At some point nearly everyone must ponder how to start investing. This guide is for first-timers and other beginners who are slightly uncomfortable with anything beyond a bank savings account.
This will be a must-read cornerstone content article, but it is still in development. This is an early rough draft.
Learn how to start investing by starting with about five topics which can be mastered in hours, and then a few more topics that you can understand more gradually. These beginning topics will help you get the big rocks in place and avoid making big mistakes. This is just the beginning of mastering the bigger process of learning how to invest.
While smart investing should be taught in schools or around kitchen tables, it’s not. So I’m here to help you find the time-proven way, and to avoid the people who will want to sell you thing that you don’t want.
Here’s our agenda:
Time needed: 12 hours.
Steps to learn How To Start Investing …
- Get your personal finances in order.
- Make a simple one-page plan. (Don’t worry. You can change it later.)
- Distinguish short-term from long-term investing
- Learn the difference between investing and speculating.
- Choose appropriate level of investment risk (risk/reward tradeoff)
- Get Wet: open an account
- Learn the Ten Simple Rules of Common Sense Investing
- Understand the role of bonds in your portfolio
- Do an annual Check-Up
Step 1: Get your personal finances in order.
When you live below your means—that means you are spending less than you are earning. If you cannot do that, then you cannot save and you’ll have nothing to invest. It all starts with having a sound lifestyle and taking control of your personal finances.
The frontpage of my website proposes financing your dreams but Jonathan Clements adds a greater focus. I reviewed his book where he clarifies the order this must be undertaken if you don’t intend to sacrifice big long-term goals for short-term ones.
“Chronologically, retirement might be our final financial goal, but we should always put it first. Amassing enough for a comfortable retirement is our life’s great financial task.” Given longer life expectancy, “we need to get ourselves on the right financial track as early in our adult life as possible, so we quickly achieve some measure of financial freedom.”
“When I talk to college students, I don’t tell them to follow their dreams. Instead, I tell them to focus on making and saving money… As our sense of financial security grows, earning money becomes less of a motivator… Many people reach the point where they have the financial leeway to pursue the goals they find intrinsically satisfying. But others never get there.”Jonathan Clements, How to Think About Money
Let’s get calibrated. In his free brochure, If You Can, popular finance author William J. Bernstein, writes about five hurdles to clear so that your dreams for retirement aren’t reduced to eating cat food. He says:
The name of the game is to accumulate around 12 years of living expenses , which, combined with Social Security, should provide for a reasonable retirement. How did I arrive at 12 years of living expenses? The average person needs to accumulate about twenty-five years of living expenses, and I’m assuming you’ll be getting about half of that from Social Security.William Bernstein, If You Can: How Millennials Can Get Rich Slowly
It’s good to get calibrated, so let’s make sure we understand what he means. If we imagine a couple that will have $80,000 in living expenses for 30 years of retirement, and half of that will come from their Social Security, then they will need the other half to come from a pension or other retirement saving. Using the 4% rule-of-thumb, they will need $1 million savings to produce that additional $40,000 per years (drawing at 4% and adjusting for inflation).
Well, that’s sobering. But it is surprisingly achievable if you can take control of your finances. The trick, Clements writes in this wonderful book, is to change how we think about money.
Money, alas, is befuddling to many folks. They imagine there’s some great secret—a single investment product, a particular trading strategy, the musings of an investment guru—that will unlock vast wealth. But growing wealthy is actually embarrassingly simple: We save as much as we reasonably can, take on debt cautiously, limit our exposure to major financial risks and try not to be too clever with our investing. Early in our adult life, progress can be agonizingly slow, and it’s easy to get discouraged. that first $100,000 can take many years to amass. If we stick to the simple, prudent path, however, the results can be astonishing. After a few decades, we might have $500,000—and that $500,000 can quickly become $1 million and maybe $2 million.Jonathan Clements, How to Think About Money
It’s a challenge. We have the need to save for the future in an environment where we are surround by advertising telling us that we need newer better things. The universal marketing message, as Jonathan says, is: The rich life consists of beautiful people who smile, laugh and never stop spending.
Vicki Robin’s book freed me of that thinking. She demonstrated to me that financial independence and freedom was to wake up every morning in control of your time—and that was available to most of us by saving aggressively and choosing frugality.
Jonathan Clements reinforces this by prioritizing earning and saving while you are young to enable, if you are lucky, financing your lesser dreams later in life. We must all manage these tradeoffs on our own.
Rather than denigrating corporate marketing, Clements embraces the free market and implores us to do the same, only like this:
There is no conspiracy here. It’s just the free market at work, with everybody pursuing his or her own self-interest. That everybody should include you. If we want a happy and successful financial life, where we squeeze the most out of our money, we need to cast aside wrongheaded conventional wisdom and ignore the self-serving prescriptions propagated by others—and instead figure out the right way to think about money.
The book, Enough., by John Bogle addresses this indirectly. But, more than anyone else, Bogle is the one who shows us what to do with our aggressive saving to earn required returns. We learn more from Mr. Bogle beginning Step #7.
Step 2: Make a simple one-page plan.
There is magical power in a written plan. The secret is to complete it quickly, and commit to improving it regularly. Don’t strive for perfection! Before long you’ll have a valuable guide—an indispensable tool for taking control of your finances.
If you refuse to do this, then just put the money in a bank savings account until I convince you that you can do this in one hour using only your current best estimates.
How does a beginner know if they are ready to start investing?
- Living below your means so that you can create savings to invest.
- An emergency fund (or alternative plan) must exist.
- You must list what the money will be used for. (Dream here!)
- That list must include amounts and timeframes. (Make estimates!)
- Include your saving (new money) plan.
- Video: Rule #1: Develop a workable plan.
Step 3: Distinguish short-term from long-term investing.
Hint: you’ll buy (invest in) different kinds of things depending on when you will need that money.
This free course will help you distinguish short-term from long-term, the difference, and which matches your goals, and help you develop an initial allocation.
- Course: Where Should I Put Money (discusses initial money allocation planning)
Step 4: Learn the difference between investing and speculating.
Don’t start investing until you know the difference between speculating and investing! There will be no speculating here! Instead, you’ll be owning a small share of productive businesses, or loaning money to banks or the government that you can count on paying you back. Speculating is merely gambling on price movements, betting that you can sell something for more than you bought it for.
“ In the long run, investing is not about markets at all. Investing is about enjoying the returns earned by businesses.”John C. Bogle
“Ask yourself: Am I an investor, or am I a speculator? An investor is a person who owns business and holds it forever and enjoys the returns that U.S. businesses, and to some extent global businesses, have earned since the beginning of time. Speculation is betting on price. Speculation has no place in the portfolio or the kit of the typical investor.”John C. Bogle
- Short video of Warren Buffett: “Gold is a speculative investment!”
- Short video of John Bogle: “Gold is not an investment at all!”
Step 5: Choose appropriate risk and reward.
Higher expected returns require taking more investment risk, although the converse is not true: taking more risk doesn’t always translate to higher return.
Step 6: Get wet. Open an account.
Active learning means getting started. You’ll learn more when you have an actual account. There is very little that can go wrong by setting up some accounts and begin saving.
- Start the habit of auto-investing
- Establish tie between your bank account and investment account
- Start with the safest investments initially — to gain confidence.
- Consider low-cost investment firms like Vanguard, Fidelity, Schwab, or the like. Avoid places that want to give you personal advisor attention because they will not have competitive low-cost offerings.
You’ll learn more in your next step if you have done all these exercises and think of this as your investment portfolio. Yep–you have an investment portfolio now!
Step 7: Learn the Ten Simple Rules of Common Sense Investing.
Keep learning. This is a lifelong requirement.
The only reliable way ordinary Americans can accumulate that kind of money is long-term investing, which includes owning a share of all productive businesses and reinvesting those earnings. This leads to compound growth.
That may sound difficult to a beginner, but the super-simple way to accomplish this is with a low-cost mutual fund called an index fund. The cost is typically 0.05% per year and the return has historically been around 10% per year. Don’t Take My Word For It! If you have an hour, I highly recommend watching or reading this introduction to the stock market by the world’s leading experts giving you consistent advice, and in plain English.
Don’t move into mutual funds until you are comfortable doing so, because you must learn why passive funds are good and active funds are generally bad (as in: expensive in both visible and hidden ways).
Read this: Smart Investing: Ten Simple Rules
Or, take this free course: Common Sense Investing
You don’t want to pay someone for basic stuff like this — you lose.
P.S. it’s ok to pay for financial advice — as long as that’s all you pay for.
“Now can I start investing?” Not yet.
“Rick, can you just tell me what to buy?” Perhaps, but if you don’t learn now you won’t be ready for the future. You want to buy the most diversified at the lowest possible cost. And that means you need to look for index funds.
Also need to think about taxable, or tax-advantaged accounts.
Step 8: Understand the role of bonds in your portfolio.
Now ready to begin investing? Not yet. Next we need to think about what investments to buy.
We need to think about bonds as an asset class
What’s an asset class? Watch this short video.
Watch this: Rule #3: never bear too much or too little risk
Read this: Build an all weather portfolio
Or, take this course: Why Bother With Bonds
Step 9: Do an annual check-up.
Watch this short video: Am I On Track?
The miracle of compound growth is so amazing that I share with you my first YouTube video which I made from an old point-n-shoot camera (before they could shoot video. I graphically illustrate what would happen if you could double a penny every day for one month. What would it be worth at the end of the month? [link to spoiler (answer)]
Other authors illustrate this miracle of compound interest with more reasonable rates-of-return. But to emphasize the importance of time in the market they generally compare an early-stage investor investing a small amount every month for ten years, to a middle-stage investor investing a much bigger amount, also for ten years. I made this video using an example from Thakor and Kedar comparing two different strategies from two young women.
Welcome to FL.org. My goal is to share this wisdom that was life-changing for me. My hope is that you will not just accept the life that comes available to you, but that you will take control of your finances and finance all the dreams that are important to you.
If you double a penny each day for 31 days it would become $10,737,418.24. Watch this very first video I ever made: Miracle of Compound Interest.