Did you know: if you invested $1,000 in the S&P 500 Index in 1974, and then did NOTHING, you would have had $154,000 at the end of 2019?
All you would have had to do is invest and wait. I know what you’re thinking…“but $1,000 was a lot of money in 1974!”
Yeah, you have a point, inflation is a real thing. $1,000 in 1974 is equal to roughly $5,500 today. But hear me out: you would’ve turned $5,500 into $154,000 by doing, let me repeat, NOTHING.
Investing can make you money while you sleep, with little to no effort on your part!
That’s the power of investing and that’s why it’s so important to understand why you should invest, how you should start investing and what you should invest in.
If you don’t know what the S&P 500 Index is, then this article is for you.
Let’s start there, the S&P 500 Index is one of the most widely used barometers of broad stock market performance.
It consists of 500 of the largest companies listed on the New York Stock Exchange. And I may have fabricated the above statement slightly.
You would have to reinvest all dividends in order to get the return mentioned. But that’s it!
Now, if you also don’t know what a dividend is and want to learn how to start investing as a beginner let’s dive in!
What is investing?
According to the Webster dictionary investing as “committing (money) in order to earn a financial return.”
Essentially you are putting money into something such as a business, a project, real estate, etc with the expectation of generating an income or profit.
That sounds all well and good, but why is it important?
It is one of the easiest ways to start making money work for you instead of the other way around.
When you can stop trading your time for money and start creating passive streams of income your ability to build wealth and achieve financial freedom skyrocket.
Many personal finance experts say investing your money is the fastest way to reach financial freedom.
When Should I Start Investing?
The short answer is, yesterday!
The sooner you can start investing, the better set-up your financial future will be.
Start Early and Contribute Often
Generally, I recommend that people start ‘seriously’ investing when they start their careers.
This can mean different things for a lot of people, but it’s common for people in their early twenties, after college, to start their career and thus, start investing.
When starting that first job, explore your retirement plan options.
Most employers offer a qualified retirement plan (such as a 401(k) plan) that will help you save.
We won’t explain the mechanics of those plans in this article, but it is important to know if your company offers a “match.” Oftentimes, employers will encourage you to save by matching a certain percentage of your contribution.
For example, if your job matches ½ of a percent of the first 4% that you contribute. That means if you contributed 1% of your salary to your 401(k), the employer would contribute ½%.
If you contribute 4%, the company’s full match is 2%.
The reason they offered 1/2 of a percent is to encourage employees to save more as it forces employees to contribute 4% to get the full company match.
The best way to start investing is to contribute to a retirement plan like this, and always contribute enough to receive the full company match, if your company offers that benefit.
There are a few things you want to consider before investing additional funds beyond a retirement plan.
Save an Emergency Fund
First, you must save an emergency fund.
Life is not always predictable and it’s not a matter of if but when an emergency is going to happen to you.
Things like a loss of a job, death in the family, car repair, home repair, etc should not derail your finances.
We recommend starting with a minimum $1,000 emergency fund.
From there you should build a fully-funded emergency fund of 3-6 months of living expenses.
Pay Off All High-Interest Debt
Next, pay off all high-interest debt before investing discretionary funds. How do you determine what is high interest?
Well, historically speaking, an aggressive investor will average roughly 10% annual returns in the stock market (using the S&P 500 as a proxy).
Any debt that has a higher annual interest rate than the rate of return that could reasonably be expected by investing, is high interest.
In this example, the aggressive investor should pay off any interest that carries an annual interest rate higher than 10%.
So, this is all good information, but it can still be overwhelming to determine where to start investing.
How to Start Investing – 5 Easy Steps for Beginners
1) Get Started As Young As Possible
We already mentioned that you should start investing young. It doesn’t matter how much you have to invest; small investments will still grow.
If you haven’t started investing yet, take a look at the picture below from Money and U.S. New and use it as a wakeup call and get started today!
2) Decide How Much to Invest
It’s generally a good practice to build a set dollar amount into your monthly budget that you can invest. The more you invest, the more you could get out of it, whether it’s investing $10,000 or more, but don’t be shy to invest even $10 with programs with low minimum thresholds!
It’s also a good practice to make weekly or monthly contributions to an investment account. This is called dollar-cost averaging.
