Updated: Mar 20
For those who are new to this topic, this post will focus on how to get started in investing.
Investing may seem daunting, but it doesn't have to be! Many people think investing in the stock market is too "out of their league", but it's a lot simpler than they think. As long as you're smart with your decisions and patient with the timing, the stock market is an extremely worthwhile investment. Read on for the basics on how to get started!
What is a brokerage account and do I need one to invest?
A brokerage account is a type of account that lets you buy and sell securities, such as stocks, bonds, exchange-traded funds (ETFs) and more. You do not need to open a brokerage account in order to start investing in the stock market - you can also do so by contributing to a Roth IRA. You can generally buy and sell the same types of securities, at no additional fees & costs, but your earnings will grow tax-free with a Roth IRA. It is a retirement account so you wouldn't ideally touch the money until you are age 59.5, but there are a few exceptions where you can withdraw from your Roth IRA penalty-free. If you earn over the income limit, you can still contribute to a Roth IRA through a backdoor Roth IRA.
If you don't want to pursue the Roth IRA route, you will need to open up an individual brokerage account to invest. Depending on your strategy, time and money, you may want to look at certain brokers over others.
Here are a few things to consider before investing:
- Strategy: what is your long term strategy with investing? Is it to slowly grow your wealth so you have more money during retirement? Is it to aggressively grow your wealth so you can pull up your retirement age?
- Time: how much time do you want to dedicate to investing? Do you want to analyze charts and understand the "greeks" or are you looking to "set it and forget it?"
- Money: how much will you start investing with? How much money will you continue to add once you open up the brokerage account? Is it continuous deposits or just a big one-time deposit into your brokerage account?
Once you have the answers to the questions above, do some research on what makes the most sense for you to invest in. Check back soon as we will do an extensive write-up of the best brokers depending on your goals.
How much money do you start investing with?
This truly depends on how much you want to dedicate to investing. If you're starting out, I wouldn't go super aggressive in investing until you feel comfortable with it. Investing all of your savings might not be the smartest strategy. You may need money quickly for an unexpected emergency and you might end up either taking a loss on the investment or taking a gain that you then have to pay capital gains tax on.
I recommend investing any money that is in excess of your savings/emergency fund. If you like to have 6 months of expenses in your savings, whatever money you have above that, move it into your brokerage account for investing. Any money that you invest should be money that you can forget about, money that you don't rely on for survival. You truly need to pretend like you will never see that money again. Otherwise, when you see the swings of the stock market, you may panic and make an emotional decision that hurts you in the long run. More on how to emotionally handle investing in the stock market at a later time.
Should you invest if you still have debt?
Personally, I always feel it's best to invest when you don't have any large outstanding debts, like student loans. If you have debt that you manage to pay monthly without falling behind on payments, such as credit cards, mortgage or a car loan, it's okay to invest if you have enough money saved up to do so. The key is that you do not fall behind on payments - if you do find yourself in this situation, stop moving money towards investments and pay down those debts ASAP.
What should beginners invest in?
The best thing to start with are exchange-traded funds or ETFs. Why? Because it offers instant diversification. Instead of investing in individual stocks, you can invest in a fund that contains a number of different companies. For example, SPY is an ETF that includes all the stocks in the S&P 500 index. If you invest in SPY, you're essentially investing in 500 stocks. Each ETF will always list out what securities are in its' fund and the percentage weight it has in the overall fund.
You can even invest in ETFs by sector or industry. QQQ is a popular tech ETF that includes Nasdaq 100 holdings. There are many others that are specific to healthcare, biotech and much more!
How much time does investing take?
It can take very little time or it can take a lot of time. If you take the advice above and invest in an ETF, it's going to take very little time. Research the ETFs you're interested in and make a purchase. Continue adding shares as you add more money into your investment account.
If you're trying to find the next big stock (the next Amazon, Tesla, etc), that will take much more time - understanding long term strategy to P/E rato to free cash flow will feed into your analysis of finding the next big stock. And even then, it doesn't always guarantee that you will be right. This isn't the first route I would take, I would go ETFs first and then after a few months to a year, I would possibly explore individual stocks to invest in. Again, it all depends on the time you are willing to put into it!
Still have questions on investing? Schedule a 1 hour strategy session with me and I'll help you craft a plan on how to start investing!