We all have to be beginners when it comes to investing at some point. Some of us get a jump start on investing when we are young and some wait a little longer to invest. The sooner we start to invest the more time we have to grow wealth.
Also, if we’ve invested for a while, it’s always important to think about the fundamentals of investing. Investing for beginners, or for veterans, doesn’t have to be a hard, complex process. There are things we all can do to build wealth for ourselves and to help us reach our goals.
This post will cover topics from where to invest, who to invest with, and what to invest in. This is a guide for if you are wanting to manage your investments yourself or if you are interested in working with someone. Either can help you accomplish goals.
Why I’m an Expert on Investing.
Well for starters, I’ve been investing since I was 13 years old. It was then that I started a small job, and had earned income. I started putting money aside for retirement. Of course that wasn’t something I chose to do; I had a lot of support and guidance from my mother. Not to age myself for the world to know, but that means I’ve been investing in the stock market over 20 years.
I then studied Personal Financial Planning in college, where one of my fundamental courses was on investing. After college, I worked for the Missouri Securities Division (no, I wasn’t a bodyguard). I investigated individuals who sold investments in the State of Missouri or to Missouri Investors. I then went on to work for the Financial Industry Regulatory Authority (FINRA), a quasi-government entity, where I was responsible for auditing people who sold investments. I worked in regulation for over a decade.
In my time investigating and auditing the investment world, I saw so many different types of investments (from annuity sales, to mutual funds, to oil and gas deals, municipal securities, penny stocks, and more!). So, I know the wide range of what is out there. But, I’ve written this post to help you make sense of where to start. Many of those types of investments are not for the average investor (which I still consider myself even though I would consider myself a sophisticated investor).
Investing for Beginners Starts Here
There are eleven steps that I recommend with respect to investing for beginners. Here they are:
1. Determine your Investing Goals
If you are a beginning investor, it’s important to think about what you are wanting to accomplish with investing. Are you wanting to preserve and grow wealth for retirement? Do you want to save for a longer-term goal, like your children’s education? Perhaps you want to invest to have some money set aside when you want to purchase your next car. There are a number of reasons to invest, and it’s important to know your why as that may affect who you want to work with, the type of account you want to open and more.
We created a free, quick and easy goal setting guide that can help you quickly identify your goals for investing. By thinking about what you want to be, have, and do, it’ll bring clarity to your reasons for investing. Get your copy of the Goal Setting Guide to set your goals!
2. Determine Your Risk Tolerance
Each of us has a risk tolerance. In our personal lives some of us may be willing to go skydiving while others of us would have no interest in doing so. In investing, each of us has a risk tolerance. Some of us may be willing to get into riskier investments, but some of us (myself included) would rather be a little more calculated with the amount of risk we are willing to take.
It’s important to know that all investing (investing for beginners or for long-term investors) has some risk, but the risk of losing purchasing power and of not having time on our side for compounding, is an even bigger risk I would argue. We no longer live in the days that we can put money into a certificate of deposit and expect to be able to live off of the interest (something perhaps our grandparents or great-grandparents could do).
So, think about your risk tolerance. Would you say you have a low risk tolerance or a high risk tolerance? Are you willing to risk it all by being aggressive and speculative, or do you want something with lower risk and perhaps a smaller return?
If you answered you want to be aggressive and speculative, let me give you a little data that might serve as a caution. The research shows that the more consistent the returns, the more an account grows over time. So, if for instance person A invests in an investment that consistently returns between 4% and 6%, after several years they will likely have more money in their portfolio than person B who invests in products that have large swings in returns (i.e. -2%, 14%, 2%, 7%, -4%). Why is this? Compounding worked in their favor.
3. Decide if You Want to Choose Your Own Investments or if You Want Recommendations
There are two paths to investing. One is through making your own investment choices. The other is to hire someone to make recommendations to you (an investment advisor or a broker-dealer representative). Choosing whether you want to work with someone or not is completely up to you. There is additional cost if you choose to work with someone; however, if you have no interest in doing research on different mutual funds, bond funds, index funds, stocks, etc. this may be your best route.
However, it really isn’t that complicated to invest on your own. You will save fees, which research shows is powerful to adding wealth. I would also argue that by investing yourself you are sure to only invest in products that you understand fully and that are suitable for you. You may not get into the “latest, greatest” (I say that in jest) products, but I say it with jest because I’m a firm believer in focusing on the basics and not getting caught up in the new flashy things. Some of you, though, may find my approach a bit dull.
If you choose to work with someone that makes recommendations, it is absolutely critical that you insure they are registered to sell you investments. The quickest way is to check them out on FINRA’s system BrokerCheck or by calling your state securities department (typically in the Secretary of State’s office) to confirm registration. If a person is not registered it is illegal for them to sell you investments, including securities in the form of promissory notes.
4. Pick a Firm to Invest With
If you have chosen to work with someone, the firm you are investing through is chosen for you. You will invest through whatever firm they’re registered with. My recommendation is that if you choose to work with someone, the person you are working with is more important than the firm; however, you still need to know who the firm is and what they’re about. Find someone that you trust and that will take time to explain the investments they are recommending until you fully understand and are recommending investments that align with your goals (not their goals for you).