It essentially means you are buying a set dollar amount of investments regardless of what is occurring in the financial markets.
Set up an automatic transfer so you can be confident that you will never miss an opportunity to invest. Paying yourself first like this is a guaranteed way to build wealth.
3) Open an Investment Account
This one can be a daunting step. There are so many options out there. How do you decide which option is best?
Older generations talk about their financial advisors, do I need to open an account with a financial advisor? Aren’t there cheaper alternatives? Are cheaper alternatives as effective as having a financial advisor?
“I don’t know if I can do this on my own”. You can do this on your own! There are advantages to having a brokerage account with a financial advisor, but that’s not for everyone.
Typically, people that have been investing for a long time and have accumulated large sums of money will turn to a financial advisor for professional advice on how to keep their assets safe.
Beginners will generally not be able to take full advantage of all that a financial advisor has to offer, which leads them to the less-expensive “Robo-Advisors.”
Robo-advisors automate investment management by using computer algorithms to build you a portfolio and manage your assets based on your goals and your tolerance for risk.
Websites such as Betterment, M1 Finance, Webull, or Robinhood offer these services for low fees and they typically don’t have account minimums. Robo-advisors are perfect for less sophisticated investors who do not want to choose specific investments.
For those who want to take a more active role in their investment portfolios, self-directed brokerage accounts are a great option.
Places such as Vanguard, Charles Schwab, Fidelity, or E-Trade offer brokerage account services at little to no commission cost to you.
If you are just getting started we highly recommend opening a robo investment account with Betterment.
4) Understand Your Investment Options
This is perhaps the step that will turn most people off from investing. You need to know what options will do best, but how?
Most investment options are income-generating assets, but not all are created equally- you want to know the best stocks for beginners and need to look around and choose wisely.
There are so many terms that investors throw around; how can you possibly keep track of how a bond works, or what a Sharpe Ratio is, or how a company’s P/E Ratio affects its stock price?
Don’t you have to understand these things before you start investing? No. You just need to know your investment options and where your money will get the most return on investment.
There are, however, a few terms you should understand before we dive deeper into this subject.
One of the most important investing lessons you should learn is the difference between index funds and individual stocks.
Don’t worry we will cover everything below.
What is a Stock?
Also known as “shares” or “equity,” is an investment vehicle in which the stock-holder owns a portion of the issuing corporation. This entitles the stock-holder to a share of the corporation’s assets or earnings.
We will use Apple as an example. If you own Apple stock, and Apple’s earnings go up, you will likely see a rise in the stock price. If Apple’s earnings go down, you will likey see the stock price fall.
The corporation also has the option to share the profits with stockholders through dividends, but they are not required to do so. Obviously other factors play into the price of a stock, but we will keep it as simple as that.
We should also touch on the various types of equities. There are four main buckets of stocks:
- Large Cap US Stocks – are considered to be the safest bucket of stocks. Companies that fall into this category are often household names, such as Ford, Johnson & Johnson, or Apple.
- Small/Mid Cap Stocks – tend to be riskier than Large Cap US Stocks. These are smaller companies in the United States and typically fill niche roles in the economy.
- Developed International Stocks – fall somewhere in between Small/Mid Cap Stocks and Large Cap Stocks on the risk spectrum. As the name suggests, these are international companies domiciled in developed countries (Think the U.K., Germany, Japan, etc.).
- Emerging Market stocks – are the riskiest bucket of stocks. These are international companies domiciled in emerging countries such as Brazil, China, or India.
If you are interested in investing in individual stocks you can open up a Robinhood account and earn your first stock for FREE. We also recommend signing up for Stock Advisor to make sure you are making smart investing decision.
What is a Bond?
Also known as “Fixed Income.” The easiest way to think about a bond is to think of it as a loan where you are the lender.
You buy the investment, and in return, you receive periodic payments known as interest.
A bond always comes with a set time frame or maturity date, and upon maturity, you receive the full principal back. Thus you end up with your principal plus interest.
It’s important to know that bonds are a safer investment than fixed income. Bond performance is largely based on broad interest-rate movements, and interest rates move much slower and much less than the stock market.
There are different risk spectrums for fixed income as well. The easiest way to break it out is “Investment Grade Fixed Income” and “High-Yield Fixed Income.”
