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Christina sent a question that puzzles many people — including me. Once we’ve established good personal finance habits, we know that it’s time to begin investing. But how? Christina writes:

I’ve had an ING direct savings account for a few years now, and today I decided to take the plunge and open a ShareBuilder account. No sooner had I gotten to the “What do you want to do?” page did I realize that I have absolutely NO IDEA what I’m doing. I was thinking I’d like to do some very basic, not-too-risky investing just so I get some experience with this stuff…but I don’t even know how to start!

Anyone have tips for me on how to get started? I feel like I’m drowning in all this lingo I don’t know. Disclaimers! Fees! Yuck!

Bravo to Christina for putting on the brakes before rushing headlong into something she doesn’t understand. I wish I had done this. Instead, my investing history is filled with thousands of dollars in losses because I simply had no idea what I was doing.

A single blog post isn’t enough to prepare her to invest, but maybe it can point her in the right direction. I’ll share my advice and then let Get Rich Slowly readers contribute theirs.

Where to Invest
The first thing to note is that Sharebuilder may not be the best place to invest.

Sharebuilder is a great way to get into the investing habit. I used it to develop the habit myself. I liked the fact that I was able to invest just $100 (or $25!) at a time. But for each scheduled investment, Sharebuilder charges a $4 fee. That’s not a lot if you’re putting $5,000 into your Roth IRA all at once, but it’s a huge chunk out of a $100 investment. Sharebuilder is a great way to learn about investing, but there are other options worth considering.

Zecco used to offer free trades with no minimum balance. Now they charge $4.50 per trade if your balance is below $2500. If your balance is above that minimum, you get 10 free trades per month. Zecco is a good choice for somebody who wants to invest in stocks.

Another option — and this is the one I currently recommend — is to accumulate cash in a high-interest savings account until you can afford to open an investment account at Vanguard. Vanguard requires a $3,000 minimum initial investment and $100 for additional transactions. Like many Get Rich Slowly readers, I am a huge fan of Vanguard’s low-cost index funds, but I don’t know much about their other investment options. I plan to open a retirement account with them this fall.

What to Invest In
To my mind, where to invest is less important than what to invest in. This is the million dollar question — literally. There are many different approaches, and the only way to learn which is right for you is to do some research.

When I was younger, I bought stocks and mutual funds with no idea how the market worked. This is probably how most people invest. Over the past couple years, I’ve begun to read about saving and investing, trying to get an understanding of the basics.

It’s important not just to research the individual stocks you purchase, but to also understand how the market works. This may seem daunting, but it doesn’t have to be. There are many fine books and web sites that can provide the necesseary foundation. Check out Michael Fischer’s video series on saving and investing, for example. Visit CNNMoney’s Money 101. Or borrow one of these books from the public library:

  • The Four Pillars of Investing by William Bernstein — I recently finished this book, and found it fascinating. Four Pillars is more theoretical than the other books I recommended, and it will appeal to readers who like to know the why behind an author’s recommendations. Bernstein looks at the theory, history, psychology, and business of investing to discover patterns. This is the book I recommend most highly for readers wanting to get started with investing. [My review.]
  • The Bogleheads’ Guide to Investing by Larimore, Lindauer, and LeBoeuf — You want expert investment advice? You can’t beat the info found here. These devotees of Vanugard founder John Bogle are big on slow, sure investments like indexed mutual funds. They tap their decades of experience to teach about diversification, inflation, and asset allocation. It’s not nearly as boring as it sounds. Highly recommended.
  • The Random Walk Guide to Investing by Burton Malkiel — Malkiel’s advice can be stated in a few short sentences: Eliminate debt. Establish an emergency fund. Begin making regular investments to a diversified portfolio of index funds. Be patient. But the simplicity of his message does not detract from its value. This is an excellent book because it sticks to the basics. [My review.]
  • The Only Investment Guide You’ll Ever Need by Andrew Tobias — Andrew Tobias is an entertaining writer. His jocular, conversational tone will keep you interested as he describes mutual funds, bonds, and treasury bills. There’s a good section on how to handle a windfall (lottery, inheritance). This is a great introduction to the subject of investing.

What advice do you have somebody who wants to get started with investing? Can you recommend books? Web sites? Are you willing to share mistakes you’ve made? What would you do differently?

Note: We tackled a similar question about eighteen months ago.