Investors today have more investment options than were available to the average investor just a few decades ago. While having multiple options is usually a good thing, too many can cause system overload and lead many people to avoid making decisions.
Investing is a broad topic that often seems intimidating to people new to investing. And that is understandable – there are dozens of investment vehicles, hundreds of investing strategies, and thousands of investment options.
Before we let analysis paralysis get the best of us, let’s look at investment options for first-time investors.
DIY Investing or hire a financial planner? This article is aimed at someone who plans on starting their investment plan. However, these steps can quickly be done with the help of a financial planner.
Suppose you are beginning your journey into investing. In that case, you want to choose a financial planner that will walk you through these steps and be able to easily explain why each investment option is suitable for reaching your goals.
They can direct you to additional information so you can better understand how and where your money is being invested.
Table of Contents
- Four Investing Styles
- How to Start Investing with Little Money
- Defining Investment Goals
- How to Set Up an Investment Strategy
- Find an Investment Vehicle
- Open an Investment Account
- Stocks, Bonds, and Mutual Funds, Oh My! The Options are Endless!
- Index Funds – The Best Investment for a First-Time Investor
- Exchange Traded Funds
- Avoid Buying Individual Stocks and Bonds as a Beginning Investor
- Mutual Funds – Experts Try to Beat the Market (and Most Fail!)
- Target Date Funds Remove the Guesswork
- Easy Places for Beginners to Start Investing Today
- Robo Advisors Make Investing Easy
- Start Investing
- Monitor and Adapt Your Investing Strategies
- Is it Better to Invest or Save Money?
Four Investing Styles
Before investing a dime, you need to consider what kind of investor you want to be. There are four primary investing styles you should study.
There are offshoots for each of these that you can do a deeper dive on once you decide which style best suits you. The four investing styles include:
1. Active Investing. As the name implies, you will take an active role in your investing by keeping an eye on the day-to-day and week-to-week movements of market trends and market movements. You are less concerned about long-term prospects and more focused on current short-term strategies.
You select specific “hot” or trending stocks and use market timing to try to outperform the market to seek short-term profits. Because this style involves more frequent and short-term transactions, you need to consider tax and transaction fee expenses.
2. Passive Investing. Consider a passive investing approach if you’re more conservative and risk-averse, with less time to devote to daily market ups and downs. Passive investors place their money with a long-term time horizon, looking for safer growth over an extended period.
Often, passive investors create portfolios that track a market-weighted index and then track the index. That lowers risk due to a more diversified portfolio and lower transaction costs due to low turnover.
A buy-and-hold style is an example of passive investing.
3. Growth Investing. This method requires investing in company stocks of companies whose earnings are growing faster than most other stocks and are expected to stay on that growth trajectory. These stocks are often looked at as being overvalued and have a high price-to-earnings ratio.
It is vital to note that these stocks often pay either a low or no dividend but have the potential to make up for that with solid returns.
4. Value Investing. Value investors are bargain hunters who look for stocks that are out of favor or undervalued. Value investors expect these securities will rise and buy them before they do.
Warren Buffett popularized this style, who argues the merits of buying stocks that sell for less than their value is based on the premise that they’ll bring solid returns in the future.
How to Start Investing with Little Money
If you’re just starting, you probably don’t have much extra cash to pour into an investment portfolio.
That’s okay because if you’re young, you have the power of time and compounding to work in your favor.
When starting with a small amount, you’ll need to treat investing like a small bill to be paid each month. Be disciplined and set aside whatever you can afford.
Make investing a habit, even if you only set aside $10 a week. Make your investing automatic through a direct withdrawal into an investment account through your work.
If you’re super tight on money, look for other ways you can cut back on some of your discretionary spending. Cut back on eating out so much. Don’t buy fancy coffee three times a week at Starbucks.
Cut back on going to the movies or out to clubs. Buy staples in bulk at savings.
You can do many little things to tighten up your lifestyle to begin some long-term investing.
Also, several investment companies will allow you to start small and make small incremental investments.
These companies cater to people just starting and understand the value of cultivating a long-term relationship with you.
The biggest thing you can do is decide you want to invest and then take action to start you on a solid long-term path.
Defining Investment Goals
The first thing we want to do is look at our investing goals. This will help us determine what type of investment vehicle is best for our investment.
Before we go much further, let’s define saving and investing; normally, saving is a short-term engagement, and investing is a longer-term engagement.
