you study them in detail before you go all in.