Start Investing: 5 Steps for the Beginner


by

28 October,2013

Many would-be investors are scared of the prospect of investing. They are concerned about how to get started, whether or not they have enough money to invest, and they worry about the complexity of investing. In fact, many people don’t ever start investing because they become paralyzed by fear and information overload.

The good news is that it doesn’t have to be that hard to get started with investing. In fact, it’s fairly easy to get started — and investing isn’t as complex as many myths lead you to believe. Here are 5 steps for the beginning investor:

1. Decide How Much Money to Invest Each Month

Rather than getting hung up on the idea that you need to have a lot of money to start investing, realize that you can start with as little as $25. Many people are surprised when I tell them that it doesn’t take much to begin investing. You don’t need a large chunk of capital. You can start with a small amount, and invest a small amount of money each month. It’s called dollar cost averaging, and it is a good way to build up your portfolio over time. Later, as you start earning more money, you can increase the amount of money you invest.

Track your spending for a month or two to figure out where you might have some money leaks. Once you identify your money leaks, stop wasting your money on what’s unimportant, and take that cash and invest it. This is a powerful way to turn the fat in your budget into long-term wealth.

2. Open a Brokerage Account

Now that you know how much you can invest each month, it’s time to open a brokerage account. There are plenty of online brokers that offer you the tools to learn how to trade. Many of these brokers will allow you to start investing with as little as $100, $50, or $25. Some of the newest online brokerages have no minimums at all, and will let you invest as little as $5 per month if that’s all you can start with.

If you start simply, and open an account at one of the more intuitive brokerages, like TradeKing¬†or Betterment (my personal favorite for a retirement account), you don’t have to get caught up in the complexities. You can use the free tools offered by the brokerage to learn the basics, and then move forward with a plan that works for you. Many of these brokerages also have low transaction costs and fees so you don’t have to worry about all of your earnings being eaten up by fees.

Plan out a long-term strategy that doesn’t involve stock picking or frequent trading.

3. Start with Funds

Begin investing with funds. It’s less risky than stock picking, especially if you get an all-market fund, or a fund that focuses on a major stock index. One of the reasons that many people are intimidated by investing is because they don’t want to pick the “wrong” stock and lose everything. The beauty of funds is that there is no stock picking involved. You get exposure to a range of assets in one swoop, and your success is dependent on the overall success of the fund, rather than relying on whether or not a single stock does well.

You can use index funds or index ETFs if you want low-cost funds. You’ll pay much less, and you’ll start building your long-term wealth. You don’t need to worry about trading a lot, and you can buy partial shares. Another great thing about using index funds or index ETFs that focus on the entire market or a major index is that you gain the advantage of total market performance over time. While there might be down days and even down years, over the course of decades, the stock market as a whole hasn’t lost yet. You don’t need to beat the market for success; you just have to keep pace.

Get started with funds, and then start doing your research. As you learn more about investing and become more comfortable, you can expand your investing horizons.

4. Set Up an Automatic Plan

Most online brokerages have automatic investing plans. This means that you can have money automatically moved from your checking or savings account into the investment account, and you automatically make purchases with the money. You can automatically buy as many shares/partial shares of the fund of your choice with the amount of your choosing. If you decide to invest $100 a month, you will automatically buy $100 worth of the fund of your choice. You don’t have to think about it, and your nest egg grows without your conscious effort.

Just make sure to increase the amount that you automatically invest as your financial situation improves, or as you find more money in your budget.

5. Stick With It

Make sure you stick with your investing plan. You want to carry on, even when you are concerned about the economic climate. Move forward with your investing plan. Historically, the stock market as a whole has not lost out over time. While there is the possibility of anything, the reality is that an index fund following a major index, or an all-market index, is unlikely to lose over the long haul.

The biggest key to success in investing, especially if you employ a dollar-cost averaging strategy that focuses on indexing, is consistency. Over time, compound interest is on your side, and you will be able to build the nest egg you need to succeed later in life. Keep with your investing plan, even when everyone else is panicking, and you will have a good chance of coming out ahead.