A Complete Guide to Investing for Beginners

A Complete Guide to Investing for Beginners

1. Determine Your Goals, Risk Tolerance and Time Horizon

Your first step to becoming an effective investor is to establish a “game plan.” A good investing game plan should be influenced by three aspects: your goals and motivation, risk tolerance and horizon.

Investing Goals and Motivations

First up are your goals for investing: Why are you investing? What’s inspiring you to open a brokerage account? Finding your “why” is a critical first step in investing because the wrong “why” can lead you down the wrong path.

If your motivation is to “make money, fast” or “get rich,” you might want to pump the brakes. It’s not hard to get rich slowly off the stock market — but it’s immensely difficult to get rich quickly. Don’t let the front page of r/wallstreetbets mislead you; in reality, less than 1% of day traders make enough money to even cover their trade fees, according to CNBC.

FOMO is also not a good investing strategy as it can lead to making rash decisions that aren’t a fit for your risk tolerance or long-term goals. Worse still, share prices upheld by FOMO-induced investors tend to crash (see GME).

Good “whys” that lead to better long-term gains include, but aren’t limited to:

  • Slowly and steadily multiplying your wealth
  • Self-educating about the stock market and our financial system
  • ESG investing, or investing in companies that benefit the earth and society

Again, going in with a clear “why” statement will help you stay focused throughout the emotional ups and downs of investing.

Risk Tolerance

Would you prefer $2,500 in cash or a 50/50 chance at winning $10,000?

Your answer reveals something about your risk tolerance — that is, your financial and emotional ability to withstand a loss in your portfolio. Your age, income, dependents, investing goals and your personal comfort level all factor into your risk tolerance.

In tangible terms, your risk tolerance will dictate your overall portfolio mix. If you have a low risk tolerance, you’ll want to bias your portfolio towards safe investments like exchange-traded funds (ETFs) and mutual funds. If you have a high risk tolerance, you can spend more on high-risk/high-reward stocks.

Time Horizon

Your investing time horizon determines when you plan to cash out your investments. The shorter your horizon, the less risk you want in the portfolio.

Generally speaking there are three time horizons:

  • Short-term: Under 3 years
  • Medium-term: 3 to 10 years
  • Long-term: 10 years or longer

If you’re reading this in 2022, and you plan to pull your money out for a house down payment in 2025, you may want to open a short-term account separate from your retirement account with a specific horizon of three years. In that account, you’ll want to focus on low-risk, short-term investments like target-date mutual funds or index funds.

Investment Help

There’s a lot to learn when you begin investing, and no one starts out an expert. Even the savviest investors started with limited knowledge.

Luckily, you have options.

Consulting a financial planner or advisor is always a smart decision. Financial fiduciaries are paid through flat hourly rates instead of commission and are required to put your best interests first.

If you’ve inherited or won a large sum of money, professional investment advice is critical, especially if you are new to investing. While financial planning services cost a little extra money, sound advice and peace of mind is priceless.

Marguerita M. Cheng, Chief Executive Officer of Blue Ocean Global Wealth, believes there is great value in working with a financial advisor if you are new to investing.

“For our clients, we address both short-term savings for any emergencies or opportunities that arise and a long-term investing plan for their life financial goals,” says Cheng.

“This gives them peace of mind and allows them to avoid making emotional decisions with their investments.”

If you’re starting small with minimum capital, consider using tools like robo-advisors or micro-investing apps to familiarize yourself with the market.

What Is a Robo-Advisor?

A robo-advisor is an investment management service that uses algorithms to build and look after your financial portfolio.

Betterment, Wealthfront and Ellevest are popular examples. These companies use computer models to determine the best portfolio mix for your unique needs based on your age, income and goals.

When you open a robo-managed account, you usually supply basic information about your investment goals through an online questionnaire. Robo-advisors build their portfolios largely out of low-cost ETFs and index funds, which are baskets of investments that often reflect the behavior of the S&P 500 or another index.

