Believe it or not, investing can be very simple. There are certainly those out there who would prefer to use big words to make investing sound incredibly complicated. We’re renowned for keeping things simple – so here’s investing simplified.
There are a few simple concepts to understand about investing at the beginning that will help set the expectations you should have and lay the foundation you need to grow.
Some might say there are “steps” to take that lead to money in an investment account. However, we’ll take a different tack and just give you the key concepts you need to get started.
Even though these aren’t “steps” per se, every journey has a “prep phase” before even the first step, so we’ll start with Step 0.
Investing for Beginners – Step “0” Set Yourself Up For Success
Investing is something that succeeds only with the clearest goal in mind – to be financially capable of supporting yourself later in life.
This may transcend into other “sub” goals or derivative goals such as:
- retiring early
- buying your dream home
- buying your dream car
- travelling the world
- quitting your job and just doing whatever it is you fancy doing
Regardless of what you do, it’s ultimately linked to getting to a stage where you’re financially capable of supporting yourself later in life.
Now, if you have distractions in your life that could impede, halt, or even reverse that goal…
Then your “step 0” is to get all of those other distractions taken care of first before you think about starting your investing journey.
When we say distractions, we mean things like:
- heavy debt burdens,
- personal or family issues,
- lack of knowledge
We’ll get into this more later, but successful investing ultimately requires commitment and consistency.
Once you get those other distractions out of the way, you can focus on investing first and then live the lifestyle you can afford.
Figure Out Your Style
There are two very important concepts about risk.
The first is that every financial investment carries some risk that it can go to zero and you might lose money.
The second is that no reward can truly be found without taking on at least some risk.
In fact, risk and expected returns maintain a proportional relationship meaning they both somewhat go hand in hand.
So, if risk is a necessity for reward, then you must figure out what your risk tolerance is.
If you can’t sleep at night with an all-equity portfolio (also called an all-stock portfolio), then you can practice good risk management by investing in safer assets like bonds.
RELATED: How Do Bonds Work?
You should also decide how much control you want over your investment portfolio.
If you want to actively manage each asset you invest in, then you’ll want to pick a brokerage or financial firm that caters to that style.
If on the other hand, you want to give a risk profile and have the firm decide where to put your money, you can choose a managed portfolio or perhaps a “robo-advisor.”
Put differently, you want to decide if you’d rather:
- actively research, analyze, and manage your investments, or
- sit back and let someone else do the hard work for a small fee
Note that “small fee” can vary dramatically across different funds.
If you want to minimize your fees and still have a decent investment portfolio, you’ll want to take a look at something like Vanguard.
There’s no “right” or “wrong” answer, really. It’s just a case of being clear on what your priorities are, and what your investing style is.
Once you understand your investing style and are clear on your priorities, the next step is to start small.
No successful investor puts millions into an account right from the start – it takes time to grow.
Even if you haven’t paid off all your debts, you can still arrive at a figure you can put away consistently after all of your debts are paid each month.
Note that a common question people have is whether they should pay off their debts or invest their money.
A simple “hack” is to compare interest rates.
Investing in equities will usually earn a return of about 6-8% per year, on average, with consistent investing.
If the interest on your loan is greater than the return on the investments, then make it a priority to pay back the debt first.
Once you have disposable funds, start with a figure that won’t make you hesitate every time you transfer the money to your investment account.
There are some excellent mobile apps available that specifically cater to those who think they can’t put any money together to invest.
Be sure to only invest money you can afford to lose.
Remember, investments can go all the way down to 0.
Remove the Decision-Making
Along the same lines as the previous section, there are financial investment funds that will allow you to set up automatic deposits on a regular basis, so you don’t even have to think about it.
This is an excellent practice for beginning investors to get into.
Sometimes life happens quickly, and there are difficulties that come up which could make it hard to click the buttons and make the usual deposit.
Perhaps the thinking is that you’ll need that money to pay for something.
Taking the decision-making out of it will help with the consistency that will literally pay dividends in the long run.
Don’t lose sight of the key determinant of how much you invest though.
Remember, only invest money you can afford to lose.
Define Your Goal
This might seem obvious because, as we’ve mentioned earlier, the goal is to be able to financially support yourself later in life.
