Ask the Readers: How to Get Started with Investing?
Published on - July 18th, 2008 (Modified on - May 10th, 2010) (by J.D. Roth) 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 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.
This article is about Ask the Readers, Basics, Investing
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“Frugal Bachelor”:
I’d suggest reading “Becoming Your Own Stock Guru” by James Trippon .. Bought a copy on Amazon.com for $9.00. He is a proponent of Jim Roger’s thinking. Rogers was a founding partner with George Soros and is highly successful. In fact he moved to China with his family to be where the action is. If you Google his name, you’ll see quite a lot of articles regarding his approach.
If you are looking for China Funds, I’d suggest either FXI, CHN or USX – These are ETFs and not funds… If you read the book, you’ll understand why ETFs rather than Funds… The China markets are **EXTREMELY** volatile. And although there are many good stocks such as China Mobile, BIDU etc, these stocks and ETFs ramp up like rockets and drop like rocks. Definitely read up on anything using Morningstar.com (Sign up for their 14 day trial and download as many reports as you can.)
China had an amazing runup last year and then had an amazing drop. I think they’re down about 40%, so you better learn how to read charts, or sign up for Trippon’s or Roger’s service, otherwise, your account will be slammed.
For the record, although you are probably correct in the long run, China is facing some very difficult situations. Off the top of my head, ask yourself how a manufacturing county supports a massive population when they retire and ask who works the factories in light of their heavily enforced ‘one child per family’ requirement. Think of our own social security problems and we are still producing 2.3 kids per family.
Happy investing… Thx jegan
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I’ll go against some of the advice here and recommend NOT starting with an imaginary portfolio. Unless you are planning to become a day trader, the results of your imaginary portfolio are absolutely meaningless. Figure out what you are investing for; for most of us, that will be a retirement that is decades away. Savings rate, broad diversification and low fees are our friends. Trying to gamble money on particular stocks is a losing game in the long run.
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I’m not sure this will help Christina, but the hardest part for me was getting comfortable with clicking on buy/trade/sell and knowing whether I wanted a market order, etc. It wasn’t the concept of investing, it was the mechanics.
To get over this, I started with smaller amounts of money. Losing a bit on commissions isn’t the worst thing if that’s what it takes to get comfortable. Also, starting to invest with a friend was a huge help.
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If you don’t have any experience investing, play with some virtual investing websites. You don’t use your own money, you start with fake money, but you fake invest in real securities in the real market. Then you can better understands the risks and research that go into actual investing without risking your own money. This isn’t to encourage you to day trade, to just to familiarize yourself with the “enter your ticker symbol here” “cofirm to buy” etc buttons so that you have confidence when dealing with your own money.
Also – if you’re investing in mutual funds, Scottrade doesn’t charge transaction fees for hundreds of no-load, no-fee funds.
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I’ve always had trouble reading investment books — I fall asleep half-way through.
Find out if there are investing classes where you live. I took courses given by our school board’s continuing education program. The benefit is that we could ask tons of questions that the books don’t address.
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Good question! I believe the best first solution for most people is the simplest – a cheap index tracker fund. Friends who have put just a hundred or so away a month have been amazed when they remember to check their accounts after a few years of (dollar cost averaged!) growth.
Many people have know idea what it feels like to have a growing pool of capital. Getting that feeling going is a vital first step, in my view.
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On “pretend” portfolios: I don’t recommend them. It’s like playing poker for chips. Poker for chips is a different game than poker for money, and anyone who plays even at the amateur level can tell that. You’ll never be as serious about investing for play as if you choose to put some amount of money on the line.
When I wanted to learn about investing (in individual stocks) I took an amount of money, in my case $1000, and researched a lot stocks to see what I wanted. It was really hard, very hard, harder than it seems when you read the books. In the end, I couldn’t decide and split the money and put $500 each on two stocks. I made 20% in 6 months, not so much because of my brilliance, but because the market did well overall. I sold the stocks to buy something else.
This was mid 2006, and I just this week checked to see how the top six contender stocks had done. Of them, nearly all had done better than the S&P 500. But one of them was WB, a financial, and it was down 75%. On average I’d probably have done just about like an index fund if I had taken some in each company, but my risk was a lot higher.
Now, if you mean serious investment, and not individual stocks… Personally, I recommend ETFs to begin. I started with mutual funds, but the fees on ETFs are so much lower that if I was totally in ETFs right now, my portfolio would probably be $100-200 cheaper in fees per year. Add to that, that you can get into a diversified portfolio of ETFs cheaper than you can get into most mutual funds, and they just make sense.
I think some variation of the Margaritaville portfolio makes sense. I.e. 33% VTI (US stocks), 33% VEU (non-US stocks), and 33% TIP (inflation protected bonds).
If you aren’t an aggressive personality, you might choose more bonds. Perhaps a portfolio like 45% VTI, 15% VEU, 40% TIP.
For VEU you could substitute EFA very reasonably. For TIP you might substitute AGG if you want exposure to corporate bonds and not just treasuries.
So save up, say $3000 in a discount brokerage account and figure out to the nearest share how much of each ETF you want. Place three purchases, one for each category you want to own. Then let it sit until next year. If your account provides free dividend reinvestment, ask for it.
Now, this is key: Next year, the amount you have devoted to each category will vary from your intended percentages. REBALANCE. Make your new purchases to bring the amount of US/non-US/bonds back to the correct amounts, again purchasing to the nearest share (unless you use a service like Sharebuilder that lets you buy partial shares).