Using a robo-advisor can be a good move for beginner investors. They allow you to quickly manage your investments without consulting a financial advisor.

Most robo-advisors have account minimums of $500 or less and offer low management fees of 0.25 percent. Some programs can even sell certain assets at a loss to offset gains in other assets — a process called tax-loss harvesting — that can help reduce your tax bill.

However, you’ll pay the fees charged by index funds and ETFs, called expense ratios, in addition to that management fee.

Micro-Investment Apps

Micro-investing apps, such as Acorns or Stash, are types of robo-advisors. These apps allow you to save and invest money in small amounts.

By linking a credit or debit card, these apps round up purchases to the nearest dollar. When you reach $5 in spare change, the app invests that money for you into a diversified portfolio.

You can also opt to have a specific amount of money, $20 for example, transferred from your bank account to the micro-investing app each week.

Like robo-advisors, these apps invest your money into a portfolio of ETFs. Your investments are then diversified across thousands of stocks and bonds.

These apps let you begin investing with just $5 or less. Acorns also lets you choose a portfolio based on your risk tolerance.

While micro-investment apps are easy to use, returns are minimal. That’s why some experts suggest spending your spare change elsewhere.

“You can round up your Starbucks purchase by a nickel for the rest of your life, and then you’ll have a handful of nickels,” financial expert Chris Hogan wrote in a 2020 blog post. “Micro investing produces micro results.”

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Are you investing reasonably?

Now that you understand how investing works, it’s time to think about where you want to put your money. As a rule of thumb, remember that the best risk an investor can take is a calculated one.

But how can you be calculated? How can you distinguish a smart investment from a risky investment? Truthfully, “smart” and “risky” are relative to every investor. Your circumstances (e.g., age, amount of debt, family status) or risk tolerance can help you identify where you fall on the risk spectrum.

In general, younger investors with many years before retirement should have riskier portfolios. That longer time horizon gives investors more years to weather the ups and downs of the market — and during their working years, investors are ideally just adding to their investment accounts rather than taking money out.

Someone at or near retirement, however, is much more vulnerable to changes in the market. If you use an investment account to cover your living expenses, you could be forced to take that money out of the account during a downturn in the market, which would not only shrink your portfolio but also could ensure significant investment losses.

A higher-risk portfolio would likely encompass a significant number of stocks and fewer (if any) bonds. As young investors grow older and need to reduce the risk in their portfolios, they should reduce their investment in stocks and increase their investment in bonds.

The ebb and flow of life will influence your investments more than you may realize. Being realistic about your current financial prospects will keep you clearheaded about where to invest your money.

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5. Continue investing

Here's one of the biggest secrets of investing, courtesy of the Oracle of Omaha himself, Warren Buffett. You do not need to do extraordinary things to get extraordinary results. (Note: Warren Buffett is not only the most successful long-term investor of all time, but also one of the best sources of wisdom for your investment strategy.)

The most surefire way to make money in the stock market is to buy shares of great businesses at reasonable prices and hold on to the shares for as long as the businesses remain great (or until you need the money). If you do this, you'll experience some volatility along the way, but over time you'll produce excellent investment returns.

Five Ways to Double Your Money

Doubling your money is actually a realistic goal that most investors can strive toward and is not as daunting a prospect as it may seem initially for a new investor. There are a few caveats, however:

  • Be very honest with yourself (and your investment advisor, if you have one) about your risk tolerance; finding out you don't have the stomach for volatility when the market plunges 20% is the worst possible time to make this discovery and may prove very detrimental to your financial well-being.
  • Don't let the two emotions that drive most investors—greed and fear—have an adverse impact on your investment decisions.
  • Be extremely wary about get-rich-quick schemes that promise you "guaranteed" sky-high results with minimal risk, because there's no such thing. Because there are probably many more investment scams out there than there are sure bets, be suspicious whenever you're promised results that appear too good to be true. Whether it's your broker, your brother-in-law, or a late-night infomercial, take the time to make sure that someone is not using you to double their money.

