How to Start Investing (the Right Way): Complete Guide for Beginners

Investing
Updated: 9th Sep 2020
Written by Drew Cheneler
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Investing
June 23, 2020
Written by Drew Cheneler

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This comprehensive and complete guide will teach you how to start investing. Our guide debunks the common myths associated with investing, teaches you how to create an investment strategy, and covers the most pertinent investment topics for beginners.

So, you want to start investing?

At first, it may seem intimidating, rightfully so; however, we created an action-oriented beginners guide to help you start investing today.

Many think you need a large amount of capital to start investing, but that couldn’t be farther from the truth. In fact, you can start investing with as little as $10.

As a beginner investor, you may be asking yourself:

In this ultimate guide of how to start investing, we will answer all of your questions and more.

What Is Investing?

Investing is the purchase of an asset (such as a Stock, Mutual Fund, Bond, ETFs) with the hopes it will increase in value or make you money over time.

As an investor, your investments will make money in one of three ways (though there are more): Appreciation, Interest Payments, or Dividends.

1. Appreciation

Over time, your asset gains in value. For example, you purchase one share of stock worth $10. After five years, your stock is now valued at $50. Your stock has appreciated over this 5-year time period.

2. Interest Payments

Whether it is for your new car, mortgage, or student loan, we have all incurred debt in one way or another in the form of a general loan. The payments we made to our lenders, are how they profited from their initial investment (issuing you the loan).

3. Dividends

Certain companies will pay you either monthly or quarterly for owning a share of their company. This is the most common way a company will share profits with you.

What Is the Goal of Investing Your Money? 

The primary goal of investing is to have your hard-earned money work for you, while you maintain your working career.

It is a fine-tuned process that requires you to set aside capital and invest it into a slew of investment vehicles with the hopes it will grow over-time. As you can imagine, the goal of investing is to make money!

Although, there is risk associated with investing, people tend to invest their money because they believe it will be profitable soon. As history has shown, the market has produced strong returns for long-term investors.

When Should I Start Investing? 

If you are debt-free then there is no better time to start investing than today. However, if you are still paying off outstanding debt, then it is best start investing once that is paid off. It is important to note, that investing is a long-term game, and is considered one of the greatest tools to generate wealth.

The longer you have your money invested in the market, then the more money you will make. The earlier you start investing, then the longer your money can compound, earn dividends, and appreciate.

How Much Money Do I Need to Start Investing? 

We all have different financial goals, but there is one fundamental rule I tend to follow and recommend – only invest 15% of your annual income.

If you only want to invest $10, $100, or even $1,000 just to start out, then that it totally fine. In fact, starting with a smaller amount will allow you to get experience and learn the basics firsthand.

The best investors all learned how to invest through experience (I am not talking about Warren Buffett), but rather, the individuals who started investing in their early 20’s and are now on their way to financial freedom.

Ultimately, only invest an amount that you are comfortable with. You know your financial situation better than anyone else.

What Type Of Investor Am I? 

As a new investor, it is paramount that you know what type of investor you are. Some investors prefer to actively manage their own portfolio. This means they buy and sell all of their stocks, index funds, and mutual funds on their own.

An active investor relies on their own investment research, instincts, and experience to manage and adjust their portfolio throughout their life. If you are interested in researching stocks, bonds, and other investment vehicles, then we urge you to turn to Morningstar to help you make calculated decisions.

On the other hand, some investors enjoy the “set it and forget it” mentality, which means they are passive investors. Passive investors embrace the long-term mindset.

They prefer to buy an index fund, stock, or mutual fund and hold it for years. Playing the long-term game allows your portfolio to compound overtime. This strategy is used by some of the most famous investors, like Warren Buffett and Benjamin Graham.

As the legend himself says…

How to get into stocks

“Only Buy Something That You’d Be Perfectly Happy To Hold If The Market Shut Down For 10 Years.” – Warren Buffett

How to Start Investing: What Do I Invest My Money In? 

Deciding what to invest your money in may be the hardest part. Fortunately, Robo-Advisors exist. They are designed to automate your investment strategy.

But, if you would like more control over your investments, then below are the six most common assets you can invest in.

Ready to start investing? Read our Acorns Investing Review.

1. Stocks

Commonly known as equities, stocks are individual shares of ownership in a single company. There are one of two ways you can profit from a stock.

First, your individual share appreciates over-time, “grows.” Second, the company you own offers a dividend. This means they will pay you (monthly or quarterly) for being a shareholder.

2. Real Estate Investment Trusts (REITs) 

Real Estate Investment Trusts (REITs) are companies that own, operate, and finance real estate deals. REITs allow the average investor to expose themselves to income-producing real-estate assets.

Fortunately, as technology continues to ramp, we are afforded with powerful ways to invest in real estate. Gone are the days where we have to put 10-15% down payment on an apartment, town home, house, or commercial property.

