Making Your First Investments

You might already be making investments through your retirement plan at work, but at some point, you may want to invest funds on your own. This article covers some simple issues to consider and offers details on how to take that step.

The decision to invest

Investing is really only done for one reason – you want to earn more on your funds than what you can earn by leaving your money in your savings account or insured Certificates of Deposit at your bank or credit union.

Investing in stocks (equities) or bonds (fixed income) involves risk. There is a chance that the value of stocks you own may decrease, and also a risk that bonds may stop paying interest, not be repaid upon maturity, or decline in value while you hold them. You choose to accept these risks in the hope that the higher returns (more than what you can earn on a CD) justify taking those risks.

It does not always work out that way, but over time, the average returns of equities and fixed income investments have been higher than those from lower-risk (or guaranteed no-risk) investments. However, 2008 was a tough year for stocks, with the S&P 500 index dropping 38%. Here is some information to help you view the risk and return considerations more clearly.

Period	Total return of large company stocks	Total return of long-term government bonds
Year of 2025	17.9%	4.5%
5-year average return – 2021 to 2025	19%	-1%
10-year average return – 2016 to 2025	13%	4%
20-year average return – 2006 to 2025	9,5%	3.0%
Best year since 1998	32.4% in 2013	28.2% in 2011
Worst year since 1998	-37% in 2008	-26.1% in 2022

How does investing work

The actual mechanics of investing can be somewhat complex, mainly because different types of investments are managed in various ways and because there are different kinds of companies through which you can choose to invest. Here are some of the basics:

Buying stock through a stockbroker – You tell your broker to buy 100 shares of XYZ stock at a specific price. The broker then sends that order to the New York Stock Exchange (NYSE), where it is usually executed very quickly, often within seconds or minutes. If the stock trades on the NASDAQ (in the over-the-counter market), the broker sends the order to a trading desk for execution.

Buying a stock online without a broker – You provide the details of the purchase online, and the order is sent to the NYSE or a NASDAQ trading desk, where it is executed. Buying a mutual fund through a stockbroker – You tell your broker to buy a specific number of shares or a certain dollar amount of a mutual fund. The broker then sends the order, and it is executed at that day’s closing price.

Buying a mutual fund directly from the mutual fund company – You can usually do this over the phone or online, with the order executed at that day’s closing price.

Creating a beginning investment strategy

First, understand that investing should be a long-term process. Markets fluctuate, and you should aim for a minimum 5-to-10-year time horizon for your investments. That doesn’t mean you have to hold all your investments that long, but if you expect to need your funds soon, it might be better to keep your money in more liquid and safer options.

Next, you should practice diversification. Diversification means avoiding putting too much money into any one specific investment. Many experts recommend that you own stocks across at least five industries, with two or three stocks in each industry. This way, you’re not overly exposed to a single part of the economy or any one company.

You should also think about how you divide your investments among different types of assets. How you split your investments among stocks, bonds, and cash investments is called asset allocation. It can serve as a logical starting point for your investment plan. Individuals should base their asset allocation on their time horizon and risk tolerance. Here are some sample allocations based on age.

Sample Asset Allocations

Age	Stocks	Bonds	Cash
30’s	65%	25%	10%
40’s	60%	30%	10%
50’s	50%	40%	10%
60’s	30%	55%	15%

You will notice that the chart shows younger individuals holding more stocks, with the percentage decreasing over time. This is logical. When you’re younger, you can take a longer-term approach—having more time to recover from investment downturns and greater opportunity to participate in the long-term performance trends of various investments.

The numbers in this chart are only sample guidelines and you may want to vary from them depending on your feelings about risk and other aspects of your situation.

Deciding what to buy

Selecting individual stocks can be the most challenging part of investing. You want to pick stocks that will increase in value, but there are no guarantees. Many professionals spend their careers trying to identify these winners. There are numerous books and evaluation services available to help you learn how to make better choices.

Another way to invest in stocks is through mutual funds. The idea of a mutual fund is quite simple. A mutual fund is a company that invests in other companies. You buy shares in the mutual fund. Your money is combined with that of other investors, and the mutual fund uses it to buy a diverse portfolio of stocks or bonds from different companies. The investment manager, or portfolio manager, is responsible for deciding when to buy, sell, or hold assets for the fund.

Your benefits include any distributions the fund makes from interest or dividends it receives, as well as distributions of the fund’s realized capital gains. You can typically choose to receive these distributions in cash or reinvest them to buy additional shares. You also benefit from increases in mutual fund share prices if the value of the underlying portfolio rises. However, if the value of the underlying portfolio falls, the value of your mutual fund shares will also decline.

Most libraries have information on mutual funds, and you can find details about most mutual funds on their websites. Like with individual stocks, some funds will perform better than others. Even the best managed mutual fund is likely to decline in value if the overall stock market falls. Although past performance doesn’t guarantee future results, be sure to review a fund’s performance and expenses before considering a purchase.

Monitoring your investments

In addition to monitoring your individual investments, you should also review your asset allocation periodically to ensure it still aligns with your goals. You might have allocated more funds to certain sectors as you grow older, and your risk tolerance can shift over time. Usually, an annual review is sufficient. Rebalancing generally makes sense if your actual allocation has deviated more than 5% from your target.

You might want to review your asset allocation twice a year. Here is a chart that can assist you. Make sure to include all your investment assets.

Asset	Stocks	Bonds	Cash
Retirement plans	$	$	$
IRAs	$	$	$
Investment accounts	$	$	$
Bank accounts	$	$	$
Mutual funds	$	$	$
Total	$	$	$
Allocation %-ages	_____ %	_____ %	_____ %

Compare these allocation percentages with your current asset allocation. Using asset allocation can help provide some discipline to your investment strategy.

This article is intended for educational purposes only. Each person should consider their own situation when making investment choices. Consulting a qualified professional can assist in this process. Remember, past performance does not guarantee future results.