How to Invest in 7 Easy Steps (for Beginners)

Learn how to invest your first dollar in 7 easy steps!

Isn’t it scary investing your hard-earned cash for the first time ever?  Of course it is.  But it can actually be very easy.  I’m going to give you some pointers to hopefully remove all the anxiety that beginners often experience when putting that first dollar to work.  Follow these 7 easy steps to invest.

Please see my disclosure page regarding my day-job.  These are my personal opinions.  This post is not intended to be an exclusive resource for investing.

Step 1:  Establish Goals.  What are you saving for?  My primary investment goal right now is saving for retirement.  I am doing so by contributing to my company’s 401k plan.  This type of plan usually limits your investment options, but the same investing principles apply.  So, keep reading!  Other investment goals may include: college, house, vehicle, vacation, etc.

Step 2:  Determine Your Risk Profile.  Every individual has a unique risk profile, some like to take more investment risk than others.  There are so many investment products out there, each has a variety of risks associated with it.

How do you determine your own risk profile?  Answering a basic questionnaire is a good place to start.  Most investment firms have some sort of questionnaire available.  Here are a few excellent free ones.

Try this sample questionnaire so that you can get started right away (not an affiliate link).
Or if you prefer a paper version: try this questionnaire (not an affiliate link).

Step 3:  Establish Time Horizon.  Younger people saving for retirement tend to take more risks with their money that older folks because they have a longer investment time horizon.  This is because they have longer time frame to build their balances back up if they experience investment losses.  Determine the number of years until you will need to utilize these funds.  For example, I plan to retire in 30 years, so that is my time horizon.

(If you used one of the risk tolerance questionnaires linked above, these take your time horizon into consideration.)
 
Step 4:  Create an Asset Allocation.  Your asset allocation can only be determined after you’ve answered for yourself, Steps 1-3 above.  In short, it is how much of your account will be allocated to each asset class. (i.e., Stocks, Bonds, Cash).  There are many other asset classes that you may hear about as you become more experienced, but let’s stick to the basics:  Stocks, Bonds, and Cash.

For example:

  • In Step 1, I determined that my goal is saving for retirement.
  • In Step 2, I determined that I have a relatively high appetite for risk.  Partially because…
  • In Step 3 I determined that I have a very long investment time horizon.
  • Therefore, in Step 4, I have established an asset allocation for my investment account of:  80% Stocks/20% Bonds.

Your asset allocation may look entirely different.  That’s okay!  It’s supposed to.  If you are 65 and nearing retirement, your asset allocation should probably not have anywhere near 80% Stocks.  Similarly, if you are 20 years old, but your risk tolerance is very low, you should probably not have 80% Stocks.

Step 5:  Make Investment Selections.  Now that you’ve determined your asset allocation, you’ll need to choose your underlying investments.  You have a few options.

Most investors, even very experienced ones, do not feel comfortable “stock-picking”.  In fact, many investment professionals do not feel comfortable picking individual stocks.  There are soooo many stocks in the universe!  And how do we know if we’re picking good ones?  And what if they’re good at first and then turn sour?  The good new is, modern technology allows us to build excellent diversified portfolios without having to be a “stock-picker”.

Mutual Funds

For beginners, perhaps you should start with mutual funds or index funds.  Mutual funds are like “baskets of stocks or bonds”.  There is an actual person employed by the mutual fund company who is qualified to pick the stocks and/or bonds held in that “basket”.  All we, as investors, need to do is pick a reputable mutual fund company with a proven track record and choose from their mutual fund offerings.  Many of these companies have “asset allocation models”.  Remember your asset allocation in Step 4?

The goal here in Step 5 is to select a few (5-10 maybe) mutual funds, building a diversified portfolio which matches your risk tolerance and target asset allocation.  Target date funds are popular for retirement accounts.

Each fund will have a “fact sheet” available on the company’s website.  The fact sheet will tell you the overall objectives of the fund, give you a list of which stocks or bonds are included in the “basket”, and report historical performance of the fund for different periods of time.

Step 6:  Open an Account.  Now it’s time to implement your plan.  Once you’ve completed steps 1-5 and researched investments thoroughly, open an account!

Don’t be fearful.  Take baby steps.  Start small until you feel more comfortable with this process.  You can always add more to your investment account.  In fact you should be adding more frequently.  We have goals, remember?  This is how we’re going to reach them!  We do our part by saving and depositing to the investment account, and the market does the rest.  It goes up over time.  This is the time value of money!

