Getting Started with Investing: Your First Steps

Quick answer

• Understand your financial goals and timeline before investing.
• Build an emergency fund to cover unexpected expenses.
• Assess your comfort level with risk.
• Choose the right investment account for your needs.
• Start with simple, low-cost investments.
• Diversify your investments to spread risk.

What to check first (before you invest)

Time Horizon

Your time horizon is the length of time you plan to invest your money before you need it. A longer time horizon generally allows for taking on more risk, as there’s more time to recover from potential market downturns. For example, saving for retirement in 30 years allows for a different approach than saving for a down payment on a house in 5 years.

Risk Tolerance

This refers to your emotional and financial ability to withstand potential losses in your investments. Some people are comfortable with higher potential returns that come with higher risk, while others prefer more stability, even if it means lower returns. Understanding this helps you choose investments that won’t cause undue stress.

Emergency Fund

Before investing, ensure you have a solid emergency fund. This is typically 3-6 months of living expenses saved in an easily accessible account, like a savings account. It prevents you from having to sell investments at a loss during an unexpected financial emergency, such as job loss or a medical bill.

Fees and Tax Impact

Investment accounts and products often come with fees (like management fees or trading commissions) that can eat into your returns over time. Similarly, how your investments are taxed can significantly affect your net gains. Understanding these costs and tax implications upfront is crucial for maximizing your investment growth.

Account Type

The type of investment account you choose depends on your goals and circumstances. Common options include:

• 401(k) or 403(b): Employer-sponsored retirement plans, often with employer matching contributions.
• Individual Retirement Accounts (IRAs): Personal retirement accounts, such as Traditional IRAs (tax-deferred growth) or Roth IRAs (tax-free withdrawals in retirement).
• Taxable Brokerage Accounts: Flexible accounts for any financial goal, with no withdrawal restrictions, but gains are subject to taxes annually.

Step-by-step (simple workflow)

1. Define Your Financial Goals:

• What to do: Clearly identify what you are investing for (e.g., retirement, down payment, education) and when you’ll need the money.
• What “good” looks like: You have specific, measurable, achievable, relevant, and time-bound (SMART) goals. For example, “Save $50,000 for a down payment in 7 years.”
• Common mistake: Investing without a clear purpose, leading to impulsive decisions or mismatched investments.
• How to avoid it: Write down your goals and the associated timelines.

2. Build Your Emergency Fund:

• What to do: Save 3-6 months of essential living expenses in a separate, easily accessible savings account.
• What “good” looks like: You have enough cash to cover unexpected job loss, medical bills, or major home repairs without touching your investments.
• Common mistake: Investing money that should be reserved for emergencies.
• How to avoid it: Prioritize building this fund before making significant investment contributions.

3. Assess Your Risk Tolerance:

• What to do: Honestly evaluate how comfortable you are with the possibility of losing money in exchange for potentially higher returns.
• What “good” looks like: You understand that investments can go down as well as up and choose investments that align with your emotional comfort.
• Common mistake: Taking on too much risk because you’re chasing high returns, or being too conservative and missing growth opportunities.
• How to avoid it: Use online risk tolerance questionnaires or talk to a financial advisor.

4. Educate Yourself on Investment Basics:

• What to do: Learn about different types of investments (stocks, bonds, mutual funds, ETFs) and how they work.
• What “good” looks like: You have a foundational understanding of investment terms and concepts.
• Common mistake: Investing in products you don’t understand.
• How to avoid it: Read reputable financial websites, books, or take introductory courses.

5. Choose the Right Investment Account:

• What to do: Select an account type that best suits your goals (e.g., 401(k) for retirement, IRA for additional retirement savings, brokerage for flexible goals).
• What “good” looks like: You’ve chosen an account that offers tax advantages or flexibility appropriate for your objective.
• Common mistake: Using a taxable brokerage account for long-term retirement savings when tax-advantaged options are available.
• How to avoid it: Research the pros and cons of each account type based on your specific needs.

