Investing in Stocks: How to Start for Beginners

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Everyone should invest in stocks. Does that sound like a broad generalization?  Maybe so, but it really is true.

The combination of relentless inflation and the need to fund future goals requires adding risk investments to your portfolio.  Stocks are perhaps the best example of risk investments.

They do have the risk of loss, but they’ve outperformed fixed income investments by a wide margin for more than a human lifetime, averaging about 10% per year going back to 1926.

That last point is a compelling reason to begin investing in stocks, even if you’ve never done it in the past.  And there are ways how to invest in stocks for beginners without losing your shirt.

Follow the nine steps below, and you’re likely to find investing in stocks will turn out to be the best long-term move you’ve ever made.

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Set a Firm Financial Foundation

If you’ve never invested in stocks before, you shouldn’t take the plunge without making sure your overall financial situation is in a solid position.

We recommend the following:

  1. Make sure you have a stable income. Since you’ll be taking a risk investing in stocks, you’ll need to have a reliable income as an anchor.
  2. Have reasonable debt levels. A car loan or mortgage are okay, but credit card debt has to go.  The interest rate paid on those cards is higher than you’re likely to earn on stocks.
  3. Have an emergency fund in place. Most financial experts recommend you have between three- and six-months living expenses sitting in a savings account.  This will avoid the need to liquidate investments in an emergency.
  4. Participate in a retirement plan. If your employer offers a plan, like a 401(k) or a 403(b), you should join.

Invest all you can to maximize any employer matching contribution.  For example, if your employer matches 50% up to 3% of your salary, contribute 6% of your salary.

If your employer doesn’t offer a plan, open an IRA. Either type of account will also be a natural place to begin investing in stocks.  If you have an emergency fund, you’ll want to keep the money absolutely safe while still earning a decent return.

Most local banks pay something close to nothing on savings accounts.  A better option for your emergency fund will be to take advantage of higher yielding online banks.

Some examples include:



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Create a Stream of Steady Investment Contributions

If you’re new to investing, the last thing you’ll want to do is move a bunch of money into stock investments all at once.  Yes, it does have the potential to enable you to score a big hit. But it’s equally likely you’ll take a big hit.

The better strategy is to invest gradually and methodically.

By doing so, you’ll be taking advantage of dollar cost averaging, which basically means you’ll be spreading your investment acquisitions over a long period of time.

The method enables you to buy more stock when prices are low, and less when prices are high. Both arrangements will work to your advantage over the long term.

A very convenient way to dollar cost average is to use payroll contributions.  If you’re investing through an employer-sponsored retirement plan, you’re already following this strategy.

But you can do the same with IRAs and taxable brokerage accounts.  All you need to do is allocate regular payroll contributions into either type of account.

That will enable you to fund those accounts gradually, while increasing your investments on a regular basis.  Not only does using steady investment contributions lower the risk of investing in stocks, but it also commits you to the long-term.

The method makes investing a regular financial habit.

When you can invest money on a regular basis without even thinking about it, you’ll be in a better position to quietly build a large portfolio – without having to do anything dramatic.

This is of course another compelling reason to have a stable income.  Methodical investing requires a steady cash flow to be successful.

Self-Directed Investing or Managed Investing (Robo-advisors)?

This is a decision you’ll need to make early in the process.

Do you want to manage your own portfolio (self-directed investing), or have it professionally managed?  Much will depend on a combination of your knowledge and comfort levels with the investing process.

If you’re strong in both categories, you’ll lean in favor of self-directed investing.  But if you don’t feel like you’re ready to manage your own investments, a robo-advisor will be the better choice.

Self-directed Investing

Just as the name implies, self-directed investing means you will be completely in charge of all your investing activities.

This will include determining your stock portfolio allocation, choosing individual investments, rebalancing your portfolio as necessary, and selling securities at appropriate times.

But self-directed investing doesn’t mean you need to invest in stocks.  You can choose to invest in index-based exchange traded funds (ETFs) instead.

Rather than picking individual stocks, you can choose ETFs representing specific market sectors you believe will perform well.  Similar to a mutual fund, each ETF is its own portfolio of securities.

The main difference between the two is that while mutual funds often charge load fees, ETFs don’t.

And while mutual funds are actively managed – seeking to outperform the market (a venture at which the vast majority fail on a regular basis) – ETFs are funds tied to recognized stock indexes.

Basically, you’ll be tracking the index of the sectors your investing in, rather than individual stocks.

ETFs will make self-directed investing easier because they offer a simple way to create and manage an investment portfolio.

