How to Start Investing

Learning how to invest can feel overwhelming. But getting the basics is very doable.

Written by Rafael Bernard / December 3, 2021

Quick Bites

  • Learning how to invest may seem like a tall order, but by getting down the basics, you can start building the confidence you need.
  • Don’t let terms like IRAs, 401(k)s and ETFs intimidate you. By the end of this guide, you’ll be able to talk about them at any dinner party.
  • It may seem like investing is all about the numbers, but it’s also a highly emotional endeavor. We show you how to stay on course through ups and downs.
  • You don’t need special training to invest; we’ve broken everything down into easy steps.

Figuring out how to invest in stocks can feel overwhelming. And that makes sense. With all the talk on the news and social media of investing in everything from Bitcoin to space travel, it’s easy to feel confused.

But what’s most intimidating about investing is how it feels so abstract. You just can’t hold or touch your shares of stock.

At least at the casino you can watch the cards obeying the laws of gravity and feel the chips in your hands. Whereas Wall Street appears to simply occupy the space between the CNBC ticker tape and numbers on your web browser.

Thankfully, there’s a way to overcome investing anxieties: demystifying the fundamentals. Once you know your different options for buying stocks and how to approach it all, the whole process begins to make sense. Let’s get started.

Inside this article

  1. Decide on a brokerage
  2. Choose an investment account
  3. Think about risk
  4. Pick your investment vehicle
  5. Stick to your strategy

Step 1: Figure out the type of brokerage that’s right for you

Saving a chunk of your earnings every month is crucial for funding your life goals. And if you have money left after you’ve met your near-term needs, built up an emergency fund and paid off high-interest debt (like from credit cards), you can use that to start investing.

So where can you park the cash you’ve earmarked for investing? Brokerage companies offer access to online trading platforms where individual investors can trade investments.

To help simplify your search, we’ve loosely divided them into four types; some where you can invest on your own, and some that offer help if you need it. But know that many of these companies overlap—for instance, Fidelity is a DIY brokerage where you can also get advice from a financial consultant.

Online Brokerage Company

Large firms such as Fidelity or Schwab offer user-friendly platforms for new and seasoned investors alike, even if you have only a few bucks to invest. Also included in this group are apps like Acorns, that round up your shopping purchases to the nearest dollar and automatically deposit change into your investments. (FYI: Many firms have apps these days, even if it’s not their primary method of client interface.)

Financial Consultants

Many financial consultants can help you sign up with a brokerage company to start investing. They may advise you on your investment strategy, or simply facilitate joining a platform for choosing your own investments.

Hybrid Model

If investing on your own sounds too intimidating, but you don’t wish to hire the full services of a financial professional, companies such as robo-advisors—platforms that assist with ongoing management of investments—may offer the ability to sign up to their platform while offering limited advice. Consider firms like Vanguard or Betterment to learn more.

Employer-Sponsored Accounts

If your employer offers 401(k)s, this is an excellent way to begin your investment journey. It enforces the habit of “dollar-cost-averaging,” or the practice of investing a little bit every few weeks, which ensures you don’t put all your money in the market at the worst time. Also, some employers will match your contributions.

Tip: Be aware that every employer’s 401(k) plan is different. So note that yours may have restrictions on when and if you can invest depending on your age, tenure and other factors.

Finding the best broker for you may take some research and experimenting. Feel free to explore several options at once. For example, you may have a brokerage account in addition to a 401(k) if you want more investment options and services than your 401(k) provides.

Tip: You may be tempted to sign up with a number of brokerages thinking this will help mitigate risk in case a company goes under. But it can be confusing to keep track of so many accounts. Just check that your brokerage offers FIDC and SIPC protections, which are government programs that guarantee your money is safe up to a specified amount.[1,2]

Step 2: Choose an investment account based on your goals

When you identify a brokerage company to work with, you will need to pick an account type to invest in. Which account to use largely depends on your financial goals. Here are the different types of accounts to consider.

Retirement Accounts

If retirement is your top goal, consider accounts like IRAs or 401(k)s. These accounts have all sorts of rules to navigate and penalties to avoid, but if done right, you won’t be taxed on earnings as your investments grow. With traditional IRAs and 401(k)s, you defer paying taxes on your investments, and often your contributions themselves, until you withdraw money at retirement. Whereas with Roth IRAs, it’s the other way around—you invest with after-tax dollars but withdrawals of earnings, typically after you turn 59½, are tax-free.

Tip: Investing your money can help you preserve its value in the face of inflation. As the prices of goods rise year after year, the money in your bank savings account loses buying power. Investing in the stock market, which historically has outpaced the rate of inflation over the long term, is one way to help your savings keep up with inflation.

