Jan. 18, 2011 -- Its easy to get confused and even a little overwhelmed once you start thinking about starting to invest "Good Morning America's" personal finance contributor Mellody Hobson is here to help answer your questions.
How to Start Investing
After you have contributed to your 401(k) and put aside three to six months of savings in an emergency fund, it is time to start thinking about how you want to invest your extra money.
First, develop a financial plan and determine what you are saving for and how much you want to save. To be on the safe side, consider putting your money in investments that fit the risk level you are willing to live with. Remember, many times investments with larger, short-term returns carry the highest risk. To reduce your risk, you should diversify among different investments.
Are Mutual Funds Right for You?
One of the best ways to diversify is through mutual funds. Mutual funds are a collection of stocks that usually fall into a specific category, such as an industry. You can buy mutual funds directly from your broker.
There are literally thousands and thousands of mutual funds out there, so it is important that you thoroughly research the mutual funds you are considering. You can get information on a specific fund from your broker. Another great source is morningstar.com, which publishes ratings and analysis on almost every type of mutual fund.
Research will help you find funds that are aligned with your goals and risk appetite. Also make sure you understand the fees associated with each mutual fund. These fees can eat unto your investment performance. Your broker should be able to explain all the related fees to you.
Should You Invest in Individual Stocks?
If you decide you want to invest in individual stocks, then try to pick companies you understand in industries you know. There is nothing worse than not understanding the companies you invest in. There are many great books, magazines and newspapers out there to help you. The one book I really love is "A Random Walk Down Wall Street." It is a must-ead for any investor.