Investing for Beginners: 4 Steps to Get Started

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By Amit

Disclaimer: Nothing in this article should ever be considered advice, research or an invitation to buy or sell securities. I am not a financial advisor.

Investing is an essential part of building wealth.

However, with so many foreign financial terms such as Exchange Traded Funds (ETFs), Mutual Funds, Rebalancing, etc. – where do we even start?

In this beginner’s guide, we will break investing down into 4 actionable steps that we can take in order to get started.

Let’s dive in.

1. Define Your Investment Goals

The single most important step when it comes to investing is defining our investment goals.

In other words, what do we want our money to do for us?

Clearly defining our investment endgame lays the foundation for how we will be investing.

It’s important to not fall into the trap of creating vague goals. This can create a lot of unnecessary stress due to the fact that it’s much harder to create a roadmap for goals that don’t have clear definitions of success. Examples of unclear and vague goals include:

  • I want to save for my child’s college fund
  • I want to retire eventually
  • I want to buy a house one day

While the above goals are a good start, they can also appear daunting or unachievable because we are not breaking them down into the clear steps needed in order to achieve them. This can result in a lack of motivation because these goals can appear impossible to achieve. 

As a result, instead we should strive to create SMART Investment Goals (Smart, Measurable, Achievable, Relevant, Time-Bound).

Let’s rewrite the same goals from above using the SMART methodology:

  • I want to have $30,000 in a 529 Plan by the time my child turns 18
  • I want to achieve financial independence by age 50 with a portfolio of $1,000,000
  • I want to save $20,000 in the next two years for a down payment on a house

With more concrete numbers at hand, we can begin breaking these larger goals into yearly and monthly goals. The result is turning what originally appeared to be an “impossible goal” into a goal with a clear path to success.

As an example, we can break down “I want to save $20,000 in the next two years for a down payment on a house” into “I need to save $833.33 / month for the next two years.”

By taking the time to establish clear timelines and concrete numbers, we enable ourselves to:

  • Break down our plans into smaller chunks
  • Measure progress against our goals
  • Increase our confidence in achieving our goals
  • Decrease feelings of unnecessary financial stress

2. Decide on Your Investing Strategy

After defining our investment goals, it’s time to decide on our investing strategy.

Our investment strategy is comprised of 3 main components:

  • Our Investing Approach
  • Our Investing Style
  • Our Investment Mix

Investing Approach: Active vs Passive

When it comes to investing approaches, there are two schools of thought.

The first approach is active investing. In a nutshell, active investing is a strategy where we are frequently buying and selling many different types of securities in order to try and “beat the market.”

Active investing is considered a more hands-on approach to investing because it often involves a lot more trading in order to take advantage of short-term fluctuations in the market. Active investing is a common strategy that is used amongst day-traders and hedge funds.

The other approach is passive investing. In short, passive investing is a strategy that includes buying and holding securities over the long-term and ignoring what the markets are doing on a daily basis.

In other words, passive investors are not trying to actively beat the market. Rather, individuals implementing this approach are typically investing on autopilot and taking advantage of dollar cost averaging.

Investing Style: Investment Focus Areas

After settling on our investing approach, the next step is deciding on our investing style.

In a nutshell, our investing style is our personal preference towards specific investment focus areas. Some popular investing styles include but are not limited to: 

When choosing an investment style, it’s important to understand that there is not one strategy that magically satisfies everyone’s needs.

At the end of the day, everybody is different. And while we may have similar goals to others, we need to recognize that everyone is at different points in their lives or in different financial situations.

As a result, it’s important not to just choose a random strategy and roll with it. We need to look at our specific situation and choose/customize our specific investment style in order to achieve our specific investment goals.

Investment Mix

The last step in creating our investment strategy is deciding which investment classes that we will be adding to our portfolio.

To keep things simple, there are 4 primary investment classes that we can choose from.

Stocks represent fractional pieces of ownership in a company. Stocks can make money either through capital appreciation (stock price increasing) or the stock paying a dividend. Stocks are also referred to as shares or equities and are typically considered “riskier” assets.

Bonds represent debt issued by either a company or a government entity. Bonds do not represent ownership of an entity, i.e., holding a U.S. treasury bond doesn’t mean we own a piece of the U.S. Treasury.

