Once you've decided on how to start investing, the next big question for many in the United States and Canada is: "What are the best investments for beginners?" The sheer number of options can feel overwhelming, but the good news is that starting your investment journey doesn't have to be complicated. For beginners, the focus should be on simplicity, diversification, low costs, and a long-term perspective. This guide, part of our "Investing for Beginners" series, will highlight some of the most suitable investment choices to help you get started on the right foot and begin growing your wealth wisely.
Key Characteristics of Good Investments for Beginners
Before diving into specific investment types, let's consider what makes an investment suitable for someone new to the market:
- Simplicity and Understandability: You should have a basic understanding of what you're investing in.
- Diversification: The investment should spread your money across multiple assets to reduce risk. "Don't put all your eggs in one basket" is a crucial mantra.
- Low Cost: High fees can significantly erode your returns over time. Look for investments with low expense ratios.
- Accessibility: Easy to buy and manage, even with small amounts of money.
- Long-Term Focus: Suitable for a buy-and-hold strategy rather than frequent trading.
Remember, before making any investment, ensure you've covered your basic financial principles, such as having an emergency fund and managing debt.
Top Investment Choices for Beginners
Here are some of the most commonly recommended investments for those just starting out:
1. Index Funds (Mutual Funds or ETFs)
What they are: Index funds are a type of mutual fund or Exchange-Traded Fund (ETF) that aims to replicate the performance of a specific market index, such as the S&P 500 (US large-cap stocks) or the TSX Composite (Canadian broad market). Instead of trying to "beat the market," they aim to "be the market."
Why they're good for beginners:
- Instant Diversification: By investing in one index fund, you gain exposure to hundreds or even thousands of companies.
- Low Cost: Index funds typically have very low expense ratios (annual fees) compared to actively managed funds.
- Simplicity: They are easy to understand and follow a passive investment strategy.
- Proven Performance: Over the long term, many actively managed funds fail to outperform their benchmark indexes.
Examples: S&P 500 index funds/ETFs (e.g., VOO, IVV, SPY in the US), Total Stock Market index funds/ETFs (e.g., VTI, ITOT in the US; XIC, VCN in Canada).
2. Exchange-Traded Funds (ETFs)
What they are: ETFs are investment funds that trade on stock exchanges, much like individual stocks. They can hold a variety of assets, including stocks, bonds, or commodities, and often track an index (as mentioned above). However, there are also actively managed ETFs and sector-specific ETFs.
Why they're good for beginners (especially broad-market index ETFs):
- Diversification: Similar to index mutual funds.
- Low Costs: Often have very low expense ratios.
- Tradability: Can be bought and sold throughout the trading day like stocks.
- Low Minimums: You can often buy as little as one share. Many brokers now offer fractional shares of ETFs.
Consideration: While broad-market index ETFs are great for beginners, be cautious with niche or leveraged ETFs, which can be much riskier.
3. Target-Date Funds (TDFs)
What they are: Target-date funds (also known as lifecycle funds) are mutual funds designed to simplify long-term investing, especially for retirement. You choose a fund with a "target date" that roughly corresponds to your expected retirement year (e.g., "Target-Date 2055 Fund").
Why they're good for beginners:
- Automatic Rebalancing & Glide Path: The fund's asset allocation (mix of stocks and bonds) automatically becomes more conservative (more bonds, fewer stocks) as you approach the target retirement date.
- "Set it and Forget it": Offers a hands-off approach to long-term investing.
- Diversification: TDFs are typically a "fund of funds," meaning they invest in a diversified mix of underlying stock and bond funds.
Consideration: Ensure the TDF's glide path and underlying investments align with your risk tolerance. Fees can vary, so check the expense ratio.
4. Robo-Advisors
What they are: Robo-advisors are digital platforms that provide automated, algorithm-driven financial planning and investment management services. You answer questions about your financial goals, time horizon, and risk tolerance, and the robo-advisor creates and manages a diversified portfolio for you, typically using low-cost ETFs.
Why they're good for beginners:
- Low Minimums: Many allow you to start with a small amount.
- Ease of Use: User-friendly interfaces and automated management.
- Professional Portfolio Management: Access to diversified portfolios without needing deep investment knowledge.
- Low Fees: Typically charge a small percentage of assets under management (e.g., 0.25% - 0.50% annually).
