5 Tips For Beginner Investors Working With Online Brokers
Have you ever been told that adding salt to your beans during cooking can make them tough and take hours longer to cook? Turns out, this advice is all wrong. Soaking your beans overnight in a salt water brine can lead to fewer burst beans and a better flavor overall. Sitting too long on the shelf, hard water, and acidic ingredients such as tomatoes is what leads to tough legumes.
If you don’t know beans about investing, making money decisions can also be tough, especially if you hear contradicting information. The availability of online brokers makes it easy for the newbie to get started, but misinformation and misunderstanding can lead to costly mistakes. When investing real dollars, you want to make sure that you’re doing the right thing at the right time so that you don’t end up with a pile beans. Here are six quick tips to keep your growth accounts cooking and looking good.
Tip #1: GO THROUGH THIS CHECKLIST FIRST
Before you get serious about investing in stocks or mutual funds, there are a few things you want to take care of first. To use another cooking analogy, you want to make sure that you add the right ingredients at the right time so that your plan doesn’t come out half-baked. Before you invest, make sure you do the following:
- Get an emergency fund in place that can support you for three to six months.
- Investigate the retirement plan offered through your employer.
- Take advantage of any free money offered by your company’s 401(k) or tax-deferred plan.
Tip #2: RESEARCH THE FEES
You’ve probably heard the saying: It takes money to make money. This is true in more ways than one, but you want to be smart about the kinds of fees you’re paying out. If you’re saving for retirement, this is a long-term investment, which means that even small fees of 1 percent add up. For example, the SEC reports that after 20 years, a $100,000 portfolio being charged 1 percent will grow to $180,000, whereas a portfolio being charged only .25 percent will grow to $210,000. That’s a $30,000 difference.
There are basically two kinds of fees:
Transaction fees: these are charged each time you do something with your investments, such as buying into a fund (a commission fee or sales charge) or selling a fund (a surrender fee or transaction fee). With variable annuities, you might also be charged a steep penalty if you get out of the investment too soon. Front load fees (known as a sales load or sales charge) instantly decrease the amount of your initial investment. You can find no-load mutual funds. Ask your advisor if a lower cost option exists before committing.
Ongoing fees: These are charged to your accounts every month, every quarter, or every year regardless of whether or not you buy or sell and regardless of whether or not your fund makes any money. This can include the fund operating costs and subaccount fees on variable annuities. What’s tricky is that these are usually paid out of the fund asset, perhaps so that investors don’t feel the pain of paying these fees directly.
You can find the fees listed in a fee table located near the front of a fund’s prospectus under the heading, “Shareholder Fees.” If you don’t read the fine print (and we don’t blame you for skipping it – the reading isn’t very exciting) then you might be paying more than you should. The SEC warns investors that “potential mischaracterization of fees may lead them to invest in funds that they would not otherwise have selected.”
Ask your advisor before you buy what fees you will be charged. If you already own an investment that seems to be costing you more than it should, get a second opinion to find out if there’s a better option out there for you instead.
Tip #3: DON’T GET TRICKED BY THE BONUS
One way that online brokers set themselves apart is by offering new account bonuses. These bonus credits might be advertised as free money, but don’t expect to be paid in cold hard cash. The bonus amounts are usually credited to your account, and in some cases, you might not have access to this money should you want to sell. Online brokers also offer other kinds of bonuses such as a free trade commission or a certain number of free trading days. This may or may not work to your advantage depending on your level of expertise.
A lot of investments also require a minimum investment. This is the smallest amount needed to get into the fund. If the fund is offering a bonus amount of money, generally speaking, you must have that minimum amount before the bonus credit, not after. Some online brokers will waive the initial minimum deposit if you agree to automatic monthly deposits. Setting up your investments on auto-pilot is often recommended by advisors as a good way to save because if you don’t see the money, you won’t spend the money.
Tip#4: UNDERSTAND THE RELATIONSHIP BETWEEN YOUR GOALS, RISK, AND REWARD
Generally speaking, investments that offer the potential for higher returns also have the potential for higher risk. One way to mitigate this risk is to think about time. Having a longer time horizon means you have time to recover should your investment go down in value.
Before you choose your investment, consider your time horizon. If your goal is to save for retirement and retirement is 20 years away, then a long-term investment such as stocks might be more appropriate for you. If your goal is short-term, such as to buy a new car in three years or less than a short-term investment such as a bank CD might be more suitable.
Tip#5: DON’T PUT ALL YOUR MONEY IN ONE PLACE
Diversification is the practice of spreading your money across more than one kind of investment to reduce your exposure to risk. In addition to cash accounts such as savings deposits, certificates of deposit (CDs), and treasury bills, there are two main asset categories:
Stocks: this asset class has the greatest potential for risk and the greatest potential for reward, historically speaking. You can choose to buy stocks according to different sectors of the economy or different subclasses based on market capitalizations, but that doesn’t necessarily lessen your chances for risk. For example, the SEC says that large company stocks as a group have lost money on average about one out of every three years.
Bonds: Generally speaking, bonds offer much more modest returns as compared with stocks, and they are less volatile. That doesn’t mean, however, that all bonds are safe. Certain categories of bonds offer higher returns more like stocks, and as such, they have higher risk and no guarantees.
These are the most common asset categories, but you also have other categories such as real estate, precious metals, and other commodities. Assets classes that track other asset classes are said to be correlated. For example, if Stock A goes up when Stock B goes up, then they are said to be correlated. If Stock A does the opposite of stock B, then it’s said to be inversely correlated. Understanding the correlation of your investments is one way to better diversify your portfolio.
Bottom Line: There is no singular right or wrong way for you to invest. It all depends on your time horizon, your goals, and your knowledge of what’s out there. If you have questions about an investment you already own, feel free to reach out to one of our experts, we’re always happy to help. We at annuity gator specialize in investments designed to produce income. If you’d like to know more about income producing assets, fill out this form and one of our qualified advisors will get back to you, no shenanigans and no strings attached.