Last updated February 12, 2023
This article explains what you need to know to get started investing. It has been made as concise as possible. Links are given where you may want additional information.
There’s no single investment strategy or portfolio that’s best for everyone.
Money saved to buy a house in 2 years should not be invested like money being saved for retirement in 30 years!
Differences in personality also play a role.
The stock market has had major downturns.
Some people panic in these situations, selling shares at huge losses.
Such people shouldn’t hold excess stock—it’s too likely another downturn will occur.
Only those with the tolerance to hang on will truly reap benefits from stocks.
How much should I invest?
Of course, the answer here is highly dependent on your goals.
The first step in investing is to write down your goals.
How much money do you need, and when do you need it?
Most investment goals are related to retirement.
A typical goal is to retire around 65-70 with the ability to maintain pre-retirement, inflation-adjusted spending.
This goal typically requires workers to invest about 15% of their paycheck for retirement.
This topic is discussed further in our article "How much to save for retirement."
Before investing any money, most experts recommend you pay off high-interest debt and build an emergency fund.
Your emergency fund should be enough to cover about 3-6 months of expenses without your salary.
Don’t forget savings for other needs or desires.
The typical family will need to save for kids’ education, a house down payment and retirement.
What should I invest in?
The primary investments are stocks, bonds and real estate.
If you own your residence, you may be heavily invested in real estate already.
Experts are divided on whether the average investor should buy more speculative assets
like cryptocurrencies, gold and other commodities.
They don’t generate cash flow or have an intrinsic reason for growing value.
If you chose to buy these assets, advisors recommend limiting it to a small portion of your portfolio,
given the high risk of little or negative return over long time horizons.
The table below lists important asset classes, including their percentage within a typical portfolio.
There are major variations in those percentages due to different investment goals, personalities and opinions.
The key considerations are your time horizon (when you will need to access/use the money) and personality (will you be able to hold a volatile asset if/when it loses substantial value).
In other words, you want to minimize the risk of selling an asset at a temporarily depressed price.
Money you will need within a year should be invested in short-term treasury bonds or similar.
With a larger time horizon, over 10 years, stocks and real-estate are often more advantageous.
They may temporarily lose substantial value, but you'll have time to wait for recovery before trading these for
less volatile investments, as your time horizon shrinks.
The table includes popular funds that you can purchase for each category.
These funds offer good diversification within the asset class with minimal fees (fees are your enemy).
For example, VXUS holds stocks in most public companies in both developed and emerging markets outside the US, including small-, mid- and large-cap businesses.
You get all that for an expense ratio of just 0.07% at the time of this writing.
Notice that cash is not listed in this table.
Experts agree (and history shows) that holding excess cash almost guarantees a loss of purchasing power over the long term.
If you're interested in some other asset not discussed here, we recommend reviewing
information from the SEC.
|Percent of total investment||Asset class||Recommended fund|
|20 to 90||US Stock||VTI|
|10 to 50||International Stock||VXUS|
|0 to 35||Long term US treasury bonds (20yrs+)||VUSTX|
|0 to 25||Real estate||VNQ|
|0 to 15||Intermediate term US treasury bonds (7-10 yrs)||FIBAX|
|0 to 15||US Treasury inflation protected bonds (TIPS)||VTIP|
|0 to 10||Gold||IAU|
|0 to 8||Commodities||GSG|
|0 to 5||Cryptocurrency||Bitcoin|
How do I get my money into these investments?
Please see our quick start guide for more information about getting your money invested.
We recommend using Vanguard if you plan to passively invest in Vanguard funds (Jack Bogle and Warren Buffett recommend this approach).
As covered in our quick start guide,
you'll start by creating an account with one of these brokerages and then wiring money to them from your bank account.
Anything I should do with my 401k?
If your employer matches a reasonable percentage of your 401K contributions (over 25%),
most experts recommend taking full advantage of that.
A 401K (and IRA) has the added benefit of
reducing your taxes—the IRS removes your traditional 401K contribution from your income when computing your taxes!
We recommend setting aside a few hours to investigate the investment options (mutual funds) available in your 401K, along with the expense ratio of each.
High expense ratios (over about 0.5%) typically lead to subpar performance.
See the first table here regarding the impact of seemingly small expense ratios over time.
We recommend passively managed index funds (e.g. VOO and VTI have a 0.03% expense ratio).
You may want to redistribute the money in your 401k to different funds, but beware of transaction fees too!
Who should I go to for help?
Experts recommend consulting a fiduciary financial advisor.
You may have to pay a bit more to get a fiduciary (as opposed to a non-fiduciary advisor),
but experts recommend this to ensure your advisor is acting in your best interests.
Click here for more information about the differences.
Some other points.
- Roth IRA or 401K. Roth accounts (IRA or 401k) are an alternative to traditional IRAs and 401ks.
The difference is the way they are taxed. A Roth is taxed on the initial investment, at the time the investment is made.
You pay no taxes when you withdraw money during retirement.
Traditional 401Ks and IRAs are taxed when the money is withdrawn (no taxes until then).
Although no one is sure, most experts expect taxes to increase significantly in the future, which could make a Roth a better option.
- Jumping in. If you’ve been saving cash, the thought of suddenly investing it all and then experiencing
e.g. a stock market crash is daunting. This prevents some people from investing.
Experts agree that holding too much cash is the most likely way to fall behind financially, long term.
One strategy to avert this fear is to gradually invest the money over time (e.g. see
- Life insurance. Surprising to some, life insurance can be a good deal, primarily due to tax breaks.
Money in these policies can be invested, grown, and withdrawn tax-free (no taxes at any step).
However, one must be careful to select a beneficial policy. Policies from not-for-profit organizations like TIAA-CREF are recommended.
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