Before You Begin Investing
A financial journey should begin with developing financial stability first by paying down high-interest debt, building emergency savings, and defining personal goals. Investing should be intentional, guided by specific financial goals, time horizons, and risk tolerance. This article will explain to a beginner investor how to go from holding cash to having an investment account, including general concepts necessary for portfolio construction. Together, we will explore how to build a practical investment system that puts money to work and gives compounding the time to help grow wealth.
Building financial stability often begins by removing roadblocks preventing forward progress. If you have outstanding debt at a high interest rate, make sure to pay off both interest and principal as early as possible. Before investing, it is natural to start with saving. Best practice is to establish an emergency fund – generally three to six months of essential expenses. Savings are best kept in secure, accessible accounts that ideally earn interest to help offset inflation over time. Savings are for stability while investing is for growth. Moving from saving into investing is a necessary progression to more effectively grow wealth.
Design Your Investment Plan
A full investment plan will focus on future goals, such as purchasing property, funding education, or preparing for retirement. Defining clear objectives will determine how you configure your portfolio:
- Near-Term (0-1 year): Money needed in the short term generally should not be overly exposed to the stock market. Keep in cash, high-yield savings accounts, or Treasury bills.
- Short-term goals (1-3 years): Money needed soon is better suited to relatively stable and liquid options such as high-yield savings accounts, CDs, Treasury bills, or short-term government bonds.
- Mid-term goals (3-10 years): A balanced portfolio of stocks and bonds can help grow wealth while managing risk, depending on individual goals and risk tolerance.
- Long-term goals (10+ years): Primarily stock-focused portfolios generally provide the highest growth potential over decades.
Risk and return go hand in hand. The potential for higher returns generally comes with greater risk. Whenever constructing a portfolio, risk tolerance should be considered alongside financial goals, investment horizon, and your financial capacity to absorb losses. Generally, debt instruments (e.g. bonds) have lower long-term growth potential than stocks, yet they can provide income and reduce portfolio volatility. Their risk varies considerably depending on the issuer, maturity, credit quality, and interest-rate environment. Equity securities (e.g. stocks) are considered riskier than debt, varying risk and return depending on the specific asset as well. When designing a portfolio, it is important to consider how risk can be reduced by diversifying across various asset classes (e.g. stocks, bonds, and commodities).
How to Access the Investment Markets
As a general introduction for those who are beginners to investing and finance, one must have a certain type of account in order to access the stock markets. A brokerage is an institution that offers access to investment markets by providing investment accounts (also called brokerage accounts) and coordinating transactions. An account is the structure in which money and investments are held, such as a taxable brokerage account or individual retirement account (IRA). An investment is the asset purchased within that account, such as a stock, bond, or commodity.
Understanding the distinction between a brokerage firm, an investment account, and an investment is the first step toward accessing the investment markets. Here are some options to consider when selecting a brokerage firm.
Potential traditional financial institutions:
- Fidelity: no account minimums, no online commission fees for U.S. stocks, exchange-traded funds (ETFs), and options, access to index funds with 0% expense ratios, and an educational library.
- Charles Schwab: provides comprehensive research and educational materials along with a larger physical branch network offering in-person support as available.
- Vanguard: geared towards buy-and-hold strategies, the platform is designed to discourage emotional day-trading.
Alternative platforms to access investing:
- So-Fi Invest: All-in-one financial application that combines banking and trading, including access to financial planners for account holders.
- Bloom: Designed for new investors utilizing a gaming mentality that helps construct an investment portfolio with the users own ideas.
- Robinhood: Simple and casual mobile investing that features a clean interface and connects a 3rd party AI agent, though it lacks some asset choices and advanced research tools.
These institutions offer different approaches to investing with various account options, some with $0 account fees, no minimum investments, and educational resources. Established financial institutions have longer operating histories and may offer more extensive educational resources and in-person services, while app-based platforms often emphasize accessibility and ease of use. Regardless of the company that you choose to act as your intermediary, make sure to only buy products that you understand with money that does not need to be paid back.