Saving goals often include major purchases such as a car, a down payment for a home, college tuition, a major vacation, etc. Many traditional “investments” would be inappropriate for savings because they may lose value.
Most savings should be kept in low volatile accounts, such as a high-yield savings account at an online bank or in a CD. Here is a list of high online bank interest rates that you may find helpful.
Common investment goals include longer-term goals such as retirement, keeping pace with inflation, college tuition, and other longer-term goals. You will notice that I listed college tuition under both saving and investing.
Which group you place each of these under depends on your time frame. You can probably take on a little more risk for an intermediate-length investment.
For example, my daughter is eight months old, so I can take a little more risk with college fund money now than I could if she were 16 years old.
How to Set Up an Investment Strategy
Ask yourself these questions to help you set up the best investment strategy for your situation.
How much money can you set aside for investing each month?
Are you a conservative or an aggressive risk taker?
What are your short-term goals?
What are your long-term goals?
What life events are you facing in the next five years? Starting a family? Buying a home? Major health issues?
Do you have an experienced investor who can mentor and guide you?
Are you willing to commit to putting in the work to educate yourself on investing?
Do you want to be an active or passive investor?
How disciplined and committed are you to an investment strategy?
Do you have specialized knowledge about specific subjects or industries that you can leverage as part of a strategy?
Do you have other assets you can use for emergencies so you don’t have to rob from your investment portfolio?
How will you react to investment setbacks?
What level of diversity do you think is essential for this stage of your investing?
Are you a good student regarding other financial issues such as understanding your credit score, credit reports, credit cards, car shopping, health, life insurance, and other related topics?
How will you measure your investing results?
Find an Investment Vehicle
After determining your investment goals, we need to find an investment vehicle that meets our needs. I’m not talking about buying a pristine 1953 Buick from the Barrett-Jackson Auction Company.
I’m talking about something more fun and exciting – IRAs, 401ks plans, college saving funds, brokerage accounts, and more.
Many specific investing plans have tax breaks or other incentives that make them worthwhile. For example, IRAs and 401k plans are tax-advantaged retirement plans that give users tax breaks either now or in their retirement years.
529 College Savings Plans and Coverdell ESAs offer tax advantages for college savings. These tax advantages can add up to tens of thousands in the long run. So take advantage of them!
Open an Investment Account
Once you determine your investment goals and which investment vehicle you will use, you should open an investment account. That could be as simple as enrolling in a 401k at work (often done automatically) or starting an IRA, which takes about 15 minutes.
Other options include opening a brokerage account.
Opening an investment account is often as simple as providing your information, signing a form, and transferring funds into your account. But knowing the type of investment will help you narrow down the best place to open your investment account.
Stocks, Bonds, and Mutual Funds, Oh My! The Options are Endless!
You can put your money in thousands of places, including stocks, bonds, index and mutual funds, REITs, real estate, commodities, small businesses, and more.
Again, I will point to the concept of analysis paralysis and the importance of having investing goals. Before becoming overwhelmed by the sheer number of options, take a hard look at your investment goals and eliminate anything that won’t help you meet your goals.
You should be able to stop a large portion of the available options by checking them against your investment goals.
Most beginning investors should focus on low-cost, easy-to-manage investments. And the investment that best fits this description is the index fund.
Index Funds – The Best Investment for a First-Time Investor
Most people should simply try to have their investments match the markets. Over the last 100 years, stocks have returned close to 10% each year, on average.
Of course, there are ups and downs. Some years the returns will be great, and the losses will hurt in other years.
But we can’t time the markets. No one can. Not even the professionals.
So the best course of action, for most people, is to put your money in the markets and try to match them as efficiently and cost-effectively as possible. The way to do this is with index funds.
For example, index funds are designed to match a market segment or index, such as the S&P 500.
Index fund investing has many benefits: low investment costs, tax efficiency, strong diversification, and low maintenance.
Exchange Traded Funds
Exchange Traded Funds are similar to index funds but are traded on the open market like a stock. They sometimes have lower fees overall but usually come attached with brokerage or transaction fees.
Investing with ETFs is usually a cheaper set of ongoing costs. ETFs are also usually better for large lump sum investing vs. dollar-cost averaging because of the brokerage fees.
Avoid Buying Individual Stocks and Bonds as a Beginning Investor
Many first-time investors think they need to know how to buy and sell individual stocks and bonds to make money in the markets. While it’s true you can win big, you can also lose big!
