How to Start Investing as a Beginner: A Step-by-Step Guide

Investing can be a valuable tool for building a better future. It can increase your wealth over time, helping you work toward the life you envision for yourself and your family. Understanding how investing works is definitely worth your time.

However, beginners who are new to the world of investing often find it overwhelming. There are many options to explore, new terms to learn, and a lot of conflicting information to sift through. Plus, since it involves risking your money, it can be stressful.

Investing is complex, but it doesn’t have to be difficult. There are some key decisions you’ll need to make to get started. Let’s break these down into manageable steps.

Step 1: Set your financial goals

Setting clear financial goals is essential for a successful investing journey. Ask yourself the following questions.

Why are you investing? Is it for retirement, a house, education, or financial independence? However, instead of “I want to buy a house” be specific: “I want to save this sum of money by next year”.

Are you investing short-term or long-term? There are different timeframes for different purposes. Short-term (1-3 years) investments are good for a person looking to set aside some money for the near future. They might want to use more liquid assets like savings accounts, short-term bonds, and money market funds. Medium-term (3-10 years) are best for someone saving for education or home. In this case a mix of high- and low-risk assets like stocks and bonds will provide necessary income and protect your money. Long-term investments (longer than 10 years) are perfect for retirement.

How much can you put away? Consider your resources and be realistic. You don’t have to start investing with a large sum — begin with smaller steps.

Long-term investing tips

Investing at a young age is certainly a wise strategy for building a solid financial foundation. By doing that you increase how much you can gain from compound earnings. The money you earn from your investments will earn even more money, creating a snowball effect that helps your account balance grow in the long term.

The stock market, or any other market that you’ll invest in, will inevitably have its ups and downs, but investing early gives you the advantage of time. With years ahead of you, you can weather the market fluctuations and allow your investments to grow. Starting now can set you on a promising path, even if it means beginning with a small amount. The sooner you begin, the more time your money has to work for you.

Follow general guidelines by FBS — they can help anyone, no matter where you are in your investing journey.

Assessing your risk tolerance

Assess your financial situation, define your investment goals, and evaluate your understanding of investments. Consider how comfortable you are with market fluctuations and potential losses. For a specific percentage and valuable insights, consider using online risk assessment tools.

Step 2: Build an emergency fund

Why you need one before investing

An emergency fund is a financial safety net.

• It protects your investments, so in case of an emergency like health issues or a job loss you won’t have to sell your assets or withdraw money prematurely.

• It helps avoid high-interest debt like credit cards in a situation of unexpected expenses.

• It helps reduce stress — knowing you have savings set aside makes you more confident.

How much should you save?

Usually saving from three to six months’ worth of average expenses is optimal. The exact sum depends:

• on your job stability (consider saving more if you have irregular income);

• dependents (save more if you have family relying on you financially);

• insurance (health insurance can reduce the amount needed in your emergency fund);

• risk tolerance (aim for saving up to a year’s worth of essential expenses to ensure peace of mind);

• current financial conditions (for example, inflation rate).

Many financial experts recommend that you invest a specific percentage of your after-tax income — about 10% to 25% of your post-tax earnings. If setting aside that much of your monthly income for investing seems challenging, don’t let that discourage you. Sometimes, even putting aside a small amount can make a difference with the right tools.

Here are a few important factors to consider:

• Take a close look at your monthly earnings to see how much you have left after covering essential expenses. If you’re struggling to make ends meet, it may be more beneficial to focus on building an emergency savings fund or paying down debt first.

• Managing debt, especially high-interest debt, can be challenging without a solid plan. Assess how much you owe and the interest rates attached to those debts. Figure out how much you can safely invest while still covering at least your minimum payments. As you reduce your debt, revisit your investment contributions and consider increasing them.

• An emergency fund is vital for handling unexpected expenses without relying on debt. If you’re still working to save three to six months’ worth of essential expenses, it may be wise to start with a smaller investment amount while you build that financial safety net.

To help you manage your finances going forward, you might consider the 50/30/20 budgeting rule. This approach divides your monthly budget into three categories: 50% for essential needs, 30% for discretionary wants, and the remaining 20% for debt repayment, savings, and investments.

Step 3: Understand different investment options

Once you’ve determined your goals, the next step is to decide what to invest in. Each investment comes with its own risks, so you should understand the details, how much risk you’re comfortable with, and whether that matches your financial objectives. Here are some popular investment choices:

Stocks

Stocks are a piece of ownership in a company (for example, Apple (AAPL), Tesla (TSLA), or Microsoft (MSFT)), also referred to as equities. You buy stocks at a share price, which ranges from just a few dollars to several thousand, depending on the company’s market value. This allows investors to enter the stock market at various levels and makes it accessible for both new and experienced investors.

Stocks are seen as some of the best investments based on past returns, often outperforming other options like bonds.

Mutual funds and ETF

Mutual funds are a curated collection of investments. They allow you to bypass the need to pick individual stocks and bonds and give you a diversified portfolio in one convenient purchase. Some mutual funds have professional managers who make investment decisions. There are also index funds that match the performance of stock market indices, such as the S&P 500, without active management. The downside is that you have less control over the specific investments within the fund.

