Getting Started with Investing

Quick answer

• Define your financial goals and the timeline for achieving them.
• Assess your comfort level with risk and potential losses.
• Ensure you have a solid emergency fund before investing.
• Understand all associated fees and potential tax implications.
• Choose the right investment account for your needs.
• Start small and consistently invest over time.

What to check first (before you invest)

Time Horizon

What to check: How long do you plan to keep your money invested before you need it? This could be for retirement in 30 years, a down payment on a house in 5 years, or another goal.

What “good” looks like: A clear understanding of when you’ll need access to your funds. Shorter time horizons generally call for more conservative investments, while longer horizons allow for potentially higher-growth, higher-risk options.

Common mistake: Not defining your time horizon. This can lead to choosing investments that are too risky for short-term goals or too conservative for long-term wealth building.

Risk Tolerance

What to check: How comfortable are you with the possibility of losing some or all of your invested money in exchange for potentially higher returns?

What “good” looks like: An honest assessment of your emotional and financial capacity to handle market fluctuations. Knowing your risk tolerance helps you select investments that won’t cause undue stress.

Common mistake: Overestimating your risk tolerance. Many investors believe they can handle significant drops until it actually happens, leading to panic selling at the worst possible time.

Emergency Fund

What to check: Do you have 3-6 months of essential living expenses saved in an easily accessible account (like a savings account)?

What “good” looks like: A fully funded emergency fund. This is your safety net, ensuring you don’t have to sell investments at a loss during unexpected events like job loss or medical emergencies.

Common mistake: Investing money that should be in an emergency fund. When unexpected expenses arise, you might be forced to withdraw from your investments, potentially incurring losses and penalties.

Fees and Tax Impact

What to check: What are the costs associated with buying, selling, and holding investments? How will your investment gains be taxed?

What “good” looks like: Awareness of all fees (e.g., management fees, trading fees, advisory fees) and an understanding of how different investment types are taxed (e.g., capital gains, dividends). Lower fees and tax-efficient strategies can significantly boost your long-term returns.

Common mistake: Ignoring fees. Even small percentage fees can erode your returns over time. Similarly, not considering tax implications can lead to a larger-than-expected tax bill.

Account Type

What to check: What type of account best suits your investment goals and circumstances? Common options include 401(k)s, IRAs (Traditional and Roth), and taxable brokerage accounts.

What “good” looks like: Selecting an account that offers tax advantages relevant to your situation and aligns with your investment goals. For example, a 401(k) or IRA is often ideal for retirement savings due to their tax benefits.

Common mistake: Not taking advantage of tax-advantaged accounts. Using only a taxable brokerage account for long-term goals like retirement means you miss out on significant tax savings.

Step-by-step (simple workflow)

1. Define Your Financial Goals:

• What to do: Write down what you want to achieve with your investments (e.g., retirement, down payment, child’s education) and when you want to achieve it.
• What “good” looks like: Specific, measurable, achievable, relevant, and time-bound (SMART) goals. For example, “Save $50,000 for a down payment in 7 years.”
• Common mistake: Having vague goals. Without clear targets, it’s hard to choose the right investments or track progress.
• How to avoid it: Spend time brainstorming and writing down your goals. Break down large goals into smaller, more manageable milestones.

2. Assess Your Risk Tolerance:

• What to do: Honestly evaluate how much volatility you can handle emotionally and financially.
• What “good” looks like: A realistic understanding of your comfort level with potential losses, which will guide your investment choices.
• Common mistake: Saying you’re comfortable with risk when you’re not, or vice versa.
• How to avoid it: Use online risk tolerance questionnaires as a starting point, but also reflect on past financial experiences and your general personality.

3. Build Your Emergency Fund:

• What to do: Save 3-6 months of essential living expenses in a liquid, safe account.
• What “good” looks like: A fully funded emergency fund that provides a cushion against unexpected events.
• Common mistake: Investing money that should be reserved for emergencies.
• How to avoid it: Prioritize building this fund before making significant investments. Automate transfers to your savings account.