6. Select Your Investments:

• What to do: Start with simple, diversified, low-cost options like index funds or ETFs.
• What “good” looks like: Your portfolio is spread across different asset classes and industries, minimizing concentration risk.
• Common mistake: Trying to pick individual stocks without sufficient knowledge or investing in overly complex products.
• How to avoid it: Consider target-date funds or broad-market index funds as a starting point.

7. Open Your Account and Fund It:

• What to do: Complete the application process for your chosen account and transfer money into it.
• What “good” looks like: Your account is set up, and you’ve made your initial investment.
• Common mistake: Delaying the process due to perceived complexity.
• How to avoid it: Many online brokers offer user-friendly platforms and clear instructions.

8. Automate Your Investments:

• What to do: Set up automatic recurring contributions from your bank account to your investment account.
• What “good” looks like: You consistently invest a set amount on a regular schedule, regardless of market fluctuations.
• Common mistake: Waiting for the “perfect time” to invest or making emotional decisions based on market news.
• How to avoid it: Automating removes the need for constant decision-making and promotes discipline.

9. Monitor and Rebalance Periodically:

• What to do: Review your portfolio at least annually to ensure it still aligns with your goals and risk tolerance. Rebalance by selling some assets that have grown and buying more of those that have lagged to return to your target allocation.
• What “good” looks like: Your portfolio remains aligned with your original investment strategy.
• Common mistake: Constantly checking your investments and making frequent, reactive changes.
• How to avoid it: Stick to a predetermined review schedule and rebalance only when necessary.

Risk and diversification (plain language)

• Risk is the possibility of losing money. All investments carry some level of risk. For example, a savings account has very low risk, while individual stocks have higher risk.
• Return is what you earn on your investment. Generally, higher potential returns come with higher risk.
• Diversification means not putting all your eggs in one basket. Spreading your money across different types of investments can reduce overall risk.
• Example: Instead of buying stock in just one tech company, you might invest in a technology ETF that holds stocks from many different tech companies.
• Asset classes: These are broad categories of investments, like stocks, bonds, and real estate. Diversifying across asset classes is important because they don’t always move in the same direction.
• Bonds are generally less risky than stocks. They represent loans to governments or corporations, and you receive regular interest payments.
• Stocks represent ownership in a company. Their value can fluctuate significantly based on company performance and market conditions.
• Mutual funds and ETFs are baskets of investments. They allow you to diversify easily by holding many stocks or bonds in a single fund.
• Low-cost funds are key. Fees can significantly impact your long-term returns. Look for funds with low expense ratios.

During market drops, it’s natural to feel anxious. The key is to remember your long-term goals. If you have a diversified portfolio and a long time horizon, market downturns can be opportunities to buy assets at lower prices. Avoid making emotional decisions to sell everything; instead, stick to your plan.

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 during unexpected expenses, hindering your long-term growth.	Prioritize saving 3-6 months of living expenses in a readily accessible savings account before investing.
<strong>Investing without clear goals</strong>	Leads to impulsive decisions, chasing trends, or investing in assets that don’t align with your needs or timeline.	Define specific, measurable, achievable, relevant, and time-bound (SMART) financial goals.
<strong>Ignoring fees and expenses</strong>	High fees erode your returns over time, significantly reducing the amount you have for your goals.	Choose low-cost index funds or ETFs. Regularly review the expense ratios of your investments.
<strong>Trying to time the market</strong>	Missing out on periods of growth or selling at the bottom during downturns, often leading to lower overall returns.	Invest consistently through dollar-cost averaging (investing a fixed amount regularly) and stay invested for the long term.
<strong>Putting all money into one investment</strong>	High risk of significant loss if that single investment performs poorly.	Diversify your portfolio across different asset classes (stocks, bonds), industries, and geographies.
<strong>Letting emotions drive decisions</strong>	Panic selling during downturns or greed-driven buying during market highs can lead to poor investment choices.	Develop a written investment plan and stick to it. Automate investments to remove emotional decision-making.
<strong>Not understanding what you own</strong>	Investing in complex products or individual stocks without sufficient knowledge can lead to unexpected losses.	Start with simple, well-understood investments like broad-market index funds. Educate yourself about any investment before committing your money.
<strong>Procrastinating on starting</strong>	Missing out on the power of compounding returns, which grows your money exponentially over time.	Start investing as soon as possible, even with small amounts. The sooner you start, the more time your money has to grow.
<strong>Over-diversifying</strong>	Spreading yourself too thin can make it hard to track your investments and may dilute potential gains.	Focus on a few broad-market, low-cost funds that provide adequate diversification rather than holding dozens of similar funds.
<strong>Ignoring taxes</strong>	Unnecessary tax liabilities can significantly reduce your net investment gains.	Understand the tax implications of different account types (taxable vs. tax-advantaged) and investment strategies. Utilize tax-loss harvesting if appropriate.

