To new investors, getting started can be intimidating. The basics of how to even begin to invest is not part of a standard public education. In a world where valuations can defy reasoning and being correct can cost you a fortune, how does one even start investing?
The simplest starting point for most investors lies with their employer. Employee sponsored retirement accounts provide a streamlined, tax deferred option that can serve as a basis of a portfolio for most individuals. Individual Roth or traditional IRAs serve as a second tax advantaged building block and maxing them out each year is a significant milestone for all individuals to target.
While complex, the stock and real estate markets have proven throughout the decades to be two of the largest generators of wealth publicly available. Technological advances have made information once known only to hedge fund managers and professional investors available to everyone. Commission-free trading, reduced or eliminated account minimums, and the ability to buy fractional shares in some of the world’s largest companies has significantly lowered the barriers to individual investing, providing more and more individuals the ability to control their financial future
Disclosure
This post contains either affiliate links or referral codes. If you elect to follow the links or use the provided code to sign up for the service, I may earn a small commission at no additional cost to you. I evaluate each tool and service relative to the value they can bring to your financial journey. The existence or lack of an affiliate program does not impact the services/tools I decide to highlight. The opinions expressed below are my own.
Table of Contents
Steps to Have in Place Before You Start Investing
Before you step into the world of investing, there are a couple of foundational steps you should have in place. They may not be the most exciting options, but the following will ensure you are accounting for the basic needs of you and your loved ones before you look to build your wealth. Before investing, strive to:
- Establish and fund an emergency cash savings with a full service local bank. High yields are desirable, but the key here is the ease and immediate access to these funds if and when you need them. Aim for a balance capable of covering eight months of typical expenses.
- Pay down and eliminate any debt with an interest rate above 4%. You may manage to grow your wealth faster than your debt, but at these levels, you are simply risking too much.
- We recently worked with community experts to discuss additional steps you should consider before investing
Start Investing as Soon as Possible
Taking one’s first steps into the world of investing can be intimidating, but time is your greatest asset. There is no perfect time to invest, no words of advice that will fully prepare you to get started. The best thing you can do is start investing as soon as you can afford to do so.
It has been rare in my 19 years of investing that I have regretted an investment. It has been far more common to regret the moments of hesitation, the subsequent delay, and the opportunities waiting has cost me.
Compound Interest
Time in the market acclimates you to its ebbs and flows, teaching you not to overreact to either. Time also introduces you to the concept of compound interest, a key driver in growing your money over time. Compound interest is the fact that, as your money accumulates, that additional money joins your initial pool of money to earn you more money in the future.
Let’s say you manage to invest $1000 at the start of your first year, and your investment grows in value. By the end of your first year, you now have $1100. In year two, your investments grow by that same 10%, growing your portfolio to a value of $1210. In year two, you made an additional 10% without investing an additional dime. Thanks to compound interest, not only did you make $100 on the $1000 you initially invested, the $100 you earned last year earned you an additional $10 this year.
Start Investing Through Your Employer
A great on-ramp for many new investors is the retirement options provided by their employer. From deferred taxes, to tax free growth, to free money from company matches, checking with your HR department and learning what options are available to you can provide an amazing return on investment.
Employer 401k
An employer-run 401k allows qualified employers to contribute pretax dollars towards their retirement. A 401k can be one of the best options available if your employer offers a 401k match. If your company does offer to match your contributions, even if it is not 1:1, prioritize contributing the maximum amount they will match each year. Your employer is offering you free money – take it.
Health Savings Account
If you take part in a High Deductible Health Insurance plan, check with your HR department to see if you are eligible to enroll in a Health Savings Account (HSA). An HSA account allows you to invest pretax dollars to pay for a myriad of eligible medical expenses. Your account carries over from year to year and goes with you when you leave your employer. Like 401ks, employers may even offer to fund some portion of the account for you.
Many HSA programs will allow you to invest your balance into a small pool of funds once your account hits a certain minimum balance. Most companies will not make these investments automatically, so make sure you log into your account and direct your money appropriately. Over time, investing this money will grow your account far more quickly than leaving it sitting in cash, helping to ensure you can take care of your future health needs.
Take Control of Your Employer Retirement Accounts
Regardless of account type, you have some control over the growth of your retirement accounts. Make sure you sign in to each account once a year and review the options available to you. The default selection often errors on the side of being overly conservative and forgoing investments with a high probability of better returns.