After selecting a firm, you must choose an account type and complete an application with identity verification. Funding a brokerage account commonly involves linking a bank account and transferring money. Some institutions make transfers easier when you already hold a checking or savings account with them. Transferring funds between a bank account and a brokerage account can take a few days to process. Keep in mind that the movement of money is not universally immediate, especially as the transactions become more complex. Once funds are available in your brokerage account, you can research investments, locate their ticker symbols, review the order details, and submit your first purchase. Now that we understand the mechanics behind accessing the market, let’s take a step back and briefly discuss different account types to consider.
Choosing the Right Account Type
An investment account is the platform between funds and transactions. At times, the confusion with different types of accounts creates a large opportunity cost for people who wait longer to begin investing because they do not know how to access the market. While specialized brokerage applications like Robinhood and Bloom allow for an easier access point, it is important to understand some traditional routes to market. The following examples focus on investment accounts available in the United States. Account structures, tax treatment, and regulations differ internationally.
Retirement accounts are important starting points to build for the future and often provide tax advantages. There are individual retirement accounts (IRAs) and employer-sponsored plans (such as 401(k)s). If your employer offers a 401(k), particularly one with matching contributions, consider contributing enough to receive the full available employer match. Begin with what is readily available to you, then branch out as you have the funds to expand your portfolio through different investment vehicles.
Retirement planning should begin early. When opening a retirement account, understand that individual retirement accounts vary by tax treatment. Roth IRA contributions are generally made with after-tax money, and qualified withdrawals are tax-free. Traditional IRA contributions may be tax-deductible depending on eligibility, while withdrawals are generally taxable. Taxes can play a substantial role when investing and begin to impact investors as early as when the first account is opened. Neither a traditional nor a Roth IRA is universally preferable. The appropriate choice depends on current financial circumstances, eligibility, and expectations about future taxes. Consider discussing these factors with a qualified tax or financial professional before deciding. Stay informed and ask questions to best navigate the ecosystem.
Retirement accounts have contribution limits, eligibility requirements, and withdrawal rules designed to encourage long-term savings. For investing that targets shorter time horizons, consider other more flexible brokerage accounts. A general taxable brokerage account will allow for more flexibility in investing and easier access to personal funds, while not providing the same tax benefits that other more structured accounts could offer. Remember that your account is the container for funds and an access point to the market, this is not the same as the investment. Once you have a brokerage account, it is finally time to begin investing.
Building Your Initial Portfolio
For anyone executing their first transaction in the market, it is best to understand what it is that you are buying. I like to recommend you look into ETFs. An exchange-traded fund (ETF) is a fund that holds a collection of various assets traded under one ticker on a stock exchange like an individual stock. Many ETFs are designed to track an index, allowing investors to purchase exposure to tens or hundreds or even thousands of securities through a single investment. An ETF can be designed to track many different categories across different sectors, giving investors exposure to a broad group of securities through a single investment be they stocks, bonds, commodities, or currencies. However, not all ETFs are broadly diversified; some concentrate on specific industries, countries, or investment strategies.
Diversification is an important financial concept that should be incorporated throughout a portfolio of investments. Diversification does not eliminate all risk. It reduces the concentration risk of any single company, industry, country, or asset disproportionately damaging a portfolio. If news comes out about a breakthrough in technology or a new medical regulation, then those respective industries may have price movements within the stock market. Spreading investments across asset classes, industries, and geographic regions can help reduce exposure to individual sources of risk. Diversification cannot eliminate systematic risk, which affects markets broadly and must be considered when constructing a portfolio. As your financial knowledge develops, you will discover additional ways to use diversification to manage risk. Utilizing ETFs is a good way to begin to diversify in order to minimize concentration risk within a portfolio.
One can start investing with an ETF that follows a major index (e.g. S&P 500 or Dow Jones). By purchasing this security, an investor is able to own a very small part of many different companies. This means that the money invested into one asset will follow the overall movement of that market index. Though one such ETF is managed to align with a market index, returns can vary due to fees, taxes, trading costs, and rebalancing errors. The following are examples of ETFs that track major market indexes.
- SPY — S&P 500: Tracks an index of 500 large U.S. companies.