If, however, you are choosing to invest on your own there are a wide variety of firms to choose from. You can work with large brokerage houses (think the big Wall Street Names), the online brokerage firms (the ones that advertise low fee trades and electronic platforms), or you can choose firms local to your community. On FINRA’s broker-check you can also research firm’s you are considering.
Make sure you know who you are working with, what they are about, and how they’re going to charge you.
Robinhood Financial, LLC, has been in the news lately, so I’m going to use them as an example. Recall they were one of the firm’s that shut down trading in certain stocks associated with the Reddit. In December 2020, Robinhood was fined $65 million for making misleading statements about how they charge customers and also for failing to follow best execution practices (i.e. they didn’t get the best prices for their customers). Additionally, if you read on Robinhood Financial’s website the money to start the company was funded by the owners of Robinhood Financial selling software to hedge funds.
As an executing broker, Robinhood Financial’s two main responsibilities are trading for their customers and making money off of that activity. I think the Reddit folks could have saved themselves a lot of hurt had they done a little more diligence on who they were working with. A quick review of Broker-Check and reading the about Robinhood Financial page on their website may have saved a lot of people a lot of time, effort, and frustration.
5. Open an Account
Now that you know what your goals are for investing and with whom you want to work, it’s time to open an account. If your goal is to save for retirement, you want to open a qualified account (i.e. traditional IRA or Roth IRA). If you are looking to save for someone’s education you’re likely looking for a 529 plan. If you are investing for a more short or medium term, you will want to open a brokerage account.
To open an account you will have to complete a lot of documentation. I want to assure you that the information they are requesting is required. They have a lot of customer identification requirements due to the United State’s Anti-Money Laundering policies. You will have to provide a copy of your driver’s license or a Social Security card. I say this, because usually it’s MPower’s position to be very careful who you provide this information to.
During the account opening process you will likely also have to fill out an investor profile that details your investment experience, time horizon, and risk tolerance. What you put on this form indicates to compliance personnel what appropriate investments for you might be. Make sure that your representative isn’t putting down you’ve had 10 years of options trading experience if you haven’t. This information needs to be correct so that compliance can use the forms as a way to verify whether what is being sold to you is suitable.
6. Investing for Beginners Next Step: Funding the Account
Typically funding the account works in concert with opening the account. You’ll write a check or have funds transferred in from your bank or another institution. This process is becoming more and more electronic.
I make this a point, because it’s so important to know where exactly your money is going. I said at the beginning that I investigated investments. What I didn’t say was that among the investigations that I focused on a few were Ponzi scheme investments. A person said they were selling something and really took the money and used it on their own lifestyle. Our number one job was to follow the money.
Know that in the investment world there are regulations on how your money has to be handled. If you write a check it has to go directly to the custodian within 24 hours. Most firms don’t accept checks, and they definitely don’t accept cash (cash is for the banking world, not the investment world!). If you have an investment professional tell you to give them cash or a check written with their name on it.. run. I mean that figuratively, but almost literally!
If you give them cash or a check written to them those funds can be deposited in their checking account or they can use it however else they want – they can deposit it in their own investment account, buy jewelry at the local jewelry store.
7. Invest Your Money
Now that you have funded your brokerage account, it’s time to get that money invested. Any funds sitting not in the market aren’t earning any real dollars. Through the process of figuring out your goals, talking with representatives, and the account opening process, you’ve probably already started thinking about what investments you want to invest in.
When it comes to investments, my two cents is that shiny and new isn’t always all it’s cracked up to be. Research shows that traditional index funds and low cost mutual funds, which are tried and true, are likely the most suitable investments across the board and have adequate return potential even though they are lower risk than most investments.
If you want one investment to avoid, it would be low priced, thinly-traded securities. In this post about avoiding pump and dumps, you’ll learn more about why these securities are extremely high risk and how stock promoters use misleading tactics (aka fraud) to entice people to invest.
8. Monitor Your Investments Appropriately
The final message I would like to give about investing for beginners is that you have to monitor your accounts over time and evaluate. As your money grows, you need to think about when is the right time to reallocate money to other types of investments. You want to monitor account statements to ensure your money is invested as you intend.
Remember, though, It is time in the market that matters, and not timing the market that matters. Investing in products that have high volatility will also keep you up checking your account balances.
It’s easy to get caught up in knowing what your investments are doing; however, it’s important to remember that you are investing for the longer haul. If you see your account is down one day remind yourself you aren’t worried about small swings, it’s the long-haul that you’re in for. As beginning investors, don’t waste your time and energy day trading. There is no fundamental get-rich-quick strategy to investing.
Investing is Key to Becoming a Millionaire Next Door
Investing is a key to growing long term wealth, and it is one important strategy in our free resource on becoming a millionaire next door. Becoming a Millionaire Next Door takes focus and time, but it is achievable whether you read this post about investing for beginners, whether you are a beginner or not.
“Spilling The Financial Tea”
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