Companies, like Fundrise, provide you private real-estate deals for you to invest in. Their deals can range from Strip Malls to Apartments, regardless it is a chance for you to invest in real estate with a much cheaper entry point.

3. Bonds

I am sure you have heard your grandparents talk about bonds once or twice in your life. Let’s cut right to it. Think of bonds as a loan to a Government Institution or Company.

A Government or Entity will pay you a certain interest rate over a specific time period for ‘borrowing’ your capital. Fret not, companies use this capital for growth purposes and internal company investments.

Learn More: Difference between bonds and stocks

4. Mutual Funds

For years, mutual funds have been a staple for passive investors. It is a large pool of money that a fund manager receives from individual investors, like you. These fund managers will then select a variety of stocks or bonds on your behalf.

Mutual funds free you from picking individual stocks and other alternative investments, but since it is actively managed, you can expect to pay a small fee. However, if you want to be as hands-off as possible, then this is a great option for you.

Further, some mutual funds only invest in stocks that fall into one of three market capitalization’s: Small Cap, Mid Cap, & Large Cap. This allows the fund to further diversify their holdings and mitigate risk.

Calculating Market Capitalization is straight forward and easy. It is simply the (number of outstanding shares x Stock Price).

Learn More: Index Fund vs. Mutual Fund

5. Index Funds

Like a mutual fund, a simple index fund is a great investment option for most investors. The only difference is that an index fund is not actively managed by a professional, so there are less fees associated with this investment asset.

An index fund is designed to mirror a broad market index, such as the S&P 500, Dow Jones Industrial Average, or the Nasdaq. The index funds performance is based off how well the broader market index it is tracking performs.

6. Exchange Traded Funds (ETFs)

Again, an ETF is nearly identical to an index fund; however, this investment asset trades like a stock, so it is easy to buy and sell. Additionally, there are more options.

For example, you can purchase an ETF that tracks only growth stocks, or one that invests in Gold or Silver. It is important to note, that ETFs are not actively managed and traditionally have the lowest associated fees.

Common Investment Fees

As you begin to invest your money, there is one thing most investors fail to consider and often overlook: Associated Investment & Brokerage Fees.

  • Expense Ratio – An annual fee that most mutual funds, index funds, and ETFs will charge you. The industry average is between 0.5% – 1.0%, so relatively low, but in some cases it can get as high as 2.5%.
  • Stock Trading Commission – By now, most brokerages are commission-free; however, you may encounter this fee when you buy or sell options, stocks, or ETFs.
  • Brokerage Fee – An annual fee that a brokerage firm will charge you for holding your investments within your account. This fee is used for maintenance, customer-service, access to advanced market research, and more.
  • Advisory Fee – A fee an investor will pay to a Certified Financial Planner, Financial Advisor, or nowadays, to a Robo-Advisor.
  • 401(k) Fee -An annual fee the employer will charge to maintain your current 401(k) investment plan.
  • Mutual Fund Transaction Fee – A recurring fee that is charged when you buy or sell a mutual fund.
  • Sales Load – This is a common fee or commission paid to the Broker, when they sell a mutual fund. This fee only applies to select brokerages and mutual funds.

How to Start Investing: Different Type Of Investment Accounts

Now that we have a strong understanding of what assets we would like to own; it is time to choose where we will invest our capital. Below is a list of the primary investment accounts you should consider:

  • Employee Sponsored Investment Account – Think 401(k), 403(b), 457s, TSP, ect.
  • Retirement Account (Roth IRA & Traditional IRA)
  • Taxable Accounts (Brokerages)
  • Robo-Advisors

Employee Sponsored Investment Account

If you have an employee sponsored plan (401(k), 403(b), 457, or TSP), then this is the first place you should invest your money. Simply ask your employer if they offer employees a sponsored plan. Why? Your employer will match you a specific amount!

My question to you: Why would you leave free money on the table? Contributing to an Employee Sponsored Investment Account allows you to set money aside for the future and reduces your overall taxable income.

This year, the Internal Revenue Service increased the contribution limit to $19,000 with an additional $6,000 for catch-up (only applies if you are over 50 years old).

Remember, all contributions you make are ‘pre-tax,’ which means you do not pay income tax. However, when it is time to withdrawal your money in retirement, you will then pay income tax, but fortunately, in retirement you are in a lower tax bracket, so you are not paying nearly as much.

Retirement Account

If your employer does not offer an employee sponsored investment account or you have reached your annual contribution limit, then the next thing you need to do is max out a Retirement Account.

Fortunately, as an investor there are two types of investable retirement accounts: Traditional IRARoth IRA.

Like an employee sponsored plan, there are contribution limits for retirement accounts. In 2019, you allowed to contribute $6,000 per year ($6,500 if you are over the age of 50).

Roth IRA

Acclaimed as one of the most powerful investment vehicles, a Roth IRA, is completely funded with ‘after-tax’ dollars. What does this mean? Every contribution you make to your Roth IRA is taxed up-front, so when it is time to withdrawal your money it is completely tax-free.

