For many people, the idea of investing is appealing but they do not know how to start. We are intimidated by having to compete with professionals. However, it can be much simpler than you think. In this post I will tell you how to start investing.
It is not difficult to start investing. And even do it with confidence. In my opinion, we simply need to break it down into three separate steps: education, strategy and implementation.
Let us analyze these steps one by one:
The first step is probably the most important one as well. It is about educating yourself and gaining as much knowledge as possible. This will give you with the tools necessary to start making decisions and understand how markets work.
You do not have to become a professional trade like Gordon Gekko. In fact, trying to be like him would probably make you lose money. And if you do not know who Gordon Gekko is, you should watch the movie Wall Street, it is great fun.
Your goal should be to understand what financial markets are, why they exist, what types of assets there are, what moves those assets, their historical returns, the differences between active and passive management, and what diversification is.
It may seem like a daunting task, but it is not. You simply need to learn about these topics little by little. A basic understanding of them will give you an edge over at least 90% of investors. See it as an interesting learning journey that will set you on the path to success.
You will find hundreds of posts on these topics in this blog. I have spent many hours writing them. And you can read them for free, so you have no excuses.
I would suggest that, once you are done reading this post, you visit the following section:
Learn How To Invest
Obviously, I also encourage you to find other blogs about personal finance and investments. And books are also an invaluable tool for this. The important thing is for you to want to improve your knowledge as much as possible.
The second step to start investing is to have a strategy place. By that I do not mean a sophisticated investment strategy. You simply need to know why you want to invest, what goals you have and your investment time horizon.
For example, if your goal is to improve your personal finances and gradually accumulate wealth, you should know that the first step is to spend less money than you earn. Perhaps you need to make some sending adjustments. Then, once you have a little bit of money, you can start investing.
If you are more ambitious and would like to achieve Financial Independence (IF) to be able to stop working in a few years, you will have to work harder at it and do some more planning.
Strategy to start investing
If you have some money saved up and would like to start investing, you will have to decide on the timing. You can choose to invest it all at once, do periodic contributions until it is all invested, or a hybrid between the two previous options.
Let us use the following example to illustrate how we could go about it. If you have $20,000 saved up and would like to invest them, and plan to add another $2,000 every month to your investments, you could invest $5,000 at once, and then simply invest $3,000 every money until it is all invested. After that you would simply contribute $2,000.
Why do it this way? This method of making regular contributions to our investments is known as dollar cost averaging. Thanks to the fact that we invest at different times, we buy both when the market goes up and when it goes down. The rationale behind is that no one really knows what will happen in the future.
Some people may prefer to invest all their savings at once, but they should consider the emotional side of things. If we are investing for the first time, put all our money in and, a few weeks later, the market thanks by 30%, it will be very painful for us. We may be tempted to take all our money out which would defeat the whole purpose of investing.
On the contrary, if we have only invested a small portion of our savings and the markets tanks, we can see it as an opportunity to buy the same assets at a cheaper price.
For all these reasons, dollar cost averaging is one of the best methods to balance performance, risk, and emotions. And needless to say those investments have to offer you a good degree of diversification. We want to invest, not gamble.
The third step is to start investing. We need to know what assets we want to buy and how we are going to do it. Opening an account with an online broker will be necessary too.
I would always recommend investing in a diversified way, both between and inside asset classes. That means investing both in the stock market and other asset classes such as gold, commodities and bonds.
Within an asset class, it is advisable to start investing in ETFs or index funds. These are investment vehicles that allow us to invest in a broad basket of stocks very easily. For example, we can buy an S&P 500 ETF and we would be immediately invested in all 500 companies of the US stock market.
Combining stocks with other asset classes will make your investment portfolio more robust, help it thrive in any macroeconomic scenarios and help you sleep at night.
A good way to start investing is by first putting our money in diversified investments that will build the core of our portfolio and, as we gain knowledge and confidence, then adding more tactical bets to see how we perform.
For example, you could start by investing in a passive mutual fund or ETF fund that tracks the MSCI World stock index, an equity index composed of all developed market country. You can then add gold to your portfolio, in physical form or by investing in a gold ETF.
After that you could start getting into things like the MSCI Emerging Markets (global emerging market equities), the Nasdaq (technological stocks), bonds, silver, other commodities, etc.
As you can see, you will build an attractive and very diversified portfolio at the same time. The important thing is for you to know what you are investing in. You do not need to be a professional.
Also, not many assets are required to be diversified. A portfolio with many positions may actually have very little diversification if all assets we own are very similar to each other. On the other hand, we could own just 3 or 4 ETFs and be extremely diversified, as there would be thousands of stocks, bonds and commodities back those ETFs.
Once you have started investing, you can make regular contributions to your investment portfolio as planned. You should also further your financial knowledge and try to understand why the decisions you have taken have been good or bad and learn from them.
You would then be on the path to success and time will be on your side. This means your results will improve and you will grow more confident.
I hope you found this information helpful. To summarize my message, the most important thing to start investing is to have a desire to do it. It may sound cliché, but it is that simple.
This blog and the Internet as a whole offer you almost unlimited tools and information for free. And if you are willing to spend some money on books, you will massively speed up your learning journey.
I want to personally encourage you to take responsibility for your finances. You, and no one else, can improve your situation. Investing is part of the process. You will not be able to control how the market moves. But your will positioned to take advantage of it.
If you have the right mindset and strategy, starting to invest is just the beginning. You will notice that eventually you will want to improve other things in your life. And I have no doubt you will be able to tackle those new challenges.
If you have made it until the end, I invite you to continue on my blog and subscribe to my newsletter: