Do you want to learn how to invest but just don’t know where to begin? We’ve put together this handy guide to investing for beginners to set you on the right path to protecting and growing your hard-earned money.
Investor Junkie was founded with one main purpose: to help everyday folks make better financial choices. Our educational articles are written to help make investing easy — be it in stocks, CDs, real estate or any other product. And our in-depth reviews can help you make decisions when it comes to which software or app to use.
But what if you’re just starting out and are a complete newbie to the idea of investing and personal finance? That’s what we’re going to address in this and the next series of articles.
We’re taking a holistic approach to investing. Yes, for you it may involve putting your money into stocks and bonds, but there’s more to it. Paying down or off consumer debt, creating a smarter budget and even investing in yourself as an entrepreneur may be part of your investing journey.
So let’s get the ball rolling!
Why Should You Invest Your Money?
I’ve heard the same story from many people I know: “What’s the point of investing? After bills, I have so little money left over to invest. Either I won’t make enough to make a difference or I’ll lose it all!”
First things first. We here at Investor Junkie certainly do not want you to lose it all. That’s why we warn folks against risky behavior such as day trading. Our goal is to provide you with safe, sustainable ways to grow your money for important events such as retirement or your kids’ college education. We certainly don’t want you to gamble that precious nest egg away!
As for the other point — not having a lot of money to start investing — you’d be surprised how a little goes a long way.
That’s thanks to the power of compound interest. With compound interest, time is on your side.
Let’s say you’re 25 years old and you can pull together $5,000 per year to invest. That’s money you may have accumulated from holiday bonuses from your boss and birthday checks from good ol’ Aunt Mabel.
Anyway, if you were to invest $5,000 every year for 40 years, when you’re 65 and ready to retire, you’ll have spent just $200,000. But if you put that money into a safe investment with, say a 7% annual return, you’ll have made $1,068,048. More than $1 million!
And if you were to increase your monthly contributions, you’d see even more money when it’s time to retire.
Of course, although Millennials are perfectly poised to take full advantage of compounding, anyone can benefit.
However, the sooner you get started investing, the better- even as investing a teenager.
What Should You Do to Start Investing?
Ready to get going, then?
Great! Let’s get started!
But how to start?
Here are some important steps you should take when you’re beginning your wealth-building journey.
Step 1: Choose Your Investment Strategy
Before you start investing, you should think about what type of strategy you’d like to use. This involves determining what your financial goals are — including what you’re saving and investing for, when that event will occur, and how much you’ll need.
There are many different financial strategies to choose from, from stocks and funds to real estate and peer-to-peer lending. Some strategies will require you to be actively engaged in investing, while others are “set it and forget it.”
Not all investment strategies will work for all people. That’s why you need to consider your financial situation — both present and future — first.
We’ve created a guide with some good starting places for beginners. Take a look and ask yourself some questions before deciding what path you’ll follow on your investment journey.
Step 2: Get Rid of Consumer Debt
If you’re like most people, you have some revolving debt balances. That means credit cards you don’t pay off in their entirety every month.
I understand — I’ve totally been there, paying just the minimum every month for years and years. It feels like you’re trying to bail out a leaking boat with a bucket… only to empty the bucket over your head!
Now, not all debt is evil (take that, Dave Ramsey!). Sometimes some debt can even help you make more money — such as taking out a loan to buy a house that you use for rental income. (Here’s a guide to good vs bad debt.)
However, credit card debt is definitely bad. Not only will paying it off reduce your stress and risks, but it will also free up your cash flow. In fact, paying off your debt is an awesome investment, because it locks in a guaranteed rate of return! Paying down a card that carries a 19% APY is like giving yourself a 19% annual bonus.
Step 3: Define Your Budget
OK, so budgeting may get a bad rap (and maybe not everyone should have one). But in reality, having a budget can be extremely helpful when it comes to saving money to use for investing.
When you budget, you can get a clear view of where you spend your money. With that knowledge, you can continue your spending habits or change them!
Now, there are plenty of methods for setting up and maintaining a budget. It doesn’t have to be rocket science. You can use a spreadsheet and just paper and a pen. Or you can use one of the helpful online services that do the heavy lifting for you. (Personal Capital is a free budgeting and personal finance software that we particularly recommend.)
Step 4: Reduce Fees and Fund Expenses
Investment expenses — i.e., fees — can take a hefty chunk out of your returns. So make sure you’re not getting ripped off.
There are many different kinds of fees — everything from account maintenance costs to mutual fund loads. And there are many ways to cut back on them or even avoid them completely!
We’ve reviewed several products that are fee-free. In fact, one of our favorite robo advisors, Wealthfront, is free for accounts under $5,000. That makes it a great place to get started.
And if you’re looking for a fee-free stockbroker, you’re in luck. The competition in this space is heating up, which means some brokerages are slashing their fees to zero. Robinhood has been a trailblazer, but even old favorite Firstrade has gone fee-free.
Step 5: Create Your Asset Allocation
OK, so this step is absolutely critical. Asset allocation is the strategy by which you divide your investment portfolio among several different asset categories. These can include stocks and bonds, but also real estate, alternative investments and even cash.
The point of asset allocation is to minimize your risk by keeping your portfolio diverse. It’s literally not putting all of your eggs in one basket.
Asset allocation is definitely not one size fits all. And there are several methods and models for determining which allocation is right for you.
Here at Investor Junkie, we tend to favor allocation models that use Modern Portfolio Theory. Known also by the acronym “MPT,” this strategy helps you decrease your return risk by diversifying your portfolio into many assets. MPT holds that asset classes are not correlated to each other. As one asset goes down in value, another can go up. When one zigs, another zags.
In general, robo advisors use Modern Portfolio Theory in their algorithms to help tailor-make a portfolio allocation for you.
When Is the Right Time to Start Investing?
This should be a no-brainer. The obvious answer is: right now!
Remember, as I stated above, time is on your side. So make the most of that advantage.
We’ve written about how you can get started with very small amounts of money. One of our most popular articles involves how to get into the stock market with only $500.
And one of the best ways to do just that is with a microsavings service called Acorns.
Acorns works in a unique way. It takes the spare change from every purchase you make and invests it. So if you buy a carnitas burrito at Chipotle for $6.95, Acorns will round up the amount to $7 and invest the 5 cents into your portfolio. Because it can do this with every purchase you make, your portfolio will grow quickly and painlessly.
But that’s not all. Acorns includes other features such as Found Money, which puts extra amounts into your account when you shop with Acorns’ partner brands. You can even invest your money into a specially designed individual retirement account (IRA). (Here are some other ideas for making the most of an Acorns account.)
Acorns costs only $1 per month for accounts under $1 million. And it’s free for users who are under age 24 and in college.
What Is Your Investing Style?
If you’re like most of us, you’ve gotten suckered into taking one of those goofy Facebook quizzes: Which Star Trek Alien Are You? Which Stinky French Cheese Matches Your Personality? You know the drill.
Well, here’s one that is actually useful: What’s Your Investing Style?
Really, the only way to answer this question is by being honest with yourself. Check out the two major investor profiles and determine which one fits your investing style best. Which statement do you agree with?
- “I would prefer to have a professional manage my investments for me.” If you’d rather “set it and forget it,” you’re going to be happiest using a robo advisor. They do all the heavy lifting for you! However, you might find the lack of control over what you invest in limiting.
- “I like to do the research and pick investments myself.” Do you prefer a hands-on approach? If you get a thrill out of research and having control over what’s in your portfolio, you’re a DIY kind of dude (or dudette). You’ll do best by finding a stock broker, rolling up your sleeves and getting to work.
A Few Terms to Know
Whether you choose to hire a robo advisor or go it alone, there are a few terms you should know when you start investing.
Stock: A stock is a share of ownership in a company. It represents a claim on that company’s earnings and assets. Generally, when a company performs well, the value of the stock grows. And when the company doesn’t meet expectations… well, it goes down.
Bond: Buying a bond is basically lending money to a company or government (federal, state or municipal). Bonds have maturity dates at which time you can cash them in and collect interest money.
Mutual Fund: A mutual fund gathers money from a lot of investors and invests it in assets such as stocks and bonds.
Cash: Yeah, it’s the green notes in your wallet. But in portfolio terms, cash usually refers to CDs (certificates of deposit), money market accounts or Treasury bills.
Expense Ratio: You’ll see this term when it comes to mutual funds. This refers to the expenses of owning a fund, including annual maintenance and administration fees, as well as the costs the mutual fund takes on for advertising.
Price-to-Earnings Ratio: When looking at a stock’s fundamentals, the price-to-earnings ratio (or P/E ratio) is important. It examines a company’s stock price as it relates to its earnings. A low P/E of 10 or less means the company isn’t doing so well. But higher is not necessarily better — a ratio of over 25 may be a sign that the industry is about to have its bubble burst.
What to Do Next
OK, so now that we’ve covered the basics of how to invest, it’s time to get started! But don’t worry — we’re not going to cut you totally loose. Here at Investor Junkie, we’ve made it our mission to help you every step of the way.
But for the time being, here’s your homework assignment:
If you’re a DIY investor, select a stock broker. We have reviewed the most popular online discount brokerages out there. Here’s a guide to choosing the right one. And here’s a roundup of our favorite stock brokers for beginning investors.
If you’re a “set it and forget it” investor, select a robo advisor. Robo advisors have democratized personalized financial advice, making it affordable for folks who simply couldn’t afford a traditional advisor. A great robo advisor will take into account your personal situation: how much you have to invest, how long you have to invest, and your risk tolerance. Here are our favorite robo advisors for 2018.
Remember, investing may seem daunting at first, but it doesn’t have to be a terrifying ordeal. If you do your research and due diligence — and play it safe with your hard-earned money — you should be well on your way to a healthy and robust financial future.