On Friday’s I answer a readers question. If you want to ask a question you can contact me. Recently a reader asked a very important and broad question – how do I start investing?
For many, the investing world is a maze of complexity. But it does not need to be so intimidating.
In this post, I’m going to try and track back about 15 years ago to when I first invested in a mutual fund. Knowing what I know now, what would I have done to start investing?
Education and knowledge
Time period: 2-4 months
Before I invested a single penny in anything other than a bank CD or a high yield checking account, I would take a significant amount of time to learn general investing lessons.
Specifically, I would read The Total Money Makeover to be sure I was in the right place to be considering investing, and then I would read the Sound Mind Investing Handbook. The SMI handbook is packed full of great introductory material to investing. If I can understand it, then you can understand it. In this stage a subscription to the Sound Mind Investing Newsletter can also give you access to tons helpful investing information.
During the education and knowledge stage, I would also try and find where I am on the risk temperament scale and learn about my personal investing weaknesses.
Index Funds, Mutual Funds, Bonds, or Single Stocks
Time period: 2 weeks
Key topics – What is the best method of investing for you? What asset allocation matches your goals, risk temperament, and time frame? Remember you goals is to set up a personalized investing plan.
In my retirement accounts, I own 100% mutual funds. However, you will need to set the allocation based on your personal preferences. The closer you are to retirement, the more important bonds become.
However, if I had to go back as a starting investor, I would go with Index funds. When you are just starting out, index funds leave the least amount of room for regret. At least you know you’ll never do much better or worse than the market.
Moreover, I’d avoid single stocks.
Decide between investment vehicles.
Time period 2 weeks
Key topics: What is the difference between a taxable and a non-taxable account? Which is better for me: a Roth IRA or a Traditional IRA? Does my employer offer a 401K match?
While there is going to be a lot of information to digest in a month, you should have a fair idea regarding your best investment vehicle.
Personally, I use a Roth IRA because I’m in a low tax bracket right now since I don’t make enough money. There is a good possibility that I will be in a higher tax bracket at retirement, so I’ll pay the taxes now.
Find an online broker or financial advisor.
Time period: 2 weeks
Read: How to Find an Online Discount Stock Broker . In this post you’ll get a good survey of some of the best places to buy and sell stocks, mutual funds, ETF’s, and index funds.
I don’t use a financial advisor any more. I fired my financial advisor because of the excessive fees. That doesn’t mean financial advisors are bad, but I think as an investor who is educated, patient, and disciplined you can do a reasonable job selecting your own funds. If you do prefer to find a financial advisor there is nothing wrong with that.
Key topics: Check out TD Ameritrade, Fidelity, Charles Schwab, Vanguard, and First trade. Find out what their fees are for your investment vehicle (taxable or non-taxable account). What are their funds’ annual operating expenses? How much does it cost to buy and sell shares? What is their customer service like?
Just set up a spreadsheet with all of these columns and visit their sites to see what they are offering in terms of pricing.
If you decide to go with index funds, you can just find a brokerage that offers the lowest transaction fees. Vanguard is consistently mentioned as the best company in terms of ease of access, low fees, and product offerings.
Time period: 1 day
At this point, you know what you need to know. You’ll try and convince yourself that you don’t know what you are doing. This may or may not be true. However, at this point you can only learn the rest of the stuff by just doing it.
Decide how much money you will invest on a monthly basis and set up automatic payments.
Most online accounts will allow you to tell them the amount of money you want taken from a designated bank account to be used to purchase a designated amount of shares.
To make things simple, I’d just have “x” number of dollars set to buy on the 1st of every month.
Dollar Cost Average.
If you follow the steps above, you are naturally doing this. Make sure that you contribute the same amount of money and purchase shares regardless of the share price.
Change nothing for 3-5 years.
I think individual investors are the greatest enemy to a healthy investment portfolio. If I had to go back, I’d get everything set up and pretty much ignore it. You’ll learn some great investing discipline, and you’ll also learn at lot about your true investing risk temperament.
Ignore any financial news or advice. Stay on your plan for 3-5 years.
Develop a personalized investing plan.
After investing for 3-5 years, you might decide to spice up your portfolio. Perhaps you want to increase risk in order to get a better return. With at least a few years of investing experience, you are in a better position to make some of those choices. I would never, however, put an entire portfolio at risk. Limit your exposure to 10-15%. If you are young your retirement planning should just be about starting and learning.
Remember that a simple investing approach will do wonders over your lifetime if you just leave it alone.