How to get started investing
Below are concise instructions on how to start investing. Important tips are included in the bullets.
Step 1: Decide how much money to invest. Holding excess cash is rarely a good thing, so invest what you don’t need in the next 6 months.
Step 2: Create an account with a low-fee brokerage. This can be done on their website.
- Your brokerage will hold your funds and execute your trades.
- Most modern brokerages do not charge fees have no minimum deposit size. Robinhood and Webull are two examples.
Use the following links to receive
free stock for signing up:
Step 3: Determine your asset allocation. For example, you may choose to invest 50% of your money in domestic stocks, 20% in foreign stocks and 30% in bonds.
- This is the most complex step, but spending excess time on this produces diminishing returns.
- Spend most of your time thinking about your goals and limitations, not about what assets to buy. Once you know your goals, you should be able to
find a portfolio already designed to achieve them. For example, if your goal is to put away money for retirement in 2045, check out the
Vanguard 2045 retirement fund.
Luck is a large part of investing so you may beat their portfolio in any given time frame (e.g. you could’ve bought Bitcoin in 2010), but don’t
think spending time and "calculating" will reveal a better option (just as you wouldn't expect to calculate the winning lottery numbers next week).
See this article for more information about "beating the market."
- Foreign currencies, commodities (like gold) and cryptocurrencies are not productive assets (they don’t create anything) and hence are unlikely to provide returns above inflation over the long haul. Unless you want to actively perform analysis and take gambles, you should limit your exposure to these assets.
- The sooner you may need to access your funds, the more conservative you should be. Being conservative typically means investing more in high quality bonds (less in stocks).
- We have example investing portfolios here.
Step 4: Transfer money to your brokerage. Typically you will do this on their website.
- You should not incur any fees for this transaction.
- It may take several business days for your funds to clear.
Step 5: Purchase your assets.
- There are two main ways people do this: (1) purchase all the assets you can as soon as possible or (2) gradually purchase assets over
time (dollar cost averaging).
Historically the former has worked better on average, but
it’s scary to most people (there’s a possibility you could purchase your assets just before a major downturn).
Step 6: Shift and rebalance your portfolio. Typically 1 or 2 times a year is plenty.
- If you purchased 70% stocks and the stock market had a great year, you might end the year with 80% stocks. In this case you may want to sell stocks to get back to your intended asset allocation.
- If you are nearing a time when you may want to access your funds, gradually shift to a more conservative portfolio. The idea is to avoid having to sell a large amount of volatile assets during a downturn.