4. Educate Yourself on Investment Basics:

• What to do: Learn about different investment types like stocks, bonds, and mutual funds/ETFs.
• What “good” looks like: A foundational understanding of what these investments are, how they work, and their general risk/reward profiles.
• Common mistake: Investing in things you don’t understand.
• How to avoid it: Read reputable financial books, articles, and websites. Start with simple explanations before diving into complex strategies.

5. Choose an Investment Account:

• What to do: Select the type of account that best fits your goals (e.g., 401(k), IRA, brokerage account).
• What “good” looks like: An account that offers tax advantages or flexibility aligned with your objectives.
• Common mistake: Not utilizing tax-advantaged accounts for retirement.
• How to avoid it: Research the benefits of employer-sponsored plans and IRAs. Consult a financial advisor if unsure.

6. Open Your Investment Account:

• What to do: Select a brokerage firm or financial institution and complete the account opening process.
• What “good” looks like: A user-friendly platform and a straightforward application process.
• Common mistake: Getting overwhelmed by the number of choices for brokers.
• How to avoid it: Compare a few well-regarded firms based on fees, investment options, and customer service.

7. Determine Your Initial Investment Amount:

• What to do: Decide how much money you can comfortably invest to start.
• What “good” looks like: An amount that fits your budget and allows you to start building your portfolio without jeopardizing your financial stability.
• Common mistake: Trying to invest too much too soon, or not investing anything because you feel the amount is too small.
• How to avoid it: Start with an amount you can afford to lose (though the goal is growth). Many accounts have low minimums.

8. Select Your Investments:

• What to do: Choose specific investments (e.g., index funds, ETFs, individual stocks/bonds) based on your goals and risk tolerance.
• What “good” looks like: A diversified portfolio that aligns with your strategy and is composed of investments you understand.
• Common mistake: Picking investments based on hype or tips from unreliable sources.
• How to avoid it: Focus on low-cost, diversified options like broad market index funds or ETFs for beginners.

9. Fund Your Account and Make Your First Investment:

• What to do: Transfer money from your bank account to your investment account and execute your first trade.
• What “good” looks like: A smooth transaction and the confirmation of your initial investment.
• Common mistake: Procrastinating after opening the account.
• How to avoid it: Set a deadline for funding and investing once your account is open.

10. Automate Your Investments:

• What to do: Set up recurring automatic transfers and investments from your bank account.
• What “good” looks like: Consistent investing that takes advantage of dollar-cost averaging and removes the temptation to time the market.
• Common mistake: Investing sporadically or only when you feel like it.
• How to avoid it: Use your brokerage’s automatic investment features. Treat your investment contributions like any other bill.

11. Monitor and Rebalance Periodically:

• What to do: Review your portfolio’s performance and adjust your holdings to maintain your desired asset allocation.
• What “good” looks like: A portfolio that stays aligned with your original strategy, rebalancing when certain asset classes grow or shrink significantly.
• Common mistake: Over-monitoring or reacting emotionally to short-term market movements.
• How to avoid it: Set specific times (e.g., annually) to review and rebalance. Focus on your long-term goals.

Risk and diversification (plain language)

Investing inherently involves risk, meaning the value of your investments can go down as well as up. Diversification is a strategy to manage this risk.

• Risk is the possibility of losing money: When you invest, you’re hoping for growth, but there’s always a chance the value of your investment will decrease.
• Different investments have different risks: For example, stocks (ownership in companies) are generally considered riskier than bonds (loans to governments or corporations) because company performance can be volatile.
• Diversification means not putting all your eggs in one basket: Instead of investing all your money in a single stock or one type of asset, you spread it across many different investments.
• Example of diversification: Owning shares in a tech company, a utility company, and a healthcare company, alongside some government bonds and real estate investment trusts (REITs).
• Diversification reduces overall portfolio risk: If one investment performs poorly, others may perform well, cushioning the impact of the loss.
• Asset allocation is key to diversification: This involves deciding what percentage of your portfolio to allocate to different asset classes (like stocks, bonds, cash) based on your risk tolerance and time horizon.
• Diversification doesn’t guarantee profits or prevent losses: It’s a risk management tool, not a guarantee against market downturns.
• Example of diversification in action: If you own 20 different stocks and one company goes bankrupt, you lose money on that specific investment, but your overall portfolio may still be stable due to the performance of the other 19.