ETFs are similar to mutual funds in that they bundle together multiple investments. The key difference is that ETFs can be bought and sold throughout the day, just like individual stocks. This often means that ETFs have a lower price point than mutual funds. On the flip side, they’re subject to market volatility throughout the day. Examples of ETFs include the SPDR S&P 500 ETF (SPY), and the Vanguard total stock market ETF (VTI).

Bonds

A bond is a loan you provide to a company or government (for example, U.S. Treasury bonds, corporate or municipal bonds), which agrees to pay you back after a specific period, with interest. Generally, bonds are viewed as less risky than stocks because you know exactly when you’ll get your money back and the interest you’ll earn. However, they can limit your overall growth potential if you’re looking to build wealth over time.

Real estate and alternative investments

You can also invest into real estate or similar assets like REITs (real estate investment trusts). Real estate is good for hedging against inflation and provides stable income.

As for alternative types of investments, you can choose from metals, cryptocurrencies, hedge funds, etc.

Here’s a table that compares different types of assets.

Step 4: Choose an investment account

Let’s break down the differences between various types of investment accounts.

Brokerage accounts vs. retirement accounts

When people talk about trading stocks, currencies, or commodities, they’re often referring to using a brokerage account. If you’re 18 or older, you can easily open one of these accounts. You have the freedom to deposit as much money as you want, whenever you want, and you can choose from a wide array of investment options. Plus, you generally have the ability to withdraw cash whenever you need it.

While brokerage accounts are straightforward to set up, they do come with tax implications. You’ll typically need to pay taxes on any realized investment gains each year, including profits from selling investments or receiving dividends.

IRA, or individual retirement account is designed to help save for retirement. There are two types of this account:

• roth IRA (contributions are made with after-tax money, but withdrawals in retirement are tax-free);

• traditional IRA (contributions may be tax-deductible, but withdrawals in retirement are taxed as income).

Another way to save for retirement is to use a 401(k) — an employer-sponsored retirement plan. Employees contribute a portion of their salary, often with an employer match. Like IRAs, there are:

• traditional 401(k) (contributions lower taxable income, but withdrawals in retirement are taxed);

• roth 401(k) (contributions are made after tax, and qualified withdrawals are tax-free).

How do you choose the right brokerage account? Check the most important features in the table below.

Step 5: Start with low-cost, diversified investments

The power of dollar-cost averaging

Dollar-cost averaging is a simple and effective investment strategy where you invest a fixed amount of money at regular intervals — like $500 every month — regardless of market conditions. This method helps minimize the stress of trying to time your investments perfectly. By spreading out your purchases, you can reduce the impact of market volatility on your overall investment. Just bear in mind that it can lead to higher transaction costs.

Step 6: Create a simple investment strategy

Your investment strategy should reflect your savings goals, the amount of money you need to achieve those goals, and your timeline for reaching them.

If your savings goal is years away, you can afford to invest most of your funds in stocks. With such a far-off horizon, you have the opportunity to ride out market fluctuations. However, selecting individual stocks can be complex and demanding. For some, investing in indices makes more sense because it offers a way to achieve broad market exposure with lower costs and less complexity.

Conversely, if you’re putting money aside for something in the near future, like a home down payment or a vacation within the next five years, it’s wise to be more cautious. We’ll explore specific strategies designed for different groups later in this article.

Investment strategies

Your investment strategy is your financial roadmap. It outlines what you plan to invest in, how much you’ll invest, and when you anticipate selling those investments.

It’s important to note that there isn’t a one-size-fits-all strategy. Each investor has different goals and interests, so determining the right approach for you involves considering several key factors:

• Age — Are you leaning toward caution as retirement approaches, or are you more willing to take risks for potential growth as a younger investor?

• Dependencies — Do you have family members or children who rely on you financially?

• Goals — What are your specific investment goals? Saving for retirement, a home, education, or something else?

• Lifestyle — How much disposable income do you want to have while you invest?

• Financial situation — How much can you realistically set aside for investments without straining your daily budget?

• Expected returns — How long are you willing to wait to see returns on your investments?

With these considerations in mind, let’s explore common investment strategies to guide you toward your financial goals:

Active vs. passive investing

Active investing involves regularly buying and selling assets, like stocks or bonds, in an attempt to outperform the market. This strategy demands a keen eye on market trends and a willingness to make quick decisions. If you enjoy diving into market analysis and want to seize opportunities as they arise, active investing might suit you.

In contrast, passive investing takes a more relaxed approach. Here, you invest in indices or other diversified portfolios that track the overall market. This strategy requires less daily attention and is designed to grow your investments over time with minimal management.

Growth vs. value investing

Growth investing focuses on companies expected to grow faster than the overall market. These are often found in innovative sectors like technology and renewable energy. Investors in this category typically don’t receive dividends because these companies often reinvest profits to fuel their growth. The potential for high returns is appealing, but this strategy involves greater risk, as it’s based on future expectations rather than current financial performance. So, it suits long-term investors who can withstand market ups and downs.