If you make the decision to become a self-directed investor, the next step will be to choose an investment broker to hold your portfolio.  Investment brokers that welcome self-directed investors include the following:



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Each broker provides all the tools you’ll need to become a successful investor. But they also charge no commissions on trades of stocks, options, and ETFs.

No-fee investing is one of the biggest advances in the investment industry in recent years.  It means you can invest without trading fees reducing the returns on your portfolio.

That’s a major advantage to all investors, but especially those who are self-directed.

Managed Investing through Robo-advisors

If you’re not ready to jump into self-directed investing, you can choose a managed option.  You’re probably aware that there are investment services that will manage portfolios for a fee.

But most traditional, human investment advisory services require large account minimums, like $250,000 and up.

They also charge annual management fees of between 1% and 2% of your portfolio value.  As a beginning investor with a small portfolio, traditional investment advisors won’t be an option.

The better choice will be robo-advisors. These are online, automated investment management platforms, that allow you to invest with little or no money and at very low fees.

Typically, they’ll have you complete a questionnaire, from which they’ll build a portfolio that will be balanced between stocks and bonds, and sometimes real estate, natural resources, and other specific sectors.

Once your portfolio has been created, it will be fully managed for you.

That will include rebalancing your portfolio as necessary and reinvesting dividends. Your only responsibility will be to fund your account.  Best of all, robo-advisors typically charge an annual fee of only about 0.25% to manage your portfolio.

That means they’ll manage $10,000 for just $25 per year.  Examples of robo-advisors we recommend include:



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Self-directed Investing vs. Robo-advisors: A Recommended Strategy for Beginners

There’s actually a third choice here. You don’t have to choose between self-directed investing and robo-advisors – you can go with both.

As a beginning investor, you may have a desire to participate in self-directed investing, but lack the knowledge and confidence.  For that reason, you can begin investing through a robo-advisor.

You can continue on that path until you have sufficient funds and knowledge to begin moving into self-directed investing.

Like everything else having to do with investing, this is also best done gradually. Start out self-directing a small percentage of your portfolio.

For example, if you have $10,000 invested with a robo-advisor, move 10% – or $1,000 – into a brokerage account, where you can begin self-directed investing.

As your investing skills improve, you can gradually shift more funds over to your self-directed investment account.

Eventually, you may no longer need the robo-advisor.  But until that day comes, using this hybrid approach should prove to be a reliable strategy.

Determine Your Stock/Bond Allocation

If you invest through a robo-advisor your portfolio allocation will be decided for you.  But if you go the self-directed investment route, you’ll need to make that decision yourself.

As a general rule, the younger you are, the higher your stock allocation should be.  As you get older, you should gradually shift a higher percentage of your portfolio into safe assets.

Fortunately, there’s a simple formula that will help you do that.  It’s referred to as 120 minus your age.  Whatever your current age is, you subtract it from 120.

Here are some examples:

  • If you’re 25 years old, 95% of your portfolio should be in stocks (120 – 25), and 5% in safe assets.
  • At 35, 85% of your portfolio should be in stocks (120 – 35), and 15% in safe assets.
  • If you’re 55 years old, your portfolio will be more conservative. 65% of your portfolio (120 – 55) will be invested in stocks, and 35% in safe assets.
  • At 65, 55% of your portfolio (120 – 65) should be invested in stocks, and 45% and safe assets.

The main reason for the higher stock allocation when you’re younger is that you will have more years to recover from short-term market declines.

As you get older, and there’s less recovery time, you’ll need to reduce the risk in your portfolio by leaning more heavily toward safe asset investments.

Just remember that 120 minus your age is only a convention. You can adjust it based on your own personal circumstances and risk tolerance.

For example, if you’re 35 years old and facing a layoff with a family in tow, having 85% of your money in stocks may be too risky.

You may want to lower that to a more acceptable percentage until your situation stabilizes.

Start with Funds

Once again, if you invest through a robo-advisor, this will be automatic.  Robo-advisors heavily favor low-cost, index-based ETFs in their portfolios.  But if you’re self-directed investor, you’ll need to choose your own fund investments.

ETFs tend to be more reliable than mutual funds.  Since they’re index-based, they can’t underperform the market. By contrast, between 85% and 92% of mutual funds do underperform the market.

And since there’s an ETF for virtually every market sector – including both stocks and bonds – it’s very easy to build a diversified portfolio with just a few funds.

Following the robo-advisor portfolio model, you can build a fully diversified portfolio using the following sector funds:

  • Large-cap US stocks, with an ETF based on the S&P 500 index
  • Mid-cap and/or small-cap US stocks
  • International developed markets
  • International emerging markets
  • Various sector funds (technology, healthcare, energy, etc)
  • US bonds
  • International bonds

Building a portfolio of ETFs representing each of those seven sectors will put thousands of individual securities in your portfolio and with not a lot of money.