What to do during market drops:

Market downturns can be unsettling, but they are a normal part of investing. Instead of panicking, view them as potential opportunities. For long-term investors, market drops can mean buying assets at lower prices. Stick to your investment plan, avoid making emotional decisions, and continue with your automated investments if possible. Remember that markets have historically recovered from downturns over time.

Common mistakes (and what happens if you ignore them)

Mistake	What it causes	Fix
<strong>Not having an emergency fund</strong>	You might have to sell investments at a loss to cover unexpected expenses, derailing your long-term financial goals.	Prioritize building a 3-6 month emergency fund in a liquid savings account before investing.
<strong>Investing money needed in the short-term</strong>	Short-term goals (e.g., a house down payment in 2 years) are vulnerable to market fluctuations, potentially leaving you with less money than you started with.	Use only money you won’t need for at least 5 years for investing. Keep short-term savings in safe, accessible accounts like high-yield savings.
<strong>Ignoring investment fees</strong>	High fees (e.g., expense ratios, trading costs) can significantly erode your returns over time, especially on smaller balances.	Choose low-cost investments like broad-market index funds and ETFs. Understand all fees before investing.
<strong>Trying to time the market</strong>	Missing the best days in the market can severely damage long-term returns. It’s virtually impossible to consistently predict market tops and bottoms.	Employ dollar-cost averaging by investing a fixed amount regularly. Focus on staying invested rather than trying to jump in and out.
<strong>Emotional investing (panic selling)</strong>	Selling investments during a market downturn locks in losses and prevents you from participating in the eventual recovery.	Develop a long-term investment plan and stick to it. Automate your investments to remove emotional decision-making. Focus on your goals, not daily market news.
<strong>Not diversifying</strong>	If one investment performs poorly, your entire portfolio can suffer significant losses.	Spread your investments across different asset classes (stocks, bonds), industries, and geographies. Consider low-cost diversified funds like index ETFs.
<strong>Investing in what you don’t understand</strong>	You’re more likely to make poor decisions, panic during volatility, or fall for scams if you don’t grasp the underlying investment.	Stick to simpler, well-understood investments like broad-market index funds or ETFs until you gain more knowledge. Do your homework before investing in individual stocks or complex products.
<strong>Not taking advantage of tax-advantaged accounts</strong>	You miss out on potential tax savings (deductions or tax-free growth) that could significantly boost your long-term wealth.	Prioritize contributions to 401(k)s, IRAs (Traditional or Roth), HSAs, or other tax-advantaged accounts before investing in taxable brokerage accounts.
<strong>Chasing “hot” investments</strong>	Investments that have performed exceptionally well recently often come with higher risk and may be overvalued, leading to future losses.	Focus on a diversified, long-term strategy rather than chasing short-term trends. Invest in assets aligned with your goals and risk tolerance.
<strong>Failing to rebalance</strong>	Your portfolio’s asset allocation can drift over time, making it either too aggressive or too conservative for your goals.	Schedule regular portfolio reviews (e.g., annually) to rebalance and bring your asset allocation back in line with your target.

