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The Beginner’s Guide to Smart Investing

If you lived through the Great Recession, investing for the first time can seem like risky business.

According to CNBC, more than half of adults are skittish about investing — and intimidated by the world of stocks and bonds.

“About 61 percent of adults say they find investing in the stock market ‘scary or intimidating,’” reports CNBC’s Shawn Carter. “And millennials feel significantly more intimidated than Baby Boomers or those in Generation X.”

These nervous potential investors have one thing right: experimenting with the stock market does involve a certain amount of financial risk. But learning more about smart, conservative investments can also help the market’s fluctuations seem less intimidating.

Contrary to popular belief, you can also start investing no matter where you are in your financial life — whether you’re right out of college, starting your first job, or finally have a substantial financial cushion.

Follow our beginner’s guide to smart investing for help getting started.

1. Identify your financial goals and priorities

First things first: why do you want to invest? Are you trying to save money for retirement? Want to help pay for your child’s college education? Buy a house?

The clearer you are about your needs, the easier it will be to make smart decisions about where to put your money, says financial journalist Miranda Marquit. “Being able to point to a specific reason for investing can help you set the right goals, and can provide you with a way to stay motivated as you move forward,” Marquit writes at U.S. News & World Report.

For example, your average investment strategy for retirement will be different from developing a portfolio of assets to grow your wealth. You want your retirement account to accumulate steady growth over a long period of time, so you’ll make different choices than someone seeking a more aggressive short-term investment.

Finally, before you set aside money to invest, make sure that you’ve also taken care of your other financial commitments. Is all of your credit card debt paid off? Do you have a substantial emergency savings account?

“Paying down your debt saves you on the amount that you pay in interest,” explains Brian Beers at Investopedia. “Therefore, if your debt-to-income ratio is too high, focus on paying down debt before you invest.”

Once your high-interest debt is paid off, you’ll have more wiggle room in your financial life to experiment with investments.

2. Re-examine your 401(k)

If you have a 401(k) account through your employer, we have some good news: you’re already investing!

401(k) accounts are long-term investments diversified across many types of funds, so you can earn money over time without worrying about the performance of a single asset.

When you take advantage of employer match programs, you’re adding more pre-tax money to your account — and helping your assets grow more quickly.

If you’ve just opened a 401(k) and have been slow to contribute or take advantage of the opportunity for matching funds, examining your contributions is a great first investment step to take.

3. Start small

Once your 401(k) is in good shape, consider your budget. How much money do you have each month after your expenses are met? What’s a small amount of money that feels “safe” to you to invest?

Once you’ve identified your monthly contribution, you’re ready to get started. Plenty of new investors choose low-risk index funds while they get their feet wet — but what you decide to invest in ultimately depends on your tolerance for risk and whether you can ride out market fluctuations.

You can tackle stocks, too, but this requires more education, attention, and a higher tolerance for risk. To learn more about playing with stocks as a new investor, check out these helpful guides from U.S. News & World Report and GoBankingRates.com.

4. Contribute on the regular

Investment works best when you contribute small but regular amounts to your funds. Some people like to “set it and forget it” by automating monthly contributions. Other investors are more hands-on, communicating regularly with a financial advisor or moving funds around themselves.

Whatever you do, start by identifying a monthly amount in your budget that you can comfortably allocate toward investment. It’s okay if this is a small amount — even $100 will help you earn more over time.

The best tactic for newbie investors is to keep things simple — and automated, says accountant Mike Piper. “Automate your contributions every month — whether to an IRA, a retirement plan at work or both,” Piper suggested to GoBankingRates.com.

“Find a low-cost, all-in-one fund with an allocation that’s appropriate for your risk tolerance,” he added. “That way, both monthly saving and portfolio management are hands-off, thereby, saving you time and minimizing the likelihood of mistakes.”

5. Wise up

No matter where you are in your financial life, the best thing you can do to ease nervousness around investment is to read about strategy and ask for advice from a financial advisor.

This can be especially true for female investors, who face more internal embarrassment when it comes to not understanding the stock market, says financial coach Juliana Valverde.

“A lot of women feel embarrassed that they don’t know how it works,” Valverde told Daily Worth. But don’t beat yourself up, she says. “[We] aren’t taught this in school.”

To learn more about making investments, check out this helpful list of resources from CNBC.

6. Play the long game

Most investments — especially major ones like your retirement account — require patience, especially when the market fluctuates.

Impatience can be especially difficult for nervous or new investors who want to see big returns or who may have difficulty waiting out a rough patch in the stock market.

But selling too early can defeat the purpose of making an investment in the first place, says Mark McCarron, chief investment officer for Wescott Financial Advisory Group, a Philadelphia-based firm.

"Investors tend to bail out of funds that are temporarily underperforming and invest in funds that have performed well over recent periods," McCarron told U.S. News & World Report. "The net result is that investors tend to buy high and sell low, which is contrary to generating good long-term results."

Your best bet is almost always to ride out market fluctuations — and to get sound advice from a trusted financial advisor.

7. Keep fees low

Some investment accounts come with steep fees for management attached, which, over time, chip away at your nest egg.

“According to the U.S. Securities and Exchange Commission, a 1 percent portfolio fee reduces asset values by about $30,000 over 20 years, compared to a portfolio with 0.25 percent in annual fees,” reports financial journalist Brian O’Connell at U.S. News & World Report.

The good news, according to Patricia Oey, a senior research analyst for Morningstar? "Investors have been voting with their feet for low-cost funds," Oey told O’Connell. "In particular, there has been strong demand for passive funds, the average cost of which is 0.17 percent, much lower than the average 0.75 percent for active funds.”

If you’re only investing small amounts, look for passive funds with low management fees that help you keep as much of your original investment (and potential growth) as possible.

When you’re ready to invest large amounts in a high-risk portfolio, you’ll most likely want to incur a reasonable fee so you can have access to more hands-on advice and management. Remember to always ask your financial advisor for advice.

8. Cultivate good relationships

Like in many areas of your life, one of the best strategies for success can be to cultivate good relationships with other people in the know.

Maybe that’s other investors or your financial manager, or maybe it’s simply reading the regular column of an investment expert you find helpful.

Sourcing advice from lots of different people can add up to big wins — both in terms of investment and in your personal life, says John D. Spooner, author of No One Ever Told Us That: Money and Life Lessons for Young Adults.

“You need hands-on advice, not virtually, not by robots, but by real live smart people who consider the best interest of you and your family,” Spooner told CNBC. “Tough to find. But it can be priceless if you do.”

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