One of the central goals of this blog is to provide you with the knowledge, and tools necessary to invest on your own. One of the key elements of investing on your own is learning how to get started. Taking the first step can sometimes be the most difficult.
I believe there are five key steps you need to take when you start on your investing journey. They are:
- Choose your investor type
- Choose an investment brokerage account
- Establish an investing plan
- Begin investing
- Ongoing account monitoring and continuous learning
I will walk you through the basics of each of these steps in this guide. We’ll focus on the main points as I will have in-depth discussions of details in separate postings. I am assuming that you have already made sure that your personal finances are ready to begin investing. This includes such items as having an emergency fund, and not having high interest debt.
1. Choose your Investor Type
Selecting your investor type is the first step that you need to take when you want to begin investing. If you don’t know what I mean when I discuss investor type, read my post that discusses each of the three types in detail.
Your investor type will influence a lot of your investing decisions. Each of Passive, Active, and DIY Investors will have slightly different choices to make as they go through steps 2-5. Passive Investors will want to choose those options with the lowest time commitment while DIY Investors will likely focus on finding just the perfect optimized situation. Active Investors will find a happy medium. The key point is that you need to understand your investor type, and thus your investing motivations before you begin investing. If you don’t, you will likely make a lot of mistakes.
2. Choose an investment brokerage account
An investment brokerage account is similar to a bank account, but instead of simply depositing money, you will use the money in the account to purchase investments. It is important to find the right brokerage account because each one comes with different features and fees. As I alluded to in the previous section, your investment brokerage account should fit your investor type.
Ideally you will choose a brokerage account that you will keep for a long time. Transferring assets between accounts can be a pain, and the goal should be to make things as simple as possible. Look to find an account that addresses your needs, while keeping the fees as low as possible. In particular, you will want to make sure that your investment account has the ability to buy and sell the types of investments that you want. If you want to buy stocks and bonds, then you need to make sure that your broker offers both options. Not all brokers do. In addition, if you want to buy and sell real estate as your source of investments, then a brokerage account is definitely not for you.
I will be publishing a full-guide on what to look for when choosing an investment brokerage account in my next post.
3. Establish an investing plan
You’ll want to make sure that you know what you want to get out of investing before getting started. That means you need to establish an investing plan.
One example of why this would be important, is if you wanted to invest in real estate. Real estate is not an investment (besides REITs) that you can invest in through a brokerage account. You will have to make those investments directly. This is why you should make sure you understand what investments you plan to buy prior to getting started. This will be written out in your investing plan document.
It is very important that your investing plan be a written document. This way it is something which you can actively refer to when you have to make a decision about your investments. This could be having to make a decision about whether or not to sell an investment after a gain, or even after a loss. Such decisions should be made in advance, so that you don’t let your emotions rule your investing. Emotions can be one of the leading causes of under performing as an investor. When the stock market dropped in 2008, many people sold their investments, locking in a steep loss. If instead, they had held on to their investments, they would have tripled from those lows, and made well more than the money they had temporarily lost. The key to making sure that you don’t make the same mistake, is by writing out what your decisions will be in certain situations, all in advance. The more you plan ahead, the higher your chances of success.
You don’t need to have all possible situations figured out but it will help to understand your basic investing strategy.
This strategy all begins with your goals. Why are you investing? Is it to save money for retirement? To buy a house? Save for your kids college? Is it to retire early, or have financial freedom? Do you simply just want to be a millionaire someday? Write out the goal. If you write out what your financial goals are, then you will be much more likely to achieve them. If you have multiple goals, write them all out. Each one can be motivation for you when you get discouraged. Notice I said, “when.” You will get discouraged. The purpose of this plan is to help you when that happens.
There are some major points that your investing plan should include:
- Your Financial Goals (at the top preferably)
- Your investor type
- What is your investing time frame (1 year? 5 years? 10? 30? 50?)
- What types of investments you will choose to invest your money in (stocks, bonds, options, mutual funds, index funds, real estate, private businesses, etc…)
- How much you plan to invest each month (or year)
- Will you automate your investments or manually manage them
- How often you plan to monitor your investments
- Under what circumstances will you buy an investment? (Price vs Value? Technical indicators? Buy on a regular time schedule?)
- Under what circumstances will you sell an investment? (Price goes up by X? Price goes down by X? Never?)
- What changes will you make (if any) if the stock market drops 20%, 30%, or 50%?
- What changes will you make (if any) if your portfolio value crosses a certain threshold such as $1,000,000.
- Do you plan to withdraw money from your investment account? If so, when and how? What will you do if the money isn’t there when you need it?
- How often will you consider making changes to your investment plan (once a year or every three years? only when your financial goals change?)
These are just some of the questions you can consider when writing your investment plan. I will be creating a full in-depth guide on this topic soon, but you can start by considering and answering these questions. Write down your answers. Talk them over with your family if you have one. You won’t have an answer for everything, and you don’t need one. The point is to think about it.
Your investment plan should achieve two goals: Align your Financial Goals with your steps to achieving them and simplify your decision making.
There is no use investing your money if you don’t have a clear plan that you will follow when making investment decisions. There is also nothing wrong with waiting to invest until you have a plan. Continue to save money and set it aside until the day you begin investing. This money isn’t a waste while you make sure that you don’t make any mistakes. If you want to invest right away, you can. Just remember that it’s important to establish an investing plan early on, so that your investments help you meet your goals. My goal is to give you the information that you need to create your own investing plan. Look for my full guide on the topic at a later date.
Your investment plan can and should change over time due to changing circumstances. This is okay. Your goals will change and your investments should adapt to them.
4. Begin investing
It’s time to take action.
- Open your investment account
- Make your first deposit
- Start to follow your investing plan
- Purchase your first investments
- Begin to make regular contributions to the account
5. Ongoing account monitoring and continuous learning
Monitor the value of your account on a regular basis. This could be monthly, twice a year, or annually. Whatever best fits your needs and investor type. It is important that although you are monitoring your investments, you should not worry about short term price changes. Instead, think about the long term value you are creating.
Work on continuous improvement. As you begin investing your level of knowledge might be relatively low. That’s okay, it’s to be expected. Over time, through resources like this blog, you can build on your knowledge and become an ever better investor.
If this helped you or you have a thought to add, please leave a comment below and consider sharing this post with your friends.