Investment Grade – is debt issued by an entity that is more trustworthy and is in a better financial position to keep up with interest payments.
High Yield – is issued by entities that have a higher probability of defaulting on the debt. As such, they have to offer a higher interest rate on issued debt in order to appeal to investors.
What is a Mutual Fund?
A mutual fund is an investment vehicle that you can buy into which is highly diversified and professionally managed.
An investment manager pools the money of every investor and uses it to build a portfolio of stocks, bonds, or both in hopes of generating an attractive return.
Mutual Fund managers always have a benchmark, or an index, which they try to outperform. A manager will retain investors by giving them a higher return than they could find using an index.
It’s important to research managers and determine who is best suited to beat an index because if they don’t beat that index, you will be paying a higher price to underperform.
What are Index Funds?
Index funds simply just track a broad market index. There are lots of pros and cons of investing in Index funds but overall they are our favorite option for long-term investing.
Equity (stock) indexes may track the S&P 500 or the Dow Jones by buying the stocks in the index in the same proportion as the index.
There are mutual funds that index. In these cases, the managers aren’t trying to outperform the index, but rather perform right in-line with the index.
These funds are often much cheaper because they offer little value other than receiving the same return as the market.
The most popular way to invest in indexes is through the use of Exchange Traded Funds (ETFs).
What are ETFs?
Exchange trade funds are much like a mutual fund. They pool investors’ money to buy a basket of securities.
The main difference between mutual funds and ETFs is that mutual funds are only priced at the end of the day, whereas ETFs are priced throughout the day and trade very similarly to a stock.
The bulk of ETFs are index funds that are extremely cheap and simply just track an index.
There are ETFs that are more actively managed, but typically investors gain active management through mutual funds.
If you are interested in learning more about ETF’s you can read this guide.
What are REITs?
A real estate investment trust (REIT) is a company that owns, operates, or finances income-generating real estate.
Similar to mutual funds, REITs pool the capital investment from a large group of investors. This makes it possible for individual investors to earn dividends from real estate investments—without having to buy, manage, or finance any properties themselves.
This is a great opportunity for people that want to get into real estate but want to invest their money and not their time. We found the perfect place to invest in REITs is through a trusted company like Fundrise.
You can read our entire in-depth Fundrise review here to see if investing in real estate is right for you. Or feel free to open an account here.
Another option is Arrived Homes, where you can start investing with as little as $100. Learn more about low-cost real estate investments with our Arrived Homes Review.
What is Active Investment Management?
Active managers are what was described under the mutual fund bullet point above.
These managers research stocks and try to pick the best stocks suited to their objectives in order to outperform the benchmark.
What is Passive Investment Management?
Passive management in what index funds use.
Managers don’t try to use skill to beat the benchmark, they simply just go along for the ride by investing in the same securities as the index.
5) Pick an Investment Strategy
When you choose an investment strategy you should always have a goal in mind.
It could be anything from buying a new laptop in 4 months, buying a house in two years, or retiring in 40 years. Whatever that end goal is should determine your investment strategy.
Short-Term Investments (5 years or less)
Short term investing is generally characterized by less aggressive portfolios. You typically want to protect the money you have saved and earn a small rate of return on top of that.
If your goal is to buy a house in two years, it could be a good idea to buy a two-year, investment grade bond and earn interest for those two years while protecting what you have already saved.
Of course, this can vary based on your risk-tolerance. If you are able to stomach some volatility, you can put some of your money in equities, but it would be a good idea to stay on the safe side of equities, like US Large Cap Stock.
Some of the best short-term investments include certificates of deposit, money market mutual funds, and corporate bonds.
Another good option is income-oriented mutual funds. These are mutual funds that invest in vehicles that generate high income through dividends or interest, and tend to be a safer alternative to growth funds.
Long-term Investments (5+ Years Into the Future)
Investing over the long-term affords you the ability to take on more risk when you begin investing.
If you’re in your twenties, and you are investing for retirement, you have decades in front of you to make up for any market losses.
The most important thing to do is to stay invested!
When markets get choppy many investors get spooked and will pull out of the market in pursuit of safer investments. This is the wrong thing to do because you are locking in losses – that is, you’re selling after the investment has lost money.
The best days in the market typically come the day after the worst days.