But the entire conglomeration will be completely managed for you by the seven ETFs.

Break into Individual Stocks Gradually

Even if you’re pretty confident in your stock picking skills, you may want to move into that universe gradually as well.

Start your self-directed portfolio with a base of ETFs.  That will give you the ability to create a diversified portfolio, with very little effort on your part.

But just as we recommended in connection with robo-advisors, you can eventually begin slowly adding individual stocks to your ETF portfolio.

Just be aware from the start that no one is born with natural investment skills.

They have to be learned and developed. If you’re a brand-new investor, you should start by subscribing to an investment service.

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Maintain Proper Diversification

If you invest through a robo-advisor, this will be part of the service provided.  And if you invest primarily through funds, you can achieve adequate diversification by holding just a handful of ETFs.

But proper diversification becomes more challenging when you invest in individual stocks.

There are a few rules to keep in mind:

  • Don’t load up on a small number of stocks – there’s no such thing as a guaranteed winner on Wall Street.
  • Choose companies that represent promising long-term investments.
  • Investment advisors recommend keeping no more than 10% of your portfolio in any one stock. As a beginning investor, you should probably make it 5% – that will enable you to invest in up to 20 different companies.
  • Spread your stocks across different industry sectors. Don’t load up on tech stocks or energy stocks, thinking a boom is right around the corner. Instead, spread your positions across at least five or six different sectors.
  • Just because stocks are the star of your portfolio, doesn’t mean you should ignore fixed income investments. Hold one or two bond ETFs to provide some downside protection.

Don’t think you can’t diversify a portfolio with just a few thousand dollars in it.  Most investment brokers today will allow you to purchase “odd lots”, such as 23 shares.

There’s no need to buy positions in minimum blocks of 100 shares.  Most firms will also allow you to purchase fractional shares.

For example, if you want to commit $500 to invest in a stock trading at $75, you should be able to purchase 6 2/3 shares of that stock without issue.  At the same time, you’ll want to be careful not to over diversify.

A portfolio of more than 20 stocks will become difficult to manage and may require frequent trading.

Never Stop Learning

If you invest in individual stocks, and don’t find much success early in the process don’t be discouraged.  There is a definite learning curve when it comes to investing, and it can be pretty steep at the beginning.

Just as you need to commit to contributing funds to your portfolio on a regular basis over many years, you’ll need to use the same strategy to build your knowledge base and skills.

That will start by becoming a regular reader of popular financial publications.  This can include online sources, such as Yahoo!Finance, MarketWatch, Bloomberg and The Motley Fool.

By regularly reading on those sites, you’ll gradually build up your knowledge base, as well as come across various investment opportunities.  It can also help if you become part of an investment group or online forum.

That’s basically a group of like-minded investors, who come together to share ideas, run scenarios, and introduce resources.

A prominent example is the Bogleheads Forum, named after the late John Bogle, the legendary founder of Vanguard and creator of the first index fund.

By joining one or more groups, you won’t need to make your investment journey alone.  You’ll have a group readily available to provide support and information.

You’re in it for the Long Haul – Don’t Get Spooked and Bail!

This last point can’t be stressed enough. Investing is a long-term process; the biggest returns generally come to those who invest steadily over decades.

For example, if you invest $500 per month at an average annual return of 7% (in a portfolio of stocks and bonds), your portfolio will grow to $588,000 after 30 years.

That’s what long-term investing can do for you.

But if you call it quits after just a few years, you may only have a few thousand dollars to show for it – and a whole bunch of discouragement to go with it.

As part of a long-term commitment, you’ll need to get the fear and greed instincts under control.  The twin emotions are the silent drivers of the financial markets.

For example, if the market loses 20% and you sell all your investments, you’ll have locked in a permanent 20% loss.  That’s what fear can do to your portfolio.

On the other hand, if you get cocky and load your portfolio primarily with just four or five stocks that are on a hot streak, you may do well for a while, but wipe out when several of those stocks crash and burn.

That’s what greed can do to your portfolio.

Learn to replace fear and greed with a popular Wall Street saying: Buy when others are selling, and sell when others are buying.

Should You Start Investing in Stocks?

Investing works best when you remove emotion from the equation.

That’s why it’s so important to develop a long-term strategy, encompassing regular investment contributions, picking the right stocks, diversifying, and maintaining your portfolio through sometimes extreme market conditions.

If you follow the advice in this guide, you should be able to do that over the long term.  That is, if you can avoid the human temptation to get sidetracked.

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