Home Money How To Get Started Investing

How To Get Started Investing

by Chris Poindexter

I was at a local car dealership not long ago talking to the business manager. She was frustrated with her current broker, indicating she had lost money in 2015. She wanted to switch but didn’t know how. It struck me as odd that the business manager of a fairly large company didn’t understand personal investing but her case is hardly unique. The majority of Americans are not invested in the stock market and I believe that’s because they don’t understand it or the basics of investing.

The reason I think that the lack of basic investment knowledge is holding people back is because one of the most common questions I see is, “I just got X dollars, how do I get started investing?” Obviously we don’t have enough time in one column to download everything there is to know about investing but, if you get a windfall, I can at least get you started down the path. For this article I’m assuming you came into some money but not necessarily so much that you need to hire a Certified Financial Planner to help manage it.

First Pick a Broker

The first thing you’ll need is somewhere to invest your money and that usually means finding a broker. I divide the universe of investment brokers into full service and discount brokers, though many are a hybrid. Full service brokers would be places like Merrill Lynch and Edward Jones. Discount brokers would be firms like Scottrade, Fidelity and eTrade. You can open different types of accounts, including IRAs, but you’ll likely want to start with a regular brokerage account.

Watch Those Fees

The goal here is to dip your toe in the investment waters as inexpensively as possible. Using a broker, like Fidelity, which is large enough to manage its own funds, is sometimes an advantage because many of their funds are marked NTF, or No Transaction Fee. That means it doesn’t cost you anything to buy or sell that fund. ETFs and mutual funds also charge management fees, that’s how they eat, and those fees should be under one percent these days. Do read the fund description carefully as many will have a minimum investment time to avoid a penalty for taking money out, usually a month, and a minimum investment amount.

Decide Your Time Frame

Before you start slinging money around, you need to know when you might need that money. You don’t want to put it in an IRA if you think you’ll need it before retirement. Even before you deposit money in your brokerage account, make sure your emergency fund is topped off. You should have at least $3,000 in ready cash to cover emergencies. That you can keep that in a regular savings account, there’s no need to keep emergency money at your brokerage but these days it’s not a big deal as many also offer banking services, such as check writing.

Decide Your Tolerance For Risk

The terror for most people investing money is the risk of losing money. So, let’s get this out of the way right up front, there are no completely safe investments. Even if you stuff your cash in the mattress, what if your house burns down? Even if it doesn’t, your cash will lose spending power due to inflation. So, there’s significant risk even in doing nothing!

Relatively safe investments are bonds and bond funds. Personally, I like municipal bond funds. The price movement is generally pretty shallow and the good ones pay a cash dividend every month. I like municipal bond funds because that money is going to cities and counties using it to improve roads and make infrastructure improvements that are good for business and it makes me feel good to know I helped make that happen.

If you’re willing to accept more risk and can leave the money invested at least five years, then consider a low-fee market index fund. Market index funds are designed to track the performance of a stock market index, like the Dow Industrials or S&P 500 and most are managed by machines so the fees are quite low. Here’s a warning: At some point you will experience gut-wrenching losses. That will happen but, hang in there five or ten years, and you’ll end up doing okay on a long time horizon.

So your first steps into investing are low-fee bond funds, low-fee stock index funds and a healthy cash emergency fund. See, it’s not that difficult to get started. In the days ahead we’ll be talking about diversification, hard assets and other investment topics but to get started all you need is an investment account and a bit of patience.

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