When you are beginning to invest, the better thing is to let the markets do the heavy lifting for you. You can do this easily by investing in index funds designed to follow the market.
Over time, matching the market will grow your investment portfolio more reliably than most people can do by buying and selling individual stocks and bonds (including the “professional” investors and money managers!).
Mutual Funds – Experts Try to Beat the Market (and Most Fail!)
Be wary of managed mutual funds. Mutual funds are a collection of stocks and bonds that are managed by a management team to earn greater returns than the general markets. Many mutual funds feature certain asset classes (small growth, large growth, commodities, etc.), or from various investment sectors (financial, health care, industrial, technology, etc.).
You can have stock mutual funds, bond funds, or a combination.
This sounds good in principle, and some managed mutual funds perform well. However, most managed funds simply cannot consistently beat the market over the long term.
On top of that, they generally have higher management fees and are less tax-efficient than index funds or index fund-based ETFs. Those added costs are another hurdle to beating the market.
For investing, I prefer efficiency. And that means minimizing fees and other costs. The best way I know how to do that is to match the market by investing in index funds.
Index funds are dirt cheap to run and generally have the lowest fees possible.
Target Date Funds Remove the Guesswork
If you are a first-time investor, you are probably doing well to get this far (defining your investment goals, finding the appropriate investment vehicle, and opening a Roth IRA).
Suppose you are still overwhelmed with your investment options. In that case, you may find it best to invest in a target date fund, which automatically diversifies your portfolio to a weighted asset allocation based on your target retirement date.
Or, to put it more simply, a target date fund is a mixture of stocks, bonds, and other investments that is designed to have more risk while you are young, then gradually transfer your funds to less volatile investments as you get closer to your target retirement date. The management is done automatically; all you do is invest and let the fund manager do the work.
Target date funds have some disadvantages, however. They are often less flexible than an asset portfolio you create and may come with higher expense ratios than a do-it-yourself plan.
I am not advocating target date funds as the best plan for everyone. But I will say they are a great place to get started if you simply don’t know where else to start.
The idea is to get into the habit of investing and get your money in the game, particularly in accounts with annual investment limits (401k plans, IRAs, etc.).
Get started, get in the habit, then move your investments to a more appropriate one where you have a better idea of how to accomplish your investment goals on your own.
Easy Places for Beginners to Start Investing Today
If you want to start investing today without putting your investments in high-risk positions, these investment accounts will make it easy to get going while you get your investing legs underneath you.
Betterment
Betterment is one of the top robo-advisers in the United States and makes investing easy by doing all the picking of investments for you. You answer easy questions, and those questions determine how much risk you can tolerate.
I like Betterment because it simplifies the process and has a great investing record.
Fundrise
Real estate investing has long been a great method for building wealth. However, the vast majority of individual investors have felt unable to capitalize on this market due to high barriers to entry.
Fundrise, a robo-real-estate-investor of sorts, is seeking to solve this problem. Fundrise promotes itself as a hands-off, low-cost investment platform that seeks out real estate investment opportunities to acquire and improve for its investors (i.e., without a ton of cash to throw around).
Fundrise reports 8.7-12.4% historical annual returns and a “low-fee approach” (which translates to 1% annually on your assets).
M1 Finance
I’ve discussed M1 Finance elsewhere, but it bears reiterating here.
M1 Finance is a robo-advisor, but they have diversified themselves in several ways from the “traditional” robo-advisor through qualities such as greater personalization of investment, no fees, and the ability to purchase stocks and ETFs.
These features (and many others) make M1 Finance a viable option for investing beginners.
Lending Club
Peer-to-peer lending has become a great alternative investment for people looking to get a solid rate of return while avoiding the stock market. Instead of investing directly in a company, you can lend small business owners and individuals money through platforms like Lending Club.
The average rate of return runs between 5% and 7%, depending on how much risk you take. The good news is you get ratings on every loan, and you can invest in any loan for as little as $25. That means you can diversify into ten different loans with a $250 investment in LendingClub.
Exchange Traded Funds
ETFs are a great way for a beginner to get into the stock market, have a little more control than with Betterment, and still not have to pick stocks themselves.
An ETF allows you to buy into mutual funds at much smaller amounts than a mutual fund company will allow you to purchase.