Value investing, on the other hand, involves buying stocks that you believe are undervalued by the market. Think of it as finding a quality product at a reduced price. Value investors look for companies that have strong fundamentals but may have experienced setbacks affecting their stock prices. This strategy tends to be less risky than growth investing, so it’s suitable for conservative investors seeking stability.

How to diversify your portfolio

Building an investment portfolio isn’t just about putting money into a few assets and hoping for the best. Here are four key tips to create a well-rounded portfolio:

Embrace diverse investments

Begin with a strong foundation of diverse asset classes. Avoid closely related investments and instead aim for assets that don’t move in tandem.

For example, you could invest in tech stocks like Microsoft and Apple, along with commodities like oil and gold. While these markets have some connection, a drop in oil or gold prices typically won’t significantly affect tech stocks. If two investments appear too similar, consider other options.

Keep an eye on costs and fees

Consider not just broker fees but also the total investment and other expenses. A good rule is to avoid investing money you can’t afford to lose.

Once you know how much you can invest, decide how to spread that across different markets. For instance, you could allocate 50% to stocks, 30% to commodities, and 20% to forex. These percentages can evolve as your investment journey progresses.

Stay engaged, don’t go on autopilot

Long-term investments are important, but don’t just set it and forget it. Ignoring your portfolio means missed opportunities and losses. If one asset is doing well, consider increasing your investment. If something is underperforming, don’t hesitate to sell it.

Step 7: Automate and monitor your investments

Setting up automatic contributions

Many brokers and robo-advisors allow automatic transfers from your bank account into your investment account at regular intervals. It helps you invest consistently and avoid panic decision making.

Reviewing and rebalancing your portfolio

Rebalance your portfolio and make sure your asset mix stays aligned with your financial goals and risk tolerance.

To review your portfolio:

• check asset performance and allocation (stocks vs. bonds, for example).

• ensure it still works for your goals and risk tolerance.

• watch out for excessive fees or underperforming investments.

To rebalance:

• sell overweight assets – if stocks grew too much compared to bonds, sell some stocks and buy more bonds.

• invest in underweight areas – instead of selling, direct new contributions into the asset class that needs rebalancing.

• set a rebalancing schedule – scheduling makes you more disciplined. Some investors rebalance annually, semi-annually, or when an asset class shifts by a certain percentage (for example, 5-10%).

Step 8: Common mistakes to avoid

Beginners tend to make the same mistakes. So, if any of these seem familiar, it might be time to rethink your investment approach:

• Ignoring fees and taxes — Hidden fees, such as expense ratios, trading commissions, and management fees, can eat into your returns over time. Choose low-cost index funds or ETFs, and always check the fees before investing.

• Unrealistic expectations — Build a diversified portfolio based on your risk tolerance and goals. Don’t let others’ experiences shape your expectations, as market returns are unpredictable.

• Overinvesting — Patience is key in investing. Frequent changes to your portfolio can incur costs and increase risks. Focus on learning about your current holdings instead of overreacting.

• Getting swept up by media hype — Don’t let sensational headlines dictate your decisions. Conduct thorough research from reliable sources to inform your investments.

• Chasing high yields — High-yield investments can be tempting, but remember that past performance is not indicative of future results. Focus on the overall picture and manage risk.

• Timing the market — Market timing is challenging and often ineffective. Consistent contributions to your portfolio are typically more beneficial than trying to predict market movements.

• Forgetting about inflation — Evaluate returns in real terms, considering inflation’s impact. What you can actually buy with your investment gains matters more than nominal returns.

• Failing to start or stay invested — Don’t let fear or lack of knowledge stop you from investing. The greatest minds agree that success requires ongoing effort and a willingness to learn.

FAQ

How much money do I need to start investing?

The amount you start with depends on your goals, the type of investment, and how comfortable you feel. But generally, you don’t need a huge sum to start investing. At FBS, beginners can start investing with an initial deposit as low as $5. Plus, with leverage options, you can stretch that deposit significantly.

Should I invest in stocks, bonds, or mutual funds?

Beginners might want to focus on stocks because they have the potential for higher returns over time, plus it’s exciting and lets you own a share of companies you believe in. Bear in mind that they’re more volatile and carry more risk, so start with a few well-researched stocks. Bonds are a less risky and more conservative type of investment, suitable for supporting long-term financial goals. Mutual funds are a highly diversified basket of assets that are managed for you, and the risks are moderate.

How do I create a diversified investment portfolio?

Choose a mix of asset classes, including stocks, indices, forex, and commodities, to spread the risk. Within each asset class, select a variety of individual investments, like different sectors for stocks. Regularly check and adjust your portfolio to keep your ideal asset mix as markets shift.

How do I choose the right investment strategy?

Consider your time horizon — how long you plan to invest before needing access to your funds. Longer horizons allow for more aggressive strategies. Evaluate your knowledge and experience with different investment types, and research various strategies, such as growth investing, value investing, or passive/active investing, to find one that goes with your objectives and comfort level.