Investing For the First Time: Make it Easy
Investing in the stock market for the first time is exciting and scary all at once. What a big, glorious step you are taking for your financial future!
It can be easy to get overwhelmed with the myriad of choices you are confronted with: what kind of stocks to buy, what tool to buy with, how much to buy of each one. I find these questions are much easier to address if you have thought about a few core principles first.
What are your investing goals?
Do you want to build your retirement nest? Are you planning to buy a house soon and need a downpayment? Are you starting to save for a newborn baby’s college expenses? Or maybe you want extra income to help with your living expenses.
When you know why you are investing and what your goals are, it narrows down the scope of stocks and plans that you are going to use. It creates a focus so that you can automatically discard some stocks and hone in on other ones.
I have a list of my short and long term goals that I want my portfolio to achieve, so I don’t lose sight of my plan and can keep focused when the market is creating a buzz. Try writing your goals down as well, starting with short term goals and moving to long term goals.
My goals look like this:
- Build a portfolio that generates me a monthly income? (also called a dividend portfolio)
- Max out my IRA contributions
- Build a huge travel savings account
- Build a true emergency savings fund with 6 months living expenses
- Think about saving for a permanent living situation… as in, I rent now, maybe I’ll buy something later?
Goals change all the time, don’t be afraid to dream as big or small as you want. My fifth point has a question mark because my partner and I haven’t decided if that is something that is truly important to us yet. Even so, we are going to plan for it, and if we decide not to go that route and buy a home, we can re-allocate that money to a different strategy that suits our needs better for our new goal.
My first point has a question mark beside it because I don’t know what my income will look like later in life. If I am making more money in the next year or so, having extra monthly income won’t matter as much to me because I’ll have enough to pay my bills. Extra income now would be amazing… seriously… anyone who wants to donate money to us, send it this way. We’re doing this for free!
The point is to sit and think about what you want your life to look like. What things are important to you? What do you want to spend your time and energy doing? Then we can start to make a plan of attack around those goals and begin the process of building the life you want to live!
Deciding Your Risk Tolerance and Timeframe
If you are in your 20s and saving for retirement, you can build a risky portfolio with a high percentage of stocks and a low percentage of bonds because you aren’t going to touch it for decades. You can afford to take on more risk for more reward with plenty of time to recover from the market lows.
In the investing world, investments that have the potential for higher returns come with higher risk. Stocks have the potential to rise or fall dramatically in price, making your rate of return unknown. It has no set interest rate or guarantee of overall performance. Unlimited potential = high risk.
Bonds and Certificate of Deposits have a set interest rate. This rate doesn’t vary at all or only varies slightly so your potential for high returns is limited. Limited potential = low risk.
If you are in your 30s and want a downpayment for a house, you don’t need anything risky. You need something safe and liquid, like bonds and Certificate of Deposits, also called CDs, so you can use it for the house without being tied up in retirement with unnecessary withdrawal fees.
The more liquid an investment is, the easier it is to get from your investment account, into your bank account. In retirement accounts, there are rules and regulations and fees that prevent you from withdrawing your money before you retire. These funds are not liquid.
With CDs and bonds, you can buy them with varying cash out dates, known as maturation dates, so that you can get all the money plus the interest on them out in a few years. This makes them more liquid than retirement accounts.
Based on your goals, you should be able to determine a timeframe for each one and set up your portfolios to meet each goals’ need.
How involved do you want to be in your retirement strategy?
Financial advisors, self-directed online platforms, and robo investors are all options for investing your money.
Choosing which one is all about how confident you feel in your knowledge and understanding of the stock market and how much time you want to dedicate to managing your investments.
Financial advisors can be hired through financial institutions to manage your investments for you. You pay them a fee and probably some commissions, depending on whether they are a fiduciary or not, and you don’t have to think about it anymore.
Choosing an advisor who is a fiduciary is a top priority. A fiduciary is an advisor who is legally obligated to act in your best interest and not invest in underperforming, high fee stocks for their own benefit. The National Association of Personal Financial Advisors (NAPFA) website makes it easy to search for fiduciary advisors in your area.
Fun fact: Fees of 0.75% equates to a 30% smaller retirement fund in a mere 20 years.
This is why having a fiduciary who doesn’t charge excess fees or put you in high fee/low return investments is so critical. Small percentages make a massive difference when compounded over decades.
Do-it-yourself options are available through online trading platforms. These platforms vary in customer service, trading options, fees per trade, and minimum starting amounts. I am not affiliated with this company in any way, but based on my own experience with Scottrade and TD Ameritrade, if I had a time machine and could go back to 18-year-old Sarah and tell her what I know now, I would have told her to open up a Vanguard account and stick with it.
I currently use TD Ameritrade and I love it to death now, but in the beginning, for those not so sure of their decisions, who don’t know a lot about trading fees, Vanguard is the best choice. They are a low fee, customer-owned company that offers mutual funds and indexes for rates as low as 0.03%.
For more experienced, hands-on investors, I would recommend TD Ameritrade. It’s my current platform and has been for a decade. There are a lot of educational resources and current news articles to help with research.
That’s not to discount the other platforms like Scottrade, Etrade, Ally, Merrill Lynch, Fidelity, and Charles Schwab just to name a few, I just have no personal experience with them and can’t give an honest review of them. Do your research and choose a platform where you feel comfortable and taken care of.
For those of you who don’t want to hire an advisor or use an online platform, there is a newer trend that is available called robo investing. Apps like RobinHood, Betterment, Wealthfront, and even micro investing apps like Acorns are all examples of robo investors.
These platforms are managed for a low/no fee by AI robots or a company manager for all the accounts. Most of them are put into something called a Target Date Fund which automatically diversifies your portfolio based on your age and risk tolerance. You set up an automatic transfer from your account, select your age and risk tolerance and that is literally it. The Robo investor does the rest for you and you don’t have to worry about rebalancing or moving things around. Set it and forget it investing.
Fun fact: About 90% of actively managed funds underperformed funds managed by robots or passively managed funds.
All these options are good options. It all depends on you and your goals. The fact that you are thinking about your financial futures at all is amazing.
The Best Investing Advice I Ever Received
“Never invest in a business you can not understand.” – Warren Buffett
This step mainly applies to those of you who have decided to manage your own portfolio without the help of an advisor or a robot.
If you use an advisor, they will talk through all your options with you and make the purchases for you. If you are using a robo investor, chances are you’re in the target date funds we mentioned earlier.
Those of you who are managing your own account, pay attention.
This is huge. I can not stress how important this is.
When you are investing, whether as a beginner or an expert, do not invest in something because you read about the company in an article online, heard about it from a friend or a parent, saw it was mentioned in the news, or saw an advertisement on tv and thought it seemed like a good company.
DO NOT DO THIS… EVER.
NEVER NOT ONCE.
Unless you live and breathe information on the mining industry and know a ton about it, don’t buy one single stock in the mining industry.
If you aren’t an expert in renewable energy wind turbines, don’t buy one single stock in the wind turbine industry.
It is too tempting to open a trade account, put money in there and go hog wild buying small amounts of companies you know nothing about but heard from an analyst