By Sonya Sellmeyer, Consumer Advocacy Officer for the Iowa Department of Insurance and Financial Services
The new year brings opportunities for improvement to your financial health. Investing in the stock market can be an effective way to build wealth. The historic average stock market return is 10% annually before inflation, but investing is geared toward long-term goals and involves risks. Being financially literate is the foundation to investing, growing, and protecting your assets.
The North American Securities Administrators Association recommends asking four questions before you start investing:
- What do you want to accomplish? Know your goals before investing in the stock market. Are you investing for a long-term goal such as retirement or a college education? Knowing the time frame for your investment and what you want to accomplish will provide you with the long-term strategy that best fits your needs.
- How much risk are you willing to take? Investments in the stock market are subject to losses, so understanding your risk tolerance is important. Risk tolerance relates to how much loss you are willing to endure in your portfolio. Stock market decisions need to be within your risk tolerance. Safer investments also have a place in your portfolio, but typically have lower returns so a balance is often needed to get the right return to fit your needs.
- What types of investments are right for you? Your risk tolerance should also change during the different life stages on your financial roadmap. Investing in the stock market for retirement during your 20s looks different than if you start investing for retirement in your 50s. The sooner you start investing, the more time you have to make up for potential losses. Investing in the stock market is a journey and not a sprint to the finish line.
- Are you comfortable enough to do this on your own? Financial literacy allows consumers to have the knowledge needed to invest on their own or with the help of a professional. The Iowa Department of Insurance and Financial Services’s Save4Later website has free financial education information and courses to help you navigate your educational journey.
How to get started investing in the stock market: There are several options to opening an investment account. You may manage your investment portfolio by opening an online brokerage account. If you don’t have the time or desire to research and manage your investment portfolio, consult a licensed professional for assistance and double-check before you invest. Another option is an automated online adviser or robo-advisor which gathers information about your investment goals and suggests an investment portfolio. With all these options, research any investment, the associated fees, and the minimum investment amount required.
Knowing the basics of financial wellness is the start of any financial journey. Before investing in the stock market know your long-term goals, risk tolerance level, and decide if you want to manage your funds or consult a professional. Once you make these decisions, diversify, and monitor your investments to meet your life stages. Always shield your savings from scammers who will attempt to take away your wealth.