Decision rules (simple if/then)

• If your time horizon is less than 5 years, then prioritize capital preservation and low-risk investments (like savings accounts or short-term bonds) because market downturns could significantly impact your principal.
• If you have a stable job and a fully funded emergency fund, then you can consider investing more aggressively for long-term growth because you have a safety net to fall back on.
• If you are investing for retirement (30+ years away), then you can generally afford to take on more risk with a higher allocation to stocks because you have time to recover from market downturns.
• If your employer offers a 401(k) match, then contribute at least enough to get the full match because it’s essentially free money that boosts your retirement savings immediately.
• If you are looking for tax-advantaged retirement savings and expect to be in a lower tax bracket in retirement, then consider a Roth IRA because contributions are made after-tax, but qualified withdrawals in retirement are tax-free.
• If you are looking for tax-advantaged retirement savings and expect to be in a higher tax bracket in retirement, then consider a Traditional IRA or 401(k) because contributions may be tax-deductible now, lowering your current taxable income.
• If you are new to investing and want broad market exposure with minimal effort, then invest in a low-cost, diversified index fund or ETF because they offer instant diversification and typically have low fees.
• If you’re feeling anxious about market volatility, then review your asset allocation to ensure it still aligns with your risk tolerance because a portfolio that’s too aggressive can lead to emotional decisions.
• If you receive a windfall (e.g., inheritance, bonus), then consider investing a portion of it according to your long-term plan, but ensure your emergency fund is still adequate first.
• If you are nearing retirement (within 5-10 years), then gradually shift your portfolio towards more conservative investments (like bonds) to reduce risk as you get closer to needing the funds.

FAQ

Q: How much money do I need to start investing?

A: You can start investing with very little. Many brokerage accounts have no minimums, and you can often buy fractional shares of stocks. The key is to start consistently, even if it’s just $25 or $50 per month.

Q: What’s the difference between a stock and a bond?

A: A stock represents ownership in a company, and its value can increase or decrease based on the company’s performance and market conditions. A bond is essentially a loan you make to a government or corporation, which pays you interest over time and returns your principal at maturity.

Q: Should I invest in individual stocks or mutual funds/ETFs?

A: For most beginners, mutual funds or Exchange Traded Funds (ETFs) are recommended. They offer instant diversification across many companies, reducing the risk compared to investing in just a few individual stocks.

Q: What is dollar-cost averaging?

A: Dollar-cost averaging is an investment strategy where you invest a fixed amount of money at regular intervals, regardless of market conditions. This helps reduce the risk of investing a large sum at a market peak and can lead to a lower average cost per share over time.

Q: How often should I check my investments?

A: Resist the urge to check daily. For long-term investors, reviewing your portfolio quarterly or annually is usually sufficient. Frequent checking can lead to emotional decisions based on short-term market noise.

Q: What are the main types of IRAs?

A: The two main types are Traditional IRAs and Roth IRAs. With a Traditional IRA, contributions may be tax-deductible now, and withdrawals in retirement are taxed. With a Roth IRA, contributions are made with after-tax money, but qualified withdrawals in retirement are tax-free.

Q: Is investing in cryptocurrency a good idea?

A: Cryptocurrencies are highly volatile and speculative investments. They carry significant risk and are not suitable for most beginner investors or for money needed in the short-to-medium term. Thorough research and understanding of the risks are essential.

Q: What’s the difference between a brokerage account and a retirement account?

A: Retirement accounts (like 401(k)s and IRAs) offer tax advantages for long-term savings specifically for retirement. Brokerage accounts are taxable accounts that offer more flexibility in terms of when you can withdraw funds but lack the same tax benefits.

What this page does NOT cover (and where to go next)

• Specific investment product recommendations: This guide provides general principles; specific investment choices depend on your individual circumstances and research.
• Advanced tax strategies for investors: While tax impact is mentioned, detailed tax planning for high-net-worth individuals or complex investment scenarios is not covered.
• Retirement withdrawal strategies: This article focuses on getting started with investing, not on how to draw down your portfolio in retirement.
• Estate planning and trusts: These are complex legal and financial areas beyond the scope of basic investing.

Where to go next:

• Learn more about specific investment vehicles like stocks, bonds, mutual funds, and ETFs.
• Explore the details of different retirement account types (401(k)s, IRAs).
• Research low-cost brokerage firms and their offerings.
• Consider consulting with a qualified, fee-only financial advisor to create a personalized investment plan.