Good investing requires you to adjust your strategy in response to market changes. But when you’re a beginner, it can be difficult to figure out what your next move should be, especially in times like these. It’s nice to have a few tried-and-true principles you can fall back on. So I’ve highlighted three tips below that you can use to grow your wealth regardless of how the stock market is doing.
1. Try dollar-cost averaging
Dollar-cost averaging is where you regularly purchase a predetermined dollar amount of a certain security. For example, you might invest $100 in a stock every week or $500 every two weeks. If you automate your contributions, you can do this without even thinking about it.
The biggest advantage to dollar-cost averaging is that you don’t have to worry about timing the market. Sometimes you’ll buy when prices are high and sometimes when prices are low. In the end, it’ll even out and you’ll end up paying a reasonable price for all of your shares.
Getting started with dollar-cost averaging is pretty simple. First, decide how much you can afford to invest and what schedule you’d like to invest on. Then, choose what you’d like to invest in. It could be a stock, a mutual fund, an exchange-traded fund (ETF), or just about anything else you want. See if you can automate your contributions so you don’t have to remember to make them manually. If you’re investing in a retirement account like a 401(k), this should be pretty easy to set up. Talk to your company’s HR department if you’re not sure how.
2. Focus on low-fee investments
You can’t avoid fees completely while investing, but you should always make it a point to keep your expenses down as much as you can so you can hold onto more of your gains. Start by checking your broker’s fee schedule so you understand what you’re paying. Compare this to other top brokers in the industry and weigh their costs and offerings to decide which one is right for you.
Look into the expenses associated with your investments too, like the expense ratios on ETFs and mutual funds. These are annual fees you pay to help the fund operate, represented as a percentage of the amount you have invested in the fund. For example, if you have a 0.5% expense ratio and you have $100 invested, you’d pay $0.50 per year in fees. You should try to keep your expense ratios under 1% whenever possible as they can add up quickly, especially once you have tens of thousands of dollars invested.
If you’re investing in a retirement plan, look at the costs associated with the plan. There are usually administrative fees, which are taken directly out of the account. You can’t do much about them, but if they are more than you want to pay, you could consider moving your money to an IRA. You can open one of these wherever you like and invest in almost anything you want, which gives you more control over what you’re paying in fees.
3. Look for tax breaks
Tax-advantaged accounts, like your 401(k) or IRA, are great places to store cash you don’t think you’ll need for a few decades. Depending on the type of account, they can either give you a tax break today or when you withdraw the funds in retirement.
Traditional, tax-deferred retirement account contributions reduce your taxable income this year. So if you earned $50,000 this year but put $5,000 in a traditional IRA, the government would only make you pay taxes on the remaining $45,000. The $5,000 you invested would continue to grow without your having to pay tax until you withdraw the funds.
These accounts are usually best if you believe you’re in a higher tax bracket today than you’ll be in once you retire. Taking the tax break today will lead to a smaller tax bill and potentially more money you can put toward investing. Then, you can take advantage of your lower tax bracket in retirement to save even more.
Roth retirement accounts work the other way. You pay taxes on your contributions today so you don’t have to pay taxes in retirement. These accounts are better if you think you’re in the same or a lower tax bracket now compared to retirement. As long as you wait until you’ve had the account for at least five years and are 59 1/2 or older before taking a withdrawal, you won’t ever pay taxes on your earnings, which means more money for you.
If you decide to use a taxable brokerage account, try to hold your investments for at least one year before selling them. Then, they’ll be subject to long-term capital gains tax instead of short-term capital gains tax. This will save you quite a bit and you may not owe any taxes on your investment earnings at all, depending on your annual income.
The three above suggestions are good pieces of advice for most investors to follow, but they’re just the tip of the iceberg. If you want to become a great investor, you have to accept education as a never-ending part of the process. The more you learn about how to invest, the better the decisions you’ll be able to make.