- DIA — Dow Jones Industrial Average: Tracks an index of 30 prominent U.S. companies.
- VT — FTSE Global All Cap: Tracks an index representing large-, mid-, and small-cap companies across developed and emerging markets around the world.
These examples illustrate how the choice of ETF determines to which parts of the market an investor gains exposure. An investor can therefore use different ETFs to diversify across companies, industries, countries, and asset classes. It is necessary to understand the specific holdings within an ETF to avoid overlap between different investments when targeting diversification. Continue to research different ETFs that align with your personal investment goals to continue constructing your portfolio.
An Example Beginner Portfolio
Let’s build an example portfolio together. For this example, the investor is a 25-year-old saving for retirement with a moderate risk tolerance. This hypothetical investor has established emergency savings and has no high-interest debt. He transfers $500 into a Fidelity traditional individual retirement account. That $500 in the brokerage account sits in cash until he chooses to purchase an asset with it. Since this investor is constructing a portfolio with a long-term time horizon (~40 years), he wants to invest primarily in equities with higher growth potential and has chosen to focus on diversifying through ETFs.
Example Beginner Long-Term Retirement Portfolio:
- Total Stock Market ETF (e.g., VTI) – 60%
- Total International Stock ETF (e.g., VXUS) – 30%
- Total Bond Market ETF (e.g., BND) – 10%
Once assets and allocations are decided on, our example investor will search for the ticker symbols VTI, VXUS, and BND through his brokerage platform. Assuming the brokerage supports fractional ETF shares, the investor can place an order to purchase $300 of VTI, $150 of VXUS, and $50 of BND. These percentages represent target allocations and do not need to be maintained daily. As market prices fluctuate, the portfolio allocations will shift. Investors can periodically rebalance to restore their target allocations. Now that a portfolio is constructed, continuing to contribute to the investment account is fundamental to growing wealth through more than just the dividends earned and price appreciation.
Maintaining & Rebalancing Your Portfolio
Once a specific portfolio is designed and executed, there are different methodologies on how to continue investing. Dollar-cost averaging (DCA) is one such portfolio strategy that suggests investing a fixed amount of money at regular intervals regardless of whether prices are rising or falling. This is a reliable strategy when consistently adding contributions to a constructed portfolio, though it is not necessary in every situation. Regardless of whether you choose to follow this specific strategy or another, you should continue to add funds into your investment accounts and purchase assets. Further exploring other portfolio strategies and rebalancing methods can help enhance personal investment plans.
Rebalancing involves adjusting a portfolio when its investments move away from their intended allocations. For example, if stocks grow to represent 95% of a portfolio originally allocated 90% to stocks and 10% to bonds, an investor might direct new contributions toward bonds or sell some stocks to restore the original balance. Rebalancing can help maintain the intended level of risk.
Why Starting Early Matters
Open a brokerage account today. The earlier you begin investing, the more time that your wealth has to build. This is due to the concept of compounding which you can read more about here. The example below illustrates this power by showing how much you would need to invest each month to reach a balance of $500,000 or $1 million by age 65, depending on what age you first start to invest. This illustrative example assumes a constant 7% nominal annual return, although actual investment returns fluctuate from year to year.
| Age You Start Investing | $500,000 by Age 65 | $1,000,000 by Age 65 |
| Age 18 | $114/month | $228/month |
| Age 25 | $190/month | $381/month |
| Age 35 | $410/month | $820/month |
| Age 45 | $960/month | $1,920/month |
| Age 55 | $2,889/month | $5,778/month |
These hypothetical calculations assume a constant 7% nominal annual return compounded monthly with contributions made at the end of each month. They exclude taxes, fees, inflation, or variation in actual market returns. Actual investment returns fluctuate, and future results are not guaranteed.
Building wealth begins with a simple sequence: spend less than you earn, eliminate expensive debt, build a cash reserve, and invest the surplus consistently over time. You do not need to be wealthy to begin investing. You need a system that allows you to consistently put money to work. Investing is not primarily about predicting which asset will rise tomorrow. It is about repeatedly putting capital to productive use, allowing time and compounding to work in your favor.