If you’ve decided you want to begin, but haven’t the slightest clue how to start investing, it’s okay. You’re in good company. Start by writing out an investment plan. An investment plan doesn’t need to be a 300-page treatise; it’s just an exercise in putting ideas on paper (or spreadsheets). You’ll need to answer three basic questions:
- What do I want to gain?
- How long do I plan on investing?
- How much risk am I willing to tolerate?
Step 1: What are your goals?
The goal of any investment plan is to complete a specific objective. For example, say you want money in the bank for a house downpayment.
You’d like to buy a home in a neighborhood with an average price of around $250,000, so a 20% down payment would be $50,000. Leaving your money in the bank might be a good idea if your time horizon is a century. But since you don’t have that long to wait, investing’s the way to go.
Once you have an investment goal, figure out how long you’re willing to wait for it. Investing takes time. Sure, you could throw a bunch of money at a volatile biotech and double up in a month, but that involves a lot of risk. You don’t want your savings trading hands on a coin flip.
Even the best money managers struggle to pick the best stocks with consistency, so your investment must be sound. The period you identify can be loose, say 3-5 years, which will allow you to consistently fund an account. Finally, how much risk are you willing to take?
Step 2: Choose a strategy
Investments have a wide range of outcomes. The biotech company that doubled last month could plummet if one of its clinical trials has a bad outcome, so you can’t blindly take on risk. How badly do you take losses?
Determine your risk profile and set your asset allocation based on these preferences. Can you withstand the roller coaster of a 100% stock portfolio? If you’re a 25-year old college graduate who’s just starting to save for retirement, an all-stock portfolio is probably appealing.
You can tolerate ups and downs of investing in stocks because you have 30 years to make up for any losses. But if you’re saving for a downpayment on a house, a shorter time frame means a smaller allocation of stocks. Maybe a 60/40 or even 50/50 portfolio is more appropriate for an investment goal like this.
Step 3: Put your money to work
The best thing about investing is sitting back and letting your money do all the work. Unless you’re a skilled trader, you should be leaving your investments alone and selling only to rebalance your asset allocation.
- Fees: Each brokerage has a different fee structure.
- Access: We live on the go, so how well can you connect to your brokerage? A great app goes a long way here.
- Customer service: If technology goes wrong, how quickly can a broker solve problems with your account?
When you find a brokerage that fits your needs, fund your account and watch your plan take flight.
It’s never been easier to start investing. You can do it all with a few taps of your iPhone and pay minimal fees in the process (or none at all). Trust the investment plan you’ve created, stick with it, and odds are, you’ll be happy down the road.