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The best investment for beginners may be one you're already utilizing: A workplace retirement plan, like a 401(k).
Why? Contributions are taken right out of your paycheck, which helps you build an investing habit. Your employer may match those contributions, adding to your investment return. Another nice bonus? You can also receive tax benefits for your contributions.
But perhaps you're already investing through a 401(k) and are looking for other ways to invest and earn a good return. Here are five investment options that are a good fit for beginners.
5 beginner-friendly investments
1. Robo-advisors
Maybe you’re on this page to eat your peas, so to speak. You know you’re supposed to invest, you’ve managed to save some money to do so, but you would really rather wash your hands of the whole situation.
There’s good news: You largely can, thanks to something known as a robo-advisor. These services manage your investments for you using computer algorithms. Due to low overhead, they charge low fees relative to human investment managers. A robo-advisor typically costs 0.25% to 0.50% of your account balance per year.
They’re a great way for beginners to get started investing because they often require very little money, and they do most of the work for you. That’s not to say you shouldn’t keep an eye on your account — you never want to be completely hands-off — but a robo-advisor will do the heavy lifting.
And if you’re interested in learning how to invest, but you need a little help getting up to speed, robo-advisors can help there, too. It’s useful to see how the service constructs a portfolio and what investments are used. Some services also offer educational content and tools. A few even allow you to customize your portfolio to a degree if you wish to experiment a bit in the future.
- Minimum investment: Varies depending on which broker you choose. Many robo-advisors have $0 account minimums, and you can get started investing with just a few dollars. Others have higher account minimums of a few hundred dollars to a few thousand dollars.
- Good to know: Opening an account with a robo-advisor is only the first step in the investing process — it's a vehicle rather than an actual investment. The program will prompt you to choose from a list of preset portfolios that are made up of ETFs and index funds, which is where your money gets invested.
» Learn more: See our picks for the best robo-advisors
2. Investment apps
Several investing apps target beginner investors. One is Acorns, which rounds up your purchases on linked debit or credit cards and invests the change in a diversified portfolio of ETFs. On that end, it works like a robo-advisor, managing that portfolio for you. Acorns starts investing for you once you’ve accumulated at least $5 in round-ups, but you can also make lump-sum deposits.
Another app option is Stash, which helps teach beginner investors how to build their own portfolios out of ETFs and individual stocks. Stash also offers a managed portfolio.
- Minimum investment: You can find beginner-focused investment apps that have no account minimum and let you get started investing with just a few dollars. But note that you do have to pay for a monthly subscription (usually $3 to $12) to use apps like Acorns or Stash.
- Good to know: Similar to a robo-advisor, an investing app is just a means to start investing — not an actual investment itself. After opening an account, you'll either choose from preset portfolios the app offers or create your own to start investing.
» Learn more: Find the best investing apps
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3. Target-date mutual funds
These are kind of like the robo-advisor of yore, though they’re still widely used and incredibly popular. Target-date mutual funds are retirement investments that adjust their holdings based on when you plan to retire.
Let’s back up a little and explain what a mutual fund is: essentially, a basket of investments. Investors buy a share in the fund, and in doing so, they invest in all of the fund’s holdings with one transaction.
A professional manager typically chooses how the fund is invested, but there will be some kind of general theme. For example, a U.S. equity mutual fund will invest in U.S. stocks (also called equities).
A target-date mutual fund often holds a mix of stocks and bonds. If you plan to retire in about 30 years, you could choose a target-date fund with 2055 in the name. That fund will initially hold mostly stocks since your retirement date is far away, and stock returns tend to be higher over the long term.
Over time, it will slowly shift some of your money toward bonds. This follows the general guideline that you want to take a bit less risk as you approach retirement.
- Minimum investment: Target-date funds in a 401(k) usually don't have a minimum investment. But outside of a 401(k), minimums can vary widely. You may find a fund with no minimum investments, but it's also fairly common to see minimums of a few thousand dollars.
- Good to know: One big difference between robo-advisors and target-date mutual funds? A target-date fund is an actual investment — not just a vehicle. You can invest in a target-date fund through a retirement account (like a 401(k) or an IRA), through a brokerage account or by going directly to the fund provider.
» Learn more: View the best brokers for mutual funds
4. Index funds
Index funds are like mutual funds on autopilot. Rather than employing a professional manager to build and maintain the fund’s investments, index funds track a market index.
A market index is a selection of investments that represent a portion of the market. For example, the S&P 500 is a market index that holds the stocks of roughly 500 of the largest companies in the United States. An S&P 500 index fund would aim to mirror the performance of the S&P 500, buying the stocks in that index.
Index funds tend to carry lower expense ratios — a fee charged based on the amount you have invested — than mutual funds. This is because index funds take a passive approach to investing by tracking an index rather than having a professional fund manager. But like mutual funds, investors in index funds are buying a chunk of the market in one transaction.
- Minimum investment: Index funds may have minimum investment requirements, which can run a few thousand dollars on the high end. But some brokerage firms — including Fidelity and Charles Schwab — offer a selection of index funds with no minimum. That means you can begin investing in an index fund with any amount you have.
- Good to know: The most common way to start investing in index funds is through a self-managed brokerage account. However, similar to target-date funds, you can also invest in index funds through a retirement account or by going through the fund provider directly.
» Learn more: A beginner’s guide to index funds
5. Exchange-traded funds
Exchange-traded funds (ETFs) operate in many of the same ways as index funds: They typically track a market index and take a passive approach to investing. They also tend to have lower fees than mutual funds.
Just like an index fund, you can buy an ETF that tracks a market index such as the S&P 500. The main difference between ETFs and index funds is that ETFs are traded throughout the day, and investors buy them for a share price.
Because ETFs are traded like stocks, brokers used to charge a commission to buy or sell them. The good news: Most brokers have dropped trading costs to $0 for ETFs. If you plan to regularly invest in an ETF, consider a commission-free ETF so you aren’t paying a commission each time.
- Minimum investment: An ETF's share price is essentially its investment minimum. Depending on the fund, the share price can range from under $100 to $300 or more. These days, many brokers offer fractional shares, which allow you to buy a specific dollar amount of an ETF rather than a full share.
- Good to know: As noted, ETFs and index funds are very similar — and that goes for how to invest in them, too. You'll generally want to open a self-managed brokerage account to get started investing in ETFs, but you can also go through the fund provider directly or invest in them through a retirement account.
» Learn more: See our list of the best ETF brokers
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