Broadly speaking, there are five ways to double your money. The method you choose depends largely on your appetite for risk and your timeline for investing. You may also consider adopting a mix of these strategies to achieve your goal of doubling your money.

How Much Money Do I Need to Start Investing?

Many, but not all, financial products have minimum deposit requirements. You may need less money than you realize to start investing.

While contributing to an employer-sponsored 401(k) plan is a great way to start investing, other options exist if you’re a beginner or tight on cash. Robo-advisors, such as Betterment and Ellevest, offer $0 account minimums. Likewise, investment apps, such as Acorns, require $5 or less to begin investing.

The earlier you’re able to start investing, the better — even if you start small. But before you commit large sums of money to investments, it’s important to improve your financial literacy. This includes learning to budget to substantially reduce or eliminate credit card debt and save for emergencies.

What If I Have Lots of Cash but No Investment Experience?

Just because you’re new to investing doesn’t mean you’re tight on money. Maybe you’re the lucky recipient of an unexpected inheritance or your small start-up finally made it big. Maybe you hit a casino jackpot or just won the lottery.

Investing is as crucial for maintaining wealth as it is for growing wealth.

Lots of cash sitting in your bank account loses value over time due to inflation and a concept called the time value of money. Smart investments can help you lessen your tax burden, earmark money for your heirs and safeguard yourself against economic uncertainty.

Experts strongly suggest consulting an accountant or financial advisor if you’ve recently received a large windfall but have little to no investment knowledge. A good planner can help you explore your options and discover the right solution for you and your family.

Otherwise, first-time-investor mistakes may cost you hundreds, if not thousands, of dollars.

Why you should invest

Investing is essential if you want your savings to grow over time. Although keeping money in a savings account appears safe, the interest you’ll earn isn’t enough to keep up with inflation over many decades.

While riskier in the short-term, over the long-term the stock market delivers compound returns that not only keep up with inflation, but outpace it.

Read more: Why The Stock Market Really Is The Best Place To Grow Your Money

Take a minute to learn how compound growth works in our guide. It’ll help you quickly understand why you simply must start investing today.

Or check out our video:

Say you got a small inheritance and you decided to invest it – if you put $5,000 in an account with an interest rate of 7% and contribute an extra $200 a month, after 30 years you’ll have a little over $284,000.

What s the Single Best Way to Double Your Money?

It really depends on your risk tolerance, investment time horizon, and personal preferences. A balanced approach that involves investing in a diversified portfolio of stocks and bonds works for most people. However, those with higher risk appetites might prefer dabbling in more speculative stuff like small-cap stocks or cryptocurrencies, while others may prefer to double their money through real estate investments.

How much should you save vs. invest?

Given that each investor enters the market because of unique circumstances, the best answer to how much you should save is “as much as possible.” As a guideline, saving 20% of your income is the right starting place. More is always better, but I believe that 20% allows you to accumulate a meaningful amount of capital throughout your career.

Initially, you’ll want to allocate these savings to building an emergency fund equal to roughly three to six months’ worth of ordinary expenses. Once you’ve socked away these emergency savings, invest additional funds that aren’t being put toward specific near-term expenses.

Invested wisely — and over a long period — this capital can multiply.

2. Diversify

To protect your money, buy stocks in various different kinds of companies and spread your purchases out over time.

"The best thing with stocks, actually, is to buy them consistently over time," Buffett told "Squawk Box" in February 2017. "You want to spread the risk as far as the specific companies you're in by owning a diversified group, and you diversify over time by buying this month, next month, the year after, the year after, the year after."

The Bottom Line

Investing in stocks sounds more complicated than it is. In reality, once you’ve made a few key decisions, downloaded an app or two, and bought and held the right shares, you’ve greatly accelerated your path to financial independence.

For more general investing tips, check out our guide on how to invest money wisely.

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