Most accounts will offer a mix of age-targeted, income-generating, and index, funds. You should see the fund’s performance over the years and any expense fees it charges. If not, Morningstar provides core information for most funds you may see as options. Look for a low-expense fund with a history of consistent performance. A total index fund or one mirroring the S&P 500 are solid options.
Start Investing on Your Own- Opening a Brokerage Account:
Once you reach a place in your life where you can max out your company’s 401k match each year (or if your company does not provide one), you can open a personal brokerage account. A brokerage account will allow you to invest in individual stocks, mutual funds, EFTs and organize your holdings in a central location.
Recent years have brought commission free trades along with lowered minimum account requirements, and there are now several quality discount brokers available to investors. I have worked with several over the past 20 years, but the majority of my experience has been with E*trade.
When you are ready to open an account, use code cv095ms at sign-up to earn additional cash upon hitting key funding milestones within the first 60 days.
Invest in a Tax Deductible IRA
A solid first step into the realm of individual investing, is to take advantage of tax advantaged accounts. Roth/traditional IRAs provide tax benefits which can strengthen the foundation for you future retirement. You can open an IRA account through most brokers and contribute up to $6000 dollars a year. IRA funds can be invested in most markets outside of life insurance and collectables.
Start Investing With Index Funds
It’s almost impossible to keep up with the overall market. Index funds provide a low-maintenance way to grow your portfolio in lockstep with one of the major indexes. With a consistent history of outperforming most actively managed funds, index funds offer a myriad of key benefits, and are a great foundational piece for any portfolio.
One of the earliest pieces of advice I received was to invest your first $10,000 into an index fund. I chose to ignore this guidance, but, for most investors, it’s a solid foundation for their portfolio.
Invest in Real Estate
The only investment that has proven itself through the years to be on par with the stock market is real estate. A fixture in almost every millionaire’s portfolio, real estate can benefit your portfolio through accumulation, cash flow, and favorable tax benefits.
Owning your own home allows you to leverage your money at traditionally low rates and provides you and your family a place to live while accumulating equity. Several tax write-offs exist to support the dream of owning a home.
Renting out a property (or part of a property you own) provides you with a stable form of cash flow while building up equity in the underlying property.
Invest in Cryptocurrency
Cryptocurrency is in its infancy and still working to define its role in the investment landscape. Is it a hedge against inflation? Is it a store of wealth similar to gold? How tightly will governments regulate it in the future? Despite a host of questions, cryptocurrency has quickly gained the endorsement of fund managers and the attention of governments around the world. With unrivaled performance in recent years, a small investment in bitcoin has shown the power to raise the diversification and performance of your entire portfolio.
More and more experts are advising their clients to allocate a small (less than 5%) portion of their portfolio to the most stable coins. We took a deep dive into the merits and concerns of investing in cryptocurrencies in July as I walked through my decision to invest in Bitcoin and Ethereum.
Invest in Your Passion
Investing in something you are passionate about makes it more likely that you understand what makes them desirable and potentially good investments. These items bringing you joy make you less susceptible to overreacting to temporary drops in their market.
2020 brought renewed focus to collectible markets with great returns seen in certain cars, art pieces, watches, and even Pokémon trading cards. Not only can these investments bring you joy, but they also serve as stores of value and can even accumulate in value over time.
While the accumulation of value can highly depend on maintaining these investments in pristine condition, some can provide value to your daily life. Some fortunate investors have integrated watches into their daily wardrobe or driven the car of their dream for years before ultimately selling it for more than they originally paid.
Invest Consistently Over Time
Many investors at some point believe they can time the market; most are wrong. In recent history, 9 out of every 10 professional investors have under-performed the market. While professional investors have to operate under restrictions most individuals do not, they are also less likely to make mistakes based on emotion or a momentary whim. Most individual investors eventually realize that it is incredibly difficult to beat the market. What anyone can achieve is leveraging the market, which has proven to persistently move upward over time, by consistently buying in and letting their money slowly but surely accumulate over time.
- You are awesome for being a part of this community!
- If you like my content subscribe to our mailing list or click the bell icon at the bottom right of your screen and never miss a step along your journey
- If this article provided value to you, please consider sending me a coffee and fueling the next article