Examples: Betterment, Wealthfront (US); Wealthsimple, CI Direct Investing (formerly WealthBar), Nest Wealth (Canada). Learning how to start investing can be made simpler with these platforms.
Investment Option | Key Benefit for Beginners | Typical Risk Level | Common Use Case |
---|---|---|---|
Index Funds/ETFs (Broad Market) | Low cost, instant diversification, simplicity. | Moderate (for stock indexes) | Core long-term holding, retirement. |
Target-Date Funds | Automatic rebalancing, hands-off. | Varies (more aggressive when young, conservative near retirement) | Retirement savings (e.g., in 401k, RRSP). |
Robo-Advisors | Easy setup, automated management, low minimums. | Customized to your risk profile. | Overall investment management, goal-based investing. |
High-Yield Savings Accounts (Not strictly 'investing' but foundational) | Safety, liquidity, better interest than traditional savings. | Very Low | Emergency fund, short-term savings. |
Investments to Approach with Caution as a Beginner:
- Individual Stocks: Requires significant research and carries higher risk than diversified funds. It's difficult to pick winners consistently.
- Cryptocurrencies: Highly volatile and speculative. Should only be considered with money you can afford to lose entirely, and after thorough research.
- Penny Stocks: Extremely risky and often subject to manipulation. Avoid.
- Complex Derivatives (Options, Futures): Require advanced knowledge and are not suitable for beginners.
"The individual investor should act consistently as an investor and not as a speculator." - Benjamin Graham. For beginners, focusing on proven, long-term strategies with diversified, low-cost investments is key.
How to Choose the Best Investment for YOU
The "best" investment depends on your individual circumstances:
- Define Your Goals and Time Horizon: Are you investing for retirement (long-term) or a down payment in 5 years (medium-term)?
- Assess Your Risk Tolerance: How comfortable are you with potential market downturns?
- Consider Your Account Type: Utilize tax-advantaged accounts (401k, IRA, RRSP, TFSA) first if possible.
- Start Simple: A broad-market index ETF or a target-date fund can be excellent starting points.
- Focus on Consistency: Regularly investing small amounts (dollar-cost averaging) is more important than trying to find the "perfect" single investment.
Remember that building good financial habits, like how to budget money, frees up capital for these investments.
Choosing the best investments for beginners is about finding a simple, diversified, and low-cost way to get your money working for you. Don't let the fear of making the "wrong" choice paralyze you. Start with one of the recommended options, continue to educate yourself, and stay focused on your long-term financial goals. Your future self will thank you.
What investments did you start with, or what are you considering as a beginner? Do you have any questions about these options? Share your thoughts and experiences in the comments below!
Frequently Asked Questions (FAQ)
Can I lose all my money investing as a beginner?
While all investments carry risk, losing all your money is highly unlikely if you invest in diversified options like broad-market index funds or ETFs and hold them for the long term. The greatest risk of significant loss comes from concentrating your investments in a few individual stocks, highly speculative assets, or trying to time the market.
How often should I check my investments as a beginner?
It's generally advisable for beginners (and even experienced investors) to avoid checking their long-term investments too frequently (e.g., daily or weekly). This can lead to emotional decision-making based on short-term market noise. Reviewing your portfolio once or twice a year, or when major life changes occur, is usually sufficient.
What is an "expense ratio" and why is it important?
An expense ratio is an annual fee charged by mutual funds and ETFs, expressed as a percentage of your investment in the fund. It covers the fund's operating expenses. Even small differences in expense ratios can significantly impact your long-term returns due to compounding. Lower expense ratios are generally better.
Should I invest in stocks or bonds as a beginner?
Most beginners benefit from a mix of both, typically achieved through diversified funds. Stocks (equities) offer higher growth potential but come with higher risk/volatility. Bonds are generally lower risk and provide stability or income. Your age and risk tolerance will influence the appropriate mix; younger investors with longer time horizons often have a higher allocation to stocks.
Is it better to pick my own investments or use a robo-advisor?
This depends on your comfort level and desire for involvement. If you're willing to do some basic research and prefer a hands-on approach, choosing your own low-cost index ETFs can be very effective. If you prefer a completely hands-off, automated approach where a diversified portfolio is built and managed for you, a robo-advisor can be an excellent choice for beginners.