Studies show that, over long-term time horizons, if you miss the 10 best days in the market, your ending value can actually be more than 50% less than if you had stayed invested.
If that didn’t sink in, read it again. We are talking 50%!
Missing the 5 best days in the market can result in more than a 35% drop in the ending value.
We are living through a historic period of market volatility right now; it’s important for long-term investors to stay the course, weather the storm, and come out better-off on the other side.
In fact, many long-term investors view a drop in the market as an opportunity to buy more investments at a cheaper price.
This leads us into a discussion of how your portfolio should look when investing for the long-term. Many experts suggest that when saving for retirement, subtract your age from 100, and the result should be your percentage of equities to fixed-income.
For example, if you are 30; 100-30=70, therefore your portfolio should be 70% equities and 30% fixed income. Other long-term investments, such as saving for a child’s education, should adopt the same principle.
Start aggressively in the early years by investing heavily in equity, and gradually decrease the risk of the portfolio over time by swapping out equity for fixed income.
The reason for this is because you don’t want an aggressively positioned portfolio to crash right before you need the money. This can destroy years of discipline and hard work.
8 Beginner Investing Tips Everyone Should Follow
Here are some of the best investment tips straight from the billionaire investor Warren Buffet himself.
These are very powerful investment tips perfect for those just getting started into investing.
1) Start Early
The earlier you start the better! Your biggest asset when it comes to investing is your time in the market.
Give your money time to work for you and start reaping the rewards of compound interest.
2) Automate Your Investment Contributions
The fastest way to make sure you are building wealth is by paying yourself first.
If you force yourself to invest automatically through automatic contributions you are setting yourself for long term success.
3) Play the Long Game
You should always be investing for the long-term. Short-term investments are risky and more often than not you will lose money.
The way to win when it comes to investing your money is investing for the long-haul (5+ years).
4) Understand Your Risk Tolerance
Investing your hard-earned money can be an emotional rollercoaster. Do some soul searching and determine if you handle risk well or not.
Understanding your risk tolerance is very important in setting up the proper investment portfolio that will work specifically for you.
5) Don’t Check Your Investments Often
As Warren Buffet says “set it and forget it”. We are all human and have lots of emotions, especially when it comes to money.
So take as much of the emotion out of investing as possible to prevent making any impulsive decisions when the market is volatile.
A good habit is only checking your investment accounts every 3-6 months or longer.
6) Keep Your Fees as Low as Possible
Mutual funds and ETFs have expense ratios. Most brokerages charge trading fees. Financial advisors and robo-advisors charge management fees.
All these fees can eat away at your wealth over time.
Keep your fees as low as possible by sticking to index funds and ETFs. This will let you see equal or better performance than the market while keeping more money in your pocket.
7) Diversify Your Investments
You never want to put all of your egg’s in one basket. Putting all of your money into one company’s stock is like playing the lottery.
Your best option to stay diversified is with low-cost index ETFs.
8) Always Listen to Warren Buffet
Mr. Buffet is arguably the greatest investor of all-time growing his investment portfolio to billions upon billions of dollars.
It’s safe to say you should always follow his investing advice.
- “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No.1”
- “Price is what you pay. Value is what you get.”
- “Risk comes from not knowing what you are doing.”
- “Never invest in a business you cannot understand.”
- “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
How Do I Track My Investments and Net Worth?
You can figure out your net worth pretty easily on your own, but there are apps for that!
When you first start investing one of the easiest ways to track your money using free money management apps.
My favorite and the one we have been personally using for longer than a decade is Empower (formerly Personal Capital).
To learn more about my favorite money app, check out my Empower review.
How to Start Investing Today
If you have made it this far then you are ready to get started investing!
I’m excited for you because investing your money is by far the fastest way to build your wealth and reach financial freedom. You are about to unlock the power of having your money work for you instead of you working for your money.
The easiest way to start investing right now is through a micro-investment app called Acorns. There are a bunch of brokerages that will provide you with a free stocks for signing up so you have plenty of options.
Acorns makes it super easy to invest by taking your debit and credit card transactions and rounding them up. The difference is then invested in low-cost ETFs.
If you are looking for a more long-term investment platform for all of your investment needs then we highly recommend opening a robot investment account with Betterment.
That’s it! Time to take action on your new learnings and start investing for your future today!