Decision rules (simple if/then)

• If your time horizon is 10+ years, then you can generally afford to take on more investment risk because you have time to recover from market downturns.
• If you have less than 5 years until you need the money, then you should consider very low-risk investments or keeping the money in cash to preserve capital.
• If you have significant debt with high interest rates (e.g., credit cards), then paying down that debt may be a better “investment” than investing in the market, as the guaranteed return from avoiding interest is often higher than potential investment gains.
• If your employer offers a 401(k) match, then contribute at least enough to get the full match because it’s essentially free money.
• If you are looking for broad market exposure with minimal cost, then consider investing in a low-cost S&P 500 index fund or a total stock market index fund.
• If you are concerned about market volatility, then consider adding a portion of bonds to your portfolio, as they tend to be less volatile than stocks.
• If you have a sudden, unexpected expense, then tap into your emergency fund first, rather than selling investments at an inopportune time.
• If you receive a windfall (e.g., inheritance, bonus), then assess your financial priorities before investing; consider paying off high-interest debt, bolstering your emergency fund, and then investing for long-term goals.
• If you are contributing to a Roth IRA, then know that your contributions are made with after-tax money, but qualified withdrawals in retirement are tax-free.
• If you are contributing to a Traditional IRA, then your contributions may be tax-deductible now, but withdrawals in retirement will be taxed as income.
• If you are rebalancing your portfolio and an asset class has grown significantly beyond your target allocation, then consider selling some of that asset to buy more of the underperforming ones.

FAQ

What is the best way to start investing?

The best way to start is by understanding your financial goals, building an emergency fund, assessing your risk tolerance, and then choosing a suitable investment account and simple, low-cost investments like index funds.

How much money do I need to start investing?

Many investment platforms allow you to start with very little money, sometimes as low as $1 or $5. The most important thing is to start consistently, even with small amounts.

Should I invest in stocks or bonds first?

For long-term growth, stocks generally offer higher potential returns but also higher risk. Bonds are typically less risky and can provide stability. A diversified portfolio often includes both, with the allocation depending on your risk tolerance and time horizon.

What is dollar-cost averaging?

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 lump sum at a market peak and averages out your purchase price over time.

How often should I check my investments?

It’s generally recommended not to check your investments too frequently, as this can lead to emotional decision-making. Reviewing your portfolio quarterly or annually, and rebalancing as needed, is usually sufficient.

Is it safe to invest online?

Yes, investing online through reputable brokerage firms is generally safe and convenient. Ensure the platform is regulated by the SEC and FINRA, and use strong passwords and two-factor authentication for security.

What’s the difference between a mutual fund and an ETF?

Both are pooled investment vehicles that hold a basket of securities. ETFs typically trade on stock exchanges throughout the day like individual stocks, while mutual funds are usually bought and sold at the end of the trading day at their net asset value. ETFs often have lower expense ratios.

When should I consider hiring a financial advisor?

You might consider a financial advisor if you have complex financial situations, need help with comprehensive financial planning, or feel overwhelmed and want professional guidance to create and manage an investment strategy.

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

• Specific investment product recommendations: This page provides general guidance, not advice on buying specific stocks, bonds, or funds.
• Advanced tax strategies: While taxes are mentioned, detailed tax planning for investments is a complex topic.
• Estate planning: This involves planning for the distribution of your assets after your death.
• Behavioral finance: Understanding the psychological aspects of investing and how to manage them.
• Real estate investing: This is a separate category of investment with its own unique considerations.
• Cryptocurrency investing: This is a highly speculative and volatile asset class.