For example, when I started investing in mutual funds from Vanguard, the smallest amount you could invest in one of the mainstream funds was $3,000. With an ETF, you can buy a small share of the mutual fund just like a small share of a company when you purchase a stock.
I like TD Ameritrade for ETF investing because they allow you to invest in more than 100 ETFs without being charged any commission. This is a great way to get started into the ETF market without paying any extra fees.
Learn More About TD Ameritrade
Robo Advisors Make Investing Easy
Many new investors are uncomfortable investing due to their lack of understanding of how the markets work or how they should best allocate their investments. This is understandable.
A software-based investment solution called a robo advisor can help investors take the first step.
Robo Advisors work like this: you choose your risk tolerance, and the software recommends a mixed percentage of stocks and bonds based on your risk tolerance.
Once you invest, they automatically change your asset allocation based on your settings. In some ways, it’s very similar to a target date fund.
Betterment – a Great Investment Tool for Beginning Investors
One such Robo Advisor is Betterment, an easy-to-use investment tool that automatically allocates your investments based on your desired risk tolerance. Betterment is the top robo-advisor brokerage in the country.
One such Robo Advisor is With Betterment, you create an account, set your goals, and determine your risk preference. After that, their tool will handle the rest.
Betterment offers a variety of features, including:
- Easy-to-use, even for beginning investors
- Automatic investing
- Tiered fee system
- Read Betterment Review
- Open a Betterment account
Start Investing
At this point, you have it all – the goal, the investment vehicle, an open account, and an idea of what you want to invest in. The next step is to get started.
If you are just beginning your investments, trying and time the market is probably not a good idea.
Dollar-cost averaging through automatic contributions is a great way to start because it will help smooth your investment returns over the long run. You can often set up an allotment from your paycheck for 401k contributions and sometimes investment contributions to brokerage firms or other investments.
Automating your contributions will make it easier to stay on track. Remember to be aware of any contribution limits that may affect your investment planning (retirement accounts such as 401k plans and IRAs have annual contribution limits).
You don’t want to contribute too much money to your accounts! If you find that you have additional money to invest, it’s best to open a brokerage account for your additional investments.
Monitor and Adapt Your Investing Strategies
Ahh, you thought we were done, didn’t you? Not quite.
Investing and saving are two different things. Setting up a savings account or CD Ladder and leaving them alone until the term is up is easy.
But investing requires a more hands-on approach. I’m not advocating day trading, but you need to know how your money is allocated and your investments perform.
It’s a good idea to track your investments with money tracking software tools so you can see it all in one place, and it is good to perform periodic spot checks and adjust your asset allocation as necessary. My favorite software program for investors is Personal Capital, a free online investment tool.
Some people prefer to do this on an annual or semi-annual basis or any time they have a significant life event that changes their investment goals. (Maintenance is one of the reasons I recommend a target date fund for beginners; it removes one step from the equation until they can learn more about asset allocation and other investment vehicles).
Is it Better to Invest or Save Money?
In reality, saving money is a form of investing, and you should keep some of your money in a traditional savings account for emergencies and big expenses that crop up from time to time.
Investing offers a greater chance for a better return in most all cases. It has a different set of objectives than traditional savings.
The bottom line is that both should have a seat at the table when creating an overall personal financial strategy for you and your family.
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Stephen says
Very well written. I think personally the best advice for a beginner investor is to just get money into indexes/etfs/something broad with a low MER as soon as they possibly can. Time in the market is the key, the sooner you start the better you’ll be in the long run.
Ryan Guina says
Thank you, Stephen. I agree – the sooner you start investing, the better. Momentum is very important when you are starting out, and contributions make up a much larger percentage of your total portfolio than most market gains or losses. So it’s easy to get excited about contributions when you constantly see your account growing. The longer you continue to invest, the larger the account grows until it (hopefully) reaches a critical mass and market gains and dividends exceed annual contributions. That takes some time, of course. But it’s a great goal to chase!
Michael @NTPNW says
Scott- check out Rick Edelman and his advisors. Even though I invest in index mutual funds if I were to receive a large inheritance these are the folks I would talk to. Just my opinion and take it for what its worth. Here is the link- http://www.edelmanfinancial.com/
scott says
I’m new to investing, just inherited over 2 million, due to death in family. It’s not a good situation, but I need to make my relatives proud of MY investment portfolio. Currently have advise from Trust attorney, but who do you trust!!!! Any quality advise is appreciated.