However, that could be relatively soon and completely unexpected if, for instance, you lose your job in the next month.
You’re allowed and in fact, encouraged to have multiple investment accounts for various goals.
If you want an emergency account for a possible layoff, that should be in the safest assets.
If you want to save for a child’s university expenses, that is many years away, and growing that fund by investing should be tackled differently than your retirement account.
Define the goal for each of your investment accounts and do not deviate.
Remember, consistency is key.
By maintaining different investment accounts for different goals, you’ll also be able to better resist the temptation to sell off your holdings when the next crisis comes.
Notice we said when the next crisis comes, not if.
Never Stop Learning
Given that you’re reading this, it may seem redundant to include this section.
But just know that there is a wide world of learning available to you, and most of what you need to know is not taught in a classroom at a fancy university.
The internet, as you can see, is full of information about investing and personal finance.
Sure, there’s a lot of garbage out there.
A lot of “investment gurus” are without any real knowledge, experience, or expertise.
How do you tell the dodgy ones from the credible ones? Ask a lot of questions.
Generally speaking, the credible ones will not only be able to answer your questions accurately, but they’ll also encourage you to ask them questions.
How do we know this? Well, we actively encourage all our students to ask us questions that push the boundaries of Finance.
This holds regardless of which one of our many rigorous finance and investing courses you may be enrolled on.
Even though there is a lot to learn when you’re getting started, just remember to take it at your own pace.
If you’re reading something that doesn’t match your investing goals and values, that simply means the information was meant for someone else.
It’s also important to keep learning because the field of finance is constantly changing.
What was good advice in the 1990s is definitely different from the advice one should follow today thanks in no small part to the internet.
Remember that help is available to those who really want to dive in and get a jump start on their understanding of investing.
Remember, Fees Add Up
Before you start shopping for an investment firm, you should know that all of those fancy investing services cost money.
Money that’ taken out of what you have invested via that particular company.
If you are just starting out, you’ll generally do well to stick to those investments that cost the least.
Oftentimes, the money taken isn’t shown explicitly on your account.
In a sense, there’s a danger where it’ll feel like you’re not paying anything.
Or that you’re paying something really tiny.
Some firms might refer to their fees as “basis points,” which is a fancy way of saying a fraction of a percentage.
1 basis point would be equal to 0.01%.
The best firms for beginners may charge less than 1% to invest in mutual funds with some charging even as low as 0.15%.
If a firm is charging more than 1%, just remember that these charges can add up over time and eat away at precious returns.
As an example, here’s what $10,000 will be worth in 30 years’ time with a 6% return:
- $55,046 (when there’s a 0.15% fee)
- $43,219 (when there’s a 1% fee).
That’s $11,827 in excess fees.
1% doesn’t feel very small now, does it?!
Investing in Stocks for Beginners – Sitting back vs. Actively Managing
Coming back to the conversation on investment style, have you thought about which one you’d prefer?
Active or passive?
If you’re looking to actively analyse investments, research them, and manage them yourself, then you want to make sure you have the right skillset to hold you in good stead.
While we have a variety of finance and investing courses to help you gain the right skillset and master important concepts in finance and investing.
If you know how to code, then you can also check out the Python version of the Investment Analysis course.
We also have a Python version of the Data Driven Investing course available.
All these courses will help you gain a genuine, solid understanding of how securities work.
In the Data Driven Investing (with Excel®) course, you’ll learn how to build a scientific, systematic investment system from scratch.
With the courses, in addition to HD video lessons, you also get access to hundreds of quiz questions, assignments, mathematical proofs, Excel spreadsheet templates, Python code, and so much more.
Of course, feel free to read the sister articles linked above.
Whatever you decide to do though – active or passive investing; learning from us or someone else – make sure you get the right fundamentals.
And be sure to stick to the 2 attributes that’ll pave the way for success – commitment and consistency.
Final Thoughts – Investing Simplified
Even though investing can be simple doesn’t mean it necessarily should be.
If you want to maximize returns, there are ways to do that intelligently and relatively safely.
Simple investing is a great way to start and gain some knowledge about how your money works for you.
However, it’s just a starting point.
It’s up to you to make your money work harder through time, experience, study, and perhaps learning from others.
We hope you found this article helpful and useful. Here’s to your continuous learning and growth in investing!