Bonds are also known as “fixed-income” investments. The interest rate of a bond corresponds to how likely the entity that issued the bond is able to make their payments. As a result, higher quality bonds tend to have lower interest rates while lower quality (junk bonds) tend to have higher interest rates.

ETFs or Exchange Traded Funds are investment funds that are traded on exchanges such as Nasdaq.

While stocks and bonds represent individual investments, an ETF represents a basket of investments (that can include stocks and bonds) in order to align with a particular investing strategy. As an example, there are ETFs that focus on high income yields as well as ETFs that track market indices such as the S&P 500.

Because ETFs represent a basket of investments, they tend to offer more diversification and less risk relative to holding individual investments such as an individual stocks. However, unlike a stock, an ETF doesn’t represent direct ownership into an individual company.

Mutual Funds are similar to ETFs in that they represent an investment fund comprised of a basket of investments (that can include stocks and bonds) in order to align with a particular investing strategy.

Likewise, because mutual bunds represent a basket of investments, they tend to offer more diversification and less risk relative to holding individual investments such as individual stocks. When buying into a mutual fund, we are buying shares of the fund and not direct ownership into any individual company that is contained within the fund.

While Mutual Funds and ETFs are very similar, they differ in some key respects, primarily:

  • Mutual Funds only trade once a day while ETFs trade throughout the day
  • Mutual Funds can require investment minimums whereas investing in ETFs only require paying the share price
  • Most brokerage accounts don’t allow for automatic ETF investments due to price volatility

Which investment classes that we decide to invest into is generally dependent on our goal timelines that we discussed in Step 1 as well as our own individual risk tolerances.

If you are unsure or uncomfortable on choosing your specific investments, it may be worthwhile to talk to a Certified Financial Planner to discuss which options make the most sense for your specific situation.

3. Setting up Your Investment Accounts

After settling on our investment strategy, the next step would be opening up the appropriate investment accounts.

While it may be tempting to lump all our money into one standard brokerage account, this may not be the most tax-efficient option. In reality, there are many different types of investment accounts that we can leverage in order to minimize our tax bill down the road.

This is important because the goal of investing is maximizing returns and minimizing friction (i.e., taxes, fees, interest paid, etc.). When deciding which accounts to fund first, it may be worthwhile to check out our guide on how to optimize your investing strategy, which provides a general funding priority guide.

With that being said, one of the most powerful things that we can do is automatically fund our investment accounts. Through automation, we can:

  • Take ourselves completely out of the process
  • Have peace of mind knowing that it’s already going to be done
  • Eliminate the psychological friction of investing

I want to place extra emphasis on the third point.

As an example, when we are manually investing, we can become more aware of the investment price fluctuations.

From a psychological perspective, we may become anchored to lower prices that we’ve see in the past. As a result, when we see a higher price, we may become more reluctant to investing because we can have thoughts such as “I don’t want to pay a premium” and forgo investing altogether.

Over the long-term, this can have a major impact on growing our portfolio. In the beginning, creating wealth requires us to do most of the heavy lifting which is why saving the first $100K is the hardest.

While automation is not a show-stopper, it can help us manage certain behavioral finance tendencies that we may not be consciously aware of.

4. Rebalance and Adjust as Necessary

The last step in investing for beginners is having a plan to rebalance and adjust our portfolio.

This is because over time our desired investment allocations (and by extension our risk profile) can change due to the under/overperformance of the assets in our portfolio.

As an example, let’s assume that we are comfortable with an investment mix comprised of 50% stocks and 50% bonds. However, let’s also assume that the stocks in our portfolio have overperformed and our overall portfolio allocation is now 60% stocks and 40% bonds.

This new portfolio allocation is not in alignment with the investment mix that we are comfortable with. As a result, we need to rebalance our portfolio by selling stocks and investing those proceeds into bonds in order to get back to the 50/50 allocation of stocks and bonds.

Rebalancing is important because it ensures that we are not over/under weight in specific investment classes. Without rebalancing, we can potentially jeopardize our investment goals.

While rebalancing annually is a common practice, the frequency in which we rebalance is ultimately up to us. With that being said, it should be noted that experts often recommend limiting how often we rebalance because frequently doing so can result in paying potentially more in taxes and fees.

Final Thoughts

The truth is that investing does not need to be complicated or overwhelming.

By understanding the basics and keeping things simple, we can jump start our path to wealth and begin investing with confidence in order to reach our life goals.

Thank for reading!

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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