Step 7:  Review and Rebalance.  Don’t look at your account every day.  Just don’t.  If you do, you may allow your emotions to drive your investing decisions.  You have a strategy, don’t deviate because the market has a hiccup one day, or a few days.  That’s what it does.  It bounces around–some days more than others.

So, instead of reviewing your account every day, I like to look at my on a quarterly basis–every 3 months.  I don’t usually make any changes this frequently, just take a look.

Inevitably, you’ll see that some of your investments have taken off, others maybe are lagging.  This is why we rebalance a few times a year (once or twice).

What does it mean to Rebalance my account?

Remember your target asset allocation?  In the example above, mine was 80% Stocks/20% Bonds.  Suppose the stock market has risen over the last several months and my stock portion is now worth more.  So, now my asset allocation looks more like 95% Stocks/5% Bonds.  This is great!  My balance has grown!  I don’t want to be greedy, so I’m going to rebalance and bring my account back to my target allocation of 80/20 by selling some shares of my stock funds and using the proceeds to invest more in my bond funds.  This forces you to BUY LOW, SELL HIGH!  Isn’t this what you’re supposed to do?  Yes!  Every investors goal is to buy low and sell high.

A Few Pointers:

  • I am a huge fan of Vanguard (not an affiliate).  They’ve been around forever, they have a proven track record, and expense ratios for their funds are just about the lowest out there (if not THE lowest).
  • Fidelity Investments (not an affiliate) is also an awesome company with excellent investment offerings, been around forever, proven track record, although their expense ratios tend to be slightly higher than Vanguard.

In Full Disclosure:  I have an account with both Vanguard and Fidelity.  They both have served my family well.  I recommend you do your own research before making your investment selections.  Although I’m very glad you’re here, this blog alone should not be used as your exclusive research tool!  I am not affiliated with Vanguard or Fidelity in any way professionally and these are my own honest opinions.  I received no compensation from them for this post.  See my Disclosure page for more details.

  • There are tons of other places out there to get started investing yourself (i.e., Scottrade, E-Trade, TD Ameritrade, Trade King, Motif, Betterment, and many more).  Visit the website of many investment firms, not just the ones I’ve mentioned.  Take notes.  Each of them will describe what they believe sets them apart from others.  You will find a lot of similarities!
  • Don’t pick funds based on historical performance.  There is no investment under the sun that will consistently out-perform year after year.  The overall market goes through various cycles based on a variety of things.  The funds you pick may out-perform in a few years and then fall out of favor for a period or vice versa.  That’s okay.  It’s how the market works!
  • Set realistic long-term return expectations.  You WILL NOT get double-digit returns year after year.  It simply will not happen.  You may get a year here and there of very high returns, but you also will sometimes have periods of negative returns.  Yes negative.  Hang in there.  Think long-term.  What we are looking for is solid, decent returns over the long-term without taking huge risks.
  • Consider a “buy and hold” strategy.  Actively trading your account does not usually yield better returns.  Develop a long-term strategy and stick to it.  Your strategy will probably change over time, but usually only after major life events, or as you get closer to retirement.  But it should not change drastically every year.
  • Don’t have your head in the sand.  Yes some investments fall out of favor and will come back.  They don’t always.  As long as you have a well-diversified portfolio, you should be just fine even after some investment losses.
  • Don’t forget to rebalance a few times a year.  As I said above, this forces you to buy low and sell high.  It also helps keep your head out of the sand and reduces greed!
  • Don’t be emotional.  Remember your long-term strategy.  If the market tanks (as in 2008), don’t sell.  Hang in there.  We’re long-term investors.  If you can’t sleep at night, you’ve probably lied to yourself on the risk questionnaire!  Reassess your risk tolerance and build a portfolio that will allow you to sleep soundly at night.
  • Don’t get overwhelmed.  Take baby steps.  You’ve got to start somewhere!
  • Read, read. read.  Investopedia.com is a good (and free) resource.
  • If you feel uncomfortable, seek professional help.  It’s not as expensive as most people think.  It is far more expensive to do nothing.

Do you plan to follow these steps and finally implement an investment plan?  If so, I’d love to hear about it!  I’m sorry I cannot give you specific investment advice, let’s keep it general.

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Also see my post on How to Budget Like a Millionaire.  It’s okay to be saving, paying off debt, and investing all at the same time (I’m doing this too)!

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