How to start investing: a beginners guide

Investing is more accessible than ever before, but many people feel too intimidated to get started. Today, there are more resources than ever to learn about investing and to start building a portfolio.

But with so much information at your fingertips, you might feel overwhelmed about where and when to start. So, we’ve put together this practical and actionable guide to help you get started.

Timing – the importance of starting now

Waiting for the “right time” to invest isn’t going to do you any favors, because there’s never really any “right time”. It’s easy to find a reason to postpone things.

But most financial experts agree that it’s best to start as early as possible. With patience, restraint, and smart financial strategies, you’ll be able to see your investments compound and grow over the years.

How much should I set aside for investing?

The amount you invest really depends on your individual financial situation as well as your financial goals. Invest too much and you’ll expose yourself financially, but even if you’re operating on a tight budget, you can still make small, smart investments.

Ideally, you should try to set aside 10% of your income for your retirement. This is a widely-accepted “best practice” rule-of-thumb. Some experts even suggest that you invest as much as 15% - 20% of your income.

Don’t forget that you can include your 401K in this allocation. This especially makes sense if your employer matches funds to maximize your retirement funds. If your employer offers a matching program, where they contribute a set amount (often up to 50%) this is almost certainly where you should start investing. It’s like getting a 50% bonus on your retirement money.

Another way of deciding how much to invest is to calculate the number of years between your retirement age and now. This will give you an annual investment “target” which you can then divide by 12 to get your monthly investment allocation.

Ultimately, everything depends on what you could afford and how comfortable you feel saving for the future. If you can’t afford to invest 10%, even 1% of your income is a good place to start. And if you can afford to invest more, you probably won’t regret it in the years to come when your investments start to grow.

How do I limit my investment risk?

Investing is inherently risky. The value of your investments can go up or down, and individual positions can go to zero. So it’s important to spread your risk across a diverse investment portfolio which includes a mix of higher risk and lower-risk investments. For example, a diverse portfolio might include some shares in startups (higher risk), some municipal bonds (lower risk) and some global ETFs or mutual funds (medium risk). In this manner, you can build a diverse portfolio and limit your risk profile.

Let’s now move onto a broader discussion about investment options.

What are my investment options?

Traditional investment instruments, such as the ones listed below, are typically where most people start investing.

Stocks (corporate equity)

• They grant you a “stake” in a company’s financial success.

Most investors put the bulk of their portfolio into stocks, because they can provide dividend income as well as share price appreciation.

The S&P 500 provided an average of 8% return per year from 1957 through 2018.

• They’re considered riskier than other investments, as their value can go up or down, or you may lose them altogether.

• You can own shares in both private and public companies. When you own publicly-traded company securities, you can sell at any time, assuming their is a willing buyer. With private investments, there is no public market to buy or sell shares in, and you generally have to wait until an “exit opportunity” arises, which is usually an IPO or an acquisition.

On the other hand, private investments can be potentially very lucrative over the long term, and they have the potential to provide a better return than other investment strategies. Patience is a virtue.

• Never put your eggs into one investment basket – we recommend building a diverse portfolio to mitigate your risk. You can do this by buying a broad index fund, such as the S&P 500. Many experts also recommend buying global stocks to diversify further.

Investing legend Warren Buffett recommends buying and holding shares for the long-term.

Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years.

Warren Buffett

Bonds

• Regarded as “I.O.U.s” between you as the lender, and the “borrower” (typically an institution).

• You’re lending money to corporations, or governments.

• Your bond matures over a set period (usually 1-30 years) and you earn interest.

• Bonds are considered less risky than stocks and shares since you can predict when your investment will be repaid and how much you will stand to gain. However, if the company who issued the bond goes under, you may not get paid back, additionally bonds can be redeemed early, possibly reducing your ROI.

Mutual funds and exchange-traded funds (ETFs)

These funds own shares in dozens or hundreds of different companies. Such investment funds can be actively managed by an investment manager, where they pick the stocks by hand. The other option is passively managed funds, such as those based on the S&P 500, which is an “index” of 500 leading public companies in the U.S.·

ETFs and mutual funds generally carry less risk than single stocks, since you’re investing in a diversified portfolio.

ETFs in particular are an attractive option if you’re on a tight budget or have little experience, given the lower minimum investment requirement. ETFs also generally have lower fees than mutual funds. In an S&P 500 index fund such as SPY, you are only paying .09% per year in expenses.

Mutual funds typically have higher expense fees, but offer more diverse strategies.

IRAs (Individual Retirement Accounts)

IRAs offer individual investors the chance to save money for retirement in a tax-sheltered account.·

Funds from an IRA can only be withdrawn after the account owner reaches the age of 59.5. Funds withdrawn before this time may be subject to additional taxes. IRAs are designed specifically to fund retirement needs.

Traditional IRAs are funded with pre-tax earnings, meaning you don’t have to pay tax on these funds on the way in. But when you withdraw your savings in the future, capital gains will be taxed.

Unlike traditional IRAs, Roth IRAs are funded by your post-tax earnings. But once you’re ready to retire, the capital gains are tax-free.

The most common investments in IRAs include stocks, ETFs, mutual funds, and bonds. IRAs can be an excellent way to save additional money for retirement if you don’t have a 401k plan, or want to save more than allowed by your plan.

Gold and other precious metals

• Gold more or less maintains value over time, so is considered to be a “hedge” against inflation.

• However, gold depends largely on currency rate fluctuations and could be heavily affected by speculation. In this light, it’s not necessarily any less risky than other investment options. But many investors prefer to have a small portion (5-10%) of their portfolio in gold, silver, and precious metal miners as protection against possible inflation.