Although, there are some stellar tax benefits, the Roth IRA is only available for certain income levels. It is important to check and see if you qualify for this retirement account.

Traditional IRA

Though your contributions in a Roth IRA are taxed upfront, a Traditional IRA taxes your money once you decide to withdrawal your cash. Since you are contributing ‘pre-tax’ dollars, this will allow you to reduce your annual taxable income.

If you would like immediate access to your cash, then a retirement account is not for you. If you would like to pull money out of your retirement account before the age of 59½, expect to encounter a penalty fee and other restrictions.

Regardless if you choose a Roth IRA or a Traditional IRA, make sure you choose the retirement account that best aligns with your financial goals and lifestyles.

Brokerage Accounts

A standard brokerage account provides the most flexibility for any investor and are straightforward. These accounts allow you to easily buy and sell any investment asset, provide detailed real-time market research, and a myriad of other benefits; however, these financial accounts offer no tax-benefits. If you want easy access to your money and no contribution limits, then a brokerage account is the best option.

Make sure to check out our popular article on the best Online Brokerages for Beginners.

Robo Advisors

With the rise of technology and innovation, the Financial Industry is now pivoting away from high-fees and catering to the wealthy. Robo-Advisors rely on advanced algorithms to create a well-balanced and diversified portfolio, which caters towards your specific financial goals and lifestyle.

At the intersection of tech and ease, Robo-Advisors provide their clients with tax-loss harvesting strategies, robust asset allocation, and low-fees. Opening an account with one of our favorite Robo-Advisors is best for individuals who want to have a hands-off approach to investing.

Here is one of our our favorite Robo-Advisors:

Betterment Robo-Advisor

Betterment allows their clients to register with no minimum account balance. With a wide variety of tools, Betterment employs advanced technology to invest your money.

As an industry leading robo-advisor Betterment allows you to focus on what matters in life – family, friends, and life experiences. This online brokerage firm is designed for truly passive investors who want to compound their net-worth without having to worry about the stress of actively managing a portfolio.

Dive Deeper: Best Investment Apps for Beginners

Create an Investment Strategy

Before you start investing, you need to create an easy-to-follow investment strategy. Believe it or not, this is relatively easy and straight forward. In fact, it can take as little as 5-10 minutes to create a profitable investment strategy. To help you create an award-winning investment strategy we outlined two key steps:

How to create an investment strategy.

Outline Your Goals

It is important to note what your financial goals are. As an investor, are you content with earning 5-6% annually? Are you primarily focused on investing for a safe and enjoyable retirement? If so, then investing in a diverse set of ETFs or mutual funds may be your best bet to achieve your goals.

Decide on Your Asset Allocation

In the World of investing, asset allocation is one of the most important decisions you will make. Why? This is essentially the way you mitigate your exposure and risk to a certain aspect. Asset allocation refers to how much money you put into stocks, bonds, or leave it as cash.

For example, as a young investor (ages 18-25), it is in your best interest to own 90% stocks and 10% bonds. As a young investor, you should take on more risk, because you have time on your side.

This will position your portfolio to enjoy long-term growth. However, if you are nearing retirement, then it is best to own 50% stocks and 50% bonds.

Ultimately, before you decide on your specific asset allocation, try and answer these leading questions: What is your Investment Time Frame? How much risk and exposure are you willing to assume?

Refining your asset allocation is a continuous process. The decision you make today, will not be the same in 2-3 years. Our financial goals are constantly changing, which means your asset allocation will change as you tailor it to meet your specific financial needs and obligations.

What Is Investment Diversification? 

Like asset allocation, investment diversification allows you to further reduce your overall risk and portfolio exposure. As a new investor, you want to ensure you do not put ‘all of your eggs in one basket.’

In your investment portfolio, you want to own multiple stocks, different index funds, and various mutual funds. This allows you to spread your capital across a wide range of industries.

Let me be clear, the worst thing you can do, is put all your capital into one stock or one fund. Why? Instead, you want to focus on owning stocks in multiple sectors or own a series of funds that track different indexes.

This eliminates your exposure and risk to one specific sector, which will protect your capital. Remember, protecting your capital is one of the most important rules of investing.

Summary: How to Start Investing

As you can see, the process of learning how to start investing is not as arduous as it may seem. In fact, it may take as little as 10-20 minutes if you follow the steps we have outlined. Remember, we all have different financial obligations and goals; however, investing is a chance for you to elevate your net-worth and live a financially free life.

What are you waiting for? 

Narrow down your financial goals, create an investment strategy, and choose the broker that aligns with your stated goals and the life you plan to live.

Drew Cheneler
Drew Cheneler
Drew is a recognized Credit, Small Business, and Personal Finance Expert. He has been quoted in CNBC, The Huffington Post, Business.com, Moneyunder30, and more. He is known for breaking down complex personal finance topics into action-oriented advice, so you can make the most of your hard-earned money.