If you're like many Americans watching the recession unfold, you've probably started to look at your finances more closely. Maybe you've started saving - the personal savings rate by American households has risen from below 1% in 2005 to a recent peak 6.9% in May of 2009 before settling down at around 3% at last measure. Now you're wondering: what about investing my money? How do I start if I don't have a lot, and how do I limit my risk? Here are seven steps to become an investor, the low-risk way.

In Pictures: Learn To Invest In 10 Steps

  1. Determine Your Needs
    When thinking about investing, you should first think about how liquid your money needs to be, or how quickly you should be able to access it. How likely are you to have to withdraw it again? Some investments are more liquid (like savings accounts) or easy to convert to cash than others (bonds, for example, often have a fixed term). Liquidity is a large factor in choosing investments, so examine your financial situation carefully before forging ahead.

  2. Identify Your Investment Goals
    What is your goal in investing? Is it to fund a retirement, your child's college or next year's vacation? Identifying these goals will help you determine your risk tolerance, since you'll know how long you'll be investing your money for. Long-term investments have different considerations than short-term ones. (Find out how to reach your long-term goals without becoming a tightwad; read 10 Simple Steps To Financial Security Before 30.)

  3. Understand Your Risk Tolerance
    Once you've identified your goals and how long you're planning to invest your money for, you should determine your risk tolerance. Here's a quick rule of thumb: the higher the return, the higher the risk. If you want to earn 15% on your stock investment, you also have to be willing to swallow the loss if your stock goes south (remember the recent stock devaluation following the housing crisis?). Here's where your goals come into play: a long-term investor can simply ride out these ebbs and flows of the stock market, but someone who needs that money to pay for their daughter's college tuition this year would be financially devastated.

    If you are worried about risk, consider investments without a loss of principal - meaning you can't lose the money you've invested - like bonds or certificates of deposit. These investments have a much lower return than stocks, but they may help you sleep better at night. (Learn more about your risk tolerance, read Personalizing Risk Tolerance.)

  4. Special Risk Consideration: Inflation
    An important factor to consider when becoming an investor is risk of inflation. Let's say you're saving for your retirement, and you want to invest low-risk. You've found a certificate of deposit that pays a fixed 3% interest, with no loss of principal - not bad, you think. But what about inflation? Let's say inflation is at 3% (about average) - that means your investment really just managed to keep pace with inflation. For short-term investments, that's OK, but if you're hoping to retire someday, this inflation risk may be more pressing than the fluctuations of the stock market. Think about the term of your goal, and your comfort level with risk before making any decisions on investments. Be sure to factor in inflation when projecting your investment returns - inflation is an unfortunate but guaranteed part of life. (Learn more by reading our Inflation Tutorial.)

  5. Start Small
    Only have a little money to invest each month? That's actually a good thing: investing monthly (called dollar-cost averaging) helps you even out the natural ebb and flow of investments that happens throughout the year. That $50 a month leaving your bank account on payday that you barely notice will add up to $600 a year, plus your return on investment. Starting small also helps you get used to investing and how it works, and will quickly reveal your comfort with risk.

  6. Do Your Homework
    So how do you decide where to invest your money? Do your homework. Spend some time learning about different investment forms and how they perform, minimum investment required and so on. Some mutual funds will waive or reduce their initial investment requirement if you make regular deposits. Find out how each investment has performed in the last year, five years, and ten or more years. You can then match your liquidity needs, goals and risk tolerance that you've determined in previous steps to the right investment.

  7. Check Up (But Don't Obsess)
    Once you've started investing, check on your account's performance regularly. Don't get too caught up in the daily or monthly fluctuations of your investment's return; remember your investment term and goal. If your investment keeps underperforming compared to its counterparts, go back to the drawing board and find somewhere else to invest. Include your investments as you check on your budget periodically.

The Bottom Line
All investment comes with some form of risk. With these steps, you can ensure that you're minimizing your risk by being an informed investor.

Feeling uninformed? Read this week's financial news highlights in Water Cooler Finance: Buffett's Armed and Greece Keeps Falling.

Related Articles
  1. Investing

    How ETFs May Save You Thousands

    Being vigilant about the amount you pay and what you get for is important, but adding ETFs into the investment mix fits well with a value-seeking nature.
  2. Stock Analysis

    The Biggest Risks of Investing in Netflix Stock

    Examine the current state of Netflix Inc., and learn about three of the major fundamental risks that the company is currently facing.
  3. Mutual Funds & ETFs

    3 Fixed Income ETFs in the Mining Sector

    Learn about the top three metals and mining exchange-traded funds (ETFs), and explore analyses of their characteristics and how investors can benefit from these ETFs.
  4. Bonds & Fixed Income

    High Yield Bond Investing 101

    Taking on high-yield bond investments requires a thorough investigation. Here are looking the fundamentals.
  5. Retirement

    How Robo-Advisors Can Help You and Your Portfolio

    Robo-advisors can add a layer of affordable help and insight to most people's portfolio management efforts, especially as the market continues to mature.
  6. Mutual Funds & ETFs

    Top 3 Muni California Mutual Funds

    Discover analyses of the top three California municipal bond mutual funds, and learn about their characteristics, historical performance and suitability.
  7. Stock Analysis

    The 5 Best Buy-and-Hold Energy Stocks

    Understand why energy companies' stock are volatile when oil prices are volatile. Learn about the top five energy companies to buy and hold.
  8. Mutual Funds & ETFs

    Mutual Funds Are Not FDIC Insured: Here Is Why

    Find out why mutual funds are not insured by the FDIC, including why the FDIC was created and how to minimize your risk with educated mutual fund investments.
  9. Professionals

    How to Sell Mutual Funds to Your Clients

    Learn about the various talking points you should cover when discussing mutual funds with clients and how explaining their benefits can help you close the sale.
  10. Professionals

    Fund and ETF Strategies for Volatile Markets

    Looking for short-term fixes in reaction to market volatility? Here are a few strategies — and their downsides.
  1. Why have mutual funds become so popular?

    Mutual funds have become an incredibly popular option for a wide variety of investors. This is primarily due to the automatic ... Read Full Answer >>
  2. What licenses does a hedge fund manager need to have?

    A hedge fund manager does not necessarily need any specific license to operate a fund, but depending on the type of investments ... Read Full Answer >>
  3. Can mutual funds invest in hedge funds?

    Mutual funds are legally allowed to invest in hedge funds. However, hedge funds and mutual funds have striking differences ... Read Full Answer >>
  4. When are mutual funds considered a bad investment?

    Mutual funds are considered a bad investment when investors consider certain negative factors to be important, such as high ... Read Full Answer >>
  5. What fees do financial advisors charge?

    Financial advisors who operate as fee-only planners charge a percentage, usually 1 to 2%, of a client's net assets. For a ... Read Full Answer >>
  6. Can your car insurance company check your driving record?

    While your auto insurance company cannot pull your full motor vehicle report, or MVR, it does pull a record summary that ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!