Taxable Accounts

Retirement accounts aren’t available to every aspiring investor. They have some rules about who can use them based on their income level. If you’re unsure whether you qualify, and you are saving for shorter-term goals, consider an individual taxable brokerage account. It doesn’t offer the same tax advantages as the aforementioned accounts, but anyone can fund one and start investing, and you may spend this money on any goal you like without penalties.

Special Purpose Accounts

There are also investment accounts for specific goals, like a 529 plan for education savings or an HSA (health savings account) plan for health care expenses. You can invest in a 529 to help pay for private school and college expenses—earnings can be withdrawn for qualified expenses (your contributions can be withdrawn tax- and penalty-free anytime). Likewise, HSAs allow you to save and invest for health care expenses, tax free. But to qualify you must be enrolled in certain high-deductible insurance plans.

Tip: 529 accounts are offered only by certain brokers or municipalities. In fact, each state has its own associated broker. So, research all 50 options and find out which one offers the best combination of low fees, returns and tax advantages for your situation.[3]

Which Account to Start With?

If your employer offers plans with a contribution match, such as a 401(k), it’s a good idea to at least contribute enough of your income to that plan so you get the match–it’s free money!

If you’re just getting started with investing and want to learn by doing, individual taxable brokerage accounts may offer the simplest way to start. There are no income or contribution limits, and your earnings can be spent on any goal at any time. Just be mindful that you may need to pay taxes on realized gains.

Another reason to start with this type of account is that we often overestimate our ability to predict future goals. So flexibility in how you can spend your investments is helpful, especially when you are just getting started and trying to learn the ropes.

How Much Might Your Preferences and Goals Change?

When it comes to setting goals, including financial ones, you may be surprised by how much they can change over time. Consider a concept from researchers Jordi Quoidbach and Daniel Gilbert ay Harvard, and Timothy Wilson at University of Virginia-Charlottesville, called “The End of History Illusion,” as reported in Science.[4] It’s a phenomenon where we tend to believe our values and preferences have changed a lot up to the present, but are unlikely to change much in the future. But in fact, we are constantly adding new interests and preferences and ditching old ones.

How likely are your own goals to change in the future? Try this quick exercise to gauge how much your preferences have changed from the past to now—it could be an indication of how likely your preferences are to change in the future, and a reminder to reassess your goals every now and then and adjust your investment portfolio accordingly.

  • Step 1: Write down the name of your favorite musician and how much you would pay to see them in a concert 10 years from now.

  • Step 2: Next, think about who your favorite musician was 10 years ago. Write down how much you would pay for tickets to see them live this weekend.

  • Step 3: Calculate the percentage change from the amount in step 1 to the amount in step 2. The higher the percentage, the more your preferences have changed from the past and may change in the future. (In the study, participants on average would pay $80 to see their favorite musician from 10 years ago, but $121 to see their current favorite artist 10 years from now. A difference of $41 or about 50%.)

If your tastes have a higher chance of changing, you may want to leverage more flexible accounts like individual taxable accounts or Roth IRAs (contributions before earnings are quite easy to withdraw, as you already paid taxes on that amount) to achieve your financial goals.

Step 3: Decide how much risk you can stomach

Once you have an account open with a broker, it’s time to consider what you will invest in.

Investment choices should be informed by your risk tolerance. Taking too much risk causes stress, hampering your ability to make sound financial decisions. Alternatively, taking much less than necessary could cause you to have lower returns, as riskier investments have historically outperformed safer assets over time.

In fact, a 30-year chart through 2018 shows that U.S. stocks appreciated an average of 10% a year while returns for bonds were 6.1%.

That’s all well and good, but you don’t want to be up nights worrying about your investments. You want to invest your money based on how much risk you are comfortable taking.

Things like small cap stocks are considered more risky, as they can be very volatile. While assets like Treasury bonds and money-market funds are seen as safer, because their prices historically have not fluctuated as much.

Here is a quick cheat sheet of common asset classes in order from most risky to least risky. Be sure to delve deeper into this subject as you become a more experienced investor.

  • Small cap stocks

  • Large cap stocks

  • Corporate bonds

  • Treasury bonds

  • Cash, including money-market funds and CDs

Vanguard also offers a quick quiz you can take to gauge your risk appetite and figure out how to divvy up your investments.[5] The self-reflection you get from taking it will give you a better idea of whether to invest more in risky assets, or in less volatile sectors.

Step 4: Choose your investment vehicles

There are several ways to acquire shares of stocks and bonds. Each vehicle has its own pros and cons, but they all allow you to gain exposure to your desired asset classes according to your risk tolerance. Mainly, these investment vehicles include:

  • Stocks: Little pieces of publicly traded companies that you can buy. For example, when Apple became a publicly traded company, it decided to allow individuals like us to become owners of the company by buying shares of its stock.

  • Bonds: Essentially, a bond is like an IOU—you lend money to a corporation or to the government and in return are paid interest on that amount.

  • Mutual Funds: A basket of stocks and/or bonds held in one vehicle. They can offer instant diversification by enabling investors to hold stocks and bonds in many different companies at once. But they may include fees and some tax inefficiencies depending on your situation. And they cannot be traded throughout the day. Their prices are updated only at the end of each day. So even if you try to sell a fund at noon, you may have to wait until the end of the trading day before your trade will execute.

  • ETFs: Similar to mutual funds, they are also a basket of investments. But ETFs (exchange-traded funds) have the advantage of being bought and sold anytime during trading hours rather than just at the end of the day. So you can be much more nimble if you are a more active trader. They have some tax inefficiencies with dividends, but many consider them to be more tax-friendly in some ways than mutual funds.

Tip: If investing in your employer’s 401(k) account, you will likely be limited to just mutual funds. If other vehicle types interest you, consider opening another account type.

If you’re new to investing and don’t aspire to be an expert investor, mutual funds and ETFs are great ways to acquire a diversified pool of investments.

There are so many mutual funds and ETFs to pick from—in fact there are more funds than there are stocks themselves—so consider exploring fund searching tools at your brokerage firm’s website that can help narrow your search, or talk to a professional.

Step 5: Stick to your strategy

Once you have an account holding investment vehicles representing investments suited for your risk tolerance, you are well on your way to investing for your goals.

But you’re not done yet. At this stage it’s imperative to reflect on what investment philosophy you will adhere to. If you don’t have a strategy to adhere to, it’s all too easy to invest based on your emotions—especially when experiencing the stress of falling markets.

Even during calm market environments, having an investment strategy can enforce good habits, such as purchasing investments based on their value rather than hype or your emotions.

We are actually so susceptible to investing based on our emotions, it was even documented by John Nofsinger, a finance professor at the University of Alaska, that stocks often go down the day after the series finale of our favorite TV shows like The Sopranos or Friends. Apparently, fans feel blue after saying goodbye to their favorite TV characters, influencing them to sell more stocks.[6]

Take time to learn about some of the more basic investing strategies, like passive index investing or buy-and-hold strategies.

With passive index investing, you buy ETFs or mutual funds that simply mirror the overall stock market or asset class you choose. These do not aim to beat the market since they aim to reflect how all the stocks in the market or in the asset class perform. They try to capture whatever returns the overall market or asset class achieves.

Proponents of buy-and-hold strategies claim that the less trading you do, the better. They believe that constantly buying and selling stocks just drives up your fees, and promotes poor decision making like overtrading. They purchase investments only if they are comfortable with holding them for years.

Regardless of which strategy resonates with you, regularly visit your investment portfolio to rebalance your investments and make any necessary updates. For example, if your desired initial portfolio is 50/50 stocks and bonds, but bonds go up a lot and now make up 60% of your portfolio, trading some bonds for stocks will return your account to your desired balance. On the flip side, checking your portfolio too often can be detrimental as you may feel the need to make more trades than necessary, which you may have to pay fees for.

Article Sources
  1. About the FDIC. Federal Deposit Insurance Corporation. https://www.fdic.gov.
  2. Securities Investor Protection Corporation. What SIPC Protects. https://www.sipc.org/for-investors/what-sipc-protects.
  3. Research and Compare 529 Plans. Saving for College. https://www.savingforcollege.com/college-savings-201.
  4. Quoidbach, Jordi. Gilbert, Daniel T. Wilson, Timothy D. (2013, January 4). The End of History Illusion. Science. https://wjh-www.harvard.edu/~dtg/Quoidbach%20et%20al%202013.pdf.
  5. Start Your Investing Journey. Vanguard. https://investor.vanguard.com/calculator-tools/investor-questionnaire/.
  6. Nofsinger, J.R. (2018). The Psychology of Investing (6 th ed). New York, NY: Routledge.

About the Author

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Rafael Bernard

Rafael Bernard, MSFP, CFP®, is a CERTIFIED FINANCIAL PLANNER™ practitioner and personal finance editor at Decisionary Media who specializes in financial therapy, which combines traditional financial planning with a therapeutic approach.

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