New to investing? You're in the right place
If you're a newcomer to investing, it can seem a bit overwhelming. The language of investing is often obscure, and the process can feel complicated. But it doesn’t have to be. Here are some basic concepts and straightforward information on how to get started—or dive in deeper. Let's start with some investing concepts.
What's your investing risk tolerance?
Asset allocation is the way you divvy up your money between various asset classes, such as stocks, bonds, and cash. Your asset allocation can range from aggressive to conservative and can help determine your level of risk, as well as your potential for gain.
- Willing to take on risk for the potential for growth? An aggressive asset allocation is made up largely of stocks, which carry risk of loss and can be more volatile, but also have the potential for higher returns.
- Don't like risk? A conservative asset allocation is made up of investments that have less risk of losing money, but also a lower potential for growth, such as U.S. Treasury bonds or CDs.
- Somewhere in between? A moderate asset allocation is a mix of the two.
Don't put all your eggs in one basket
Diversification is how you spread your risk among many different types of investments and sectors. It's important to note that diversification isn't a magic bullet; it can't guarantee a profit or eliminate the risk that you'll lose money. However, if you don't diversify, you're setting yourself up for a potentially huge hit if your chosen investment falters.
Consider dollar-cost averaging
If you're looking to get started investing but don't know how, consider dollar-cost averaging. Here's how it works: every month (or any regular interval), you invest a set amount of money—regardless of how your investments are performing. When your investments' values are down and their individual prices are low, you can buy more shares for your money. When investment values and prices are up, you'll buy fewer shares. The concept is to hold steady at your set amount and invest it each month. Despite the inherent volatility of the stock market, the strategy says that your investments tend to grow over time.
Which investment vehicles are right for you?
- Asset class
Asset classStocks>DefinitionA share of stock is a portion of ownership in a company, allowing you to participate in a company's growth.>
Asset classBonds>DefinitionBonds allow you to lend money to a company, government, or government agency, and in return, you receive a promise of repayment, plus interest, at specific dates. Bonds are particularly useful for retirees as they can provide a predictable income stream.>
Asset classCash>DefinitionCDs, Treasury bills and money market funds are all examples of cash investments. Cash is great for stability and liquidity, but it's not the best choice for building long-term wealth.>
Asset classMutual Funds>DefinitionA mutual fund pools money from many investors and invests in a broad range of stocks or securities. With mutual funds you can achieve a certain level of diversification without having to choose each individual security. There are two different approaches to consider with mutual funds—passive and active. Passively managed funds (known as index funds) are designed to track—rather than beat—a specific index such as the S&P 500®. Index funds usually have lower fees and expenses, which can add up over time. Actively managed funds strive to beat the market. Active management could result in better performance than an index, but it's no guarantee. And the higher costs and taxes generated by these types of funds may result in worse performance in the end.>
Asset classETFs>DefinitionWith an ETF, you own a single security representing a basket of underlying stocks that track an index, such as the S&P 500®. The main difference between mutual funds and ETFs is the way they're traded: mutual funds are processed at the end of the day; ETFs trade like stocks, which means you can buy or sell them any time during the trading day.>
Where you park your investments is equally as important
Bank savings account. A bank savings account works great if you're simply putting money aside for a rainy day or for something in the next couple of years. You'll only make a small amount of interest, but you will have easy and quick access to your money (also known as liquidity).
Investment account. An investment account is offered through a brokerage firm and allows you to buy and sell investments like stocks, mutual funds, ETFs and bonds. There could be an initial minimum deposit and account fees, depending on where you open your account. There are two types of investment accounts:
- A taxable brokerage account is the most flexible as there are no limits to how much you can invest and no timing considerations on when you can access your money, other than your own. The tax rules are a bit more complex. You'll pay taxes on interest income, plus any short- or long-term capital gains tax on any money you make when you sell an investment that's gone up in value. Finally, you'll pay long-term capital gains tax on qualified dividends.
- A tax-advantaged account is tailored to a specific goal like retirement or college savings. Earnings grow tax deferred to help you grow your money, but penalties apply to early or non-qualified withdrawals. Some of the most common tax-advantaged accounts include an employer sponsored retirement account, an individual retirement account (IRA), a Health Savings Account (HSA) and a 529 College Savings Account.
Once your investments are up and running, try to take a long-term view. Periodic losses when the markets are volatile or making wild swings up or down are nothing more than distractions—so don't panic. With a well-constructed financial plan and balanced portfolio in place, you'll be set up for success over the long term. Investing rewards those who are patient and follow a disciplined process.
As you continue on your investing journey, don't be afraid to ask questions and keep learning. Be persistent and get the information you need! After all, investing is one of the best ways to build wealth and achieve your financial goals.
Investors should consider carefully information contained in the prospectus or, if available, the summary prospectus, including investment objectives, risks, charges, and expenses. You can request a prospectus by calling Schwab at 1‐800‐435‐4000. Please read it carefully before investing.
Investment performance may be affected by risks associated with non‐diversification, including investments in specific countries or sectors. Additional risks may also include, but are not limited to, investments in foreign securities, especially emerging markets, real estate investment trusts (REITs), fixed income and small capitalization securities. Each individual investor should consider these risks carefully before investing in a particular security or strategy.
Diversification and asset allocation strategies do not ensure a profit and cannot protect against losses in a declining market.