The rebalancing is what reduces risk in an investment portfolio. It is trite and not that clever to say “don’t put your eggs in one basket,” but the real reduction of risk is only partially provided by diversification. A substantial portion of risk reduction comes from rebalancing. It matters more than you think, and if you fail to rebalance you don’t reduce your risk as much as you believe.
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To follow up on my post: if $3000 is too much to save in a short period of time for you, then save $1000 and buy your VTI. Then when you get your second $1000 saved, buy your VEU. Then TIP. Nothing says you have to make each investment simultaneously. Perhaps if you feel more timid about stocks, you do VTI, then TIP, then VEU. Whatever.
You’ll still have a goal of getting into different asset classes, and you’ll want to invest less in the parts of your portfolio that have performed well and more in the laggards, trying at least to “bounce around” the ideal balanced portfolio. But you can get started without having the whole chunk of change together at the same time.
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The Only Investment Guide You’ll Ever Need is the best book — hands-down — about leaving beneath your means and investing wisely. It was published long before any blog and it still is as valuable today as it was then.
You can read Tobias’ “blog” today, at andrewtobias.com.
I’d suggest somebody test the waters with index funds and then branch out to a mix of index, foreign, and sector funds, sprinkling in a few individual stocks when the time is right. Never invest money you cannot afford to lose.
If inflation rears its ugly head, a good way to play the eventual drop in interest rates is a zero-coupon bond fund (remember Econ 101: Interest rates drop, bond prices rise). The leverage is remarkable on these and they’re sure-fire IF/WHEN rates drop. We’re nowhere near that, but with the Fed wanting to keep inflation in check, and oil prices high, food prices on the rise, and all other commodities rising, too, you can bet that if we avert a recession, we’ll be headstrong in an inflationary period.
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Yes my favorte place for people to begin investing is with the long
standing Pax World Balanced fund. It has a 30-year track record, it is
green/socially responsible fund, and only has a $250 min. initial
investment required to open an account. Go to http://www.paxworld.com for
more information on this well-respected fund.
- Cliff, GreenMoney.com
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make sure you’re out of debt first. that’s key. once you’re out of debt, investing is a wonderful tool. just make sure to do your research. don’t do it blindly.
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Vanguard has ETFs as well, which are very low cost. As a Canadian I can’t buy their index funds but I do own some of their ETFs. Because of transaction costs of ETFs, investors should get started with the index funds.
Mike
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Learning how to invest and manage large sums at some point in the future is important. Starting to invest with small amounts over a long time is a good start. This is more important than paying off the mortgage early (and then ending up with a larger sum to invest…and a need to learn fast). Part of this learning is watching your investments grow and and at times shrink.
My suggestions for beginning are reading books, starting with a low cost mutual fund (and dollar cost averaging). After a few years of this and further learning, you can branch out and do more. Then I would recommend either learning to step things up and/or getting professional help. But if you go with an advisor, I’d want to make sure that I knew enough to make sure that my interest was taken care of.
Good luck with learning to invest. Stick with it and look at it as a long term project. I started learning about investing about 20 years ago; started investing about 15 years ago and am just starting to think I’m making some good progress.
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ETF iShares looks like a good place to start investing.
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As far as good books, Warren Buffet bases his investing strategies on Benjamin Graham and Philip Fisher. If you know at least a little about the market I would recommend reading “The Intelligent Investor” by Graham and “Common Stocks and Uncommon Profits” by Fisher
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I signed up with Sharebuilder and got their free $50 promotion. I took the $50 and like weakonomist says, picked something. I figure I’m working house money, so no big investment on my part and I watch to see where it goes from there.
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I’m out of debt, but a long way from having a large enough emergency fund, so I’m saving for that now. However I do own stock. I bought stock that was available directly through a company, and was a DRIP. I could start with $50 and add $50 whenever,and the fees are very low. The stock split and it consistently earns dividends. I have a very small amount, but when my friends talk about investing and their portfolios (many of them are in much higher income brackets than I am) I can smile to myself knowing that I too am a stock holder. It helps me to keep the green-eyed monster at bay. Eventually I will be able to do bigger investing, but I chose carefully and so far, so good.
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Is Vanguard’s STAR fund an index fund? Or is it just a normal mutual fund? (sorry if this is a dumb question… still learning)
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Nico,
Vanguard’s STAR fund (VGSTX) is a large cap blend. It’s also what is known as a ‘fund of funds’. It carries a Morningstar ’4 Star’ rating and has low expenses. It is cheap to buy into.
You might consider it a large blend index, except it doesn’t really follow any indeces. Having said that, it’s returns are not spectacular, but better than some. It seems to return about 10% per year in good years, only 6% last year and it lost 6% so far this year. When I say a fund of funds, it’s only holdings are other funds. Seems to me, you might want to go to Morningstar.com and copy down each fund that it holds, then look up each one and compare the results. Some of the funds it holds are better than others.
As a quick excercise, I also checked for funds that match the same characteristics on Morningstar.com and found this fund; State Farm Growth (STFGX), which not only is managed, but has a lower fee and is cheaper to get into. And it has a better performance record in general. (All except this year, which is worse….But over the last 5 years a better performer. No recommendation.. Just pointing out what’s available and where to find it..)
Thx jegan
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I would recommend that you learn all you can about value investing. While there is some study involved, it is fairly straight-forward. Done properly and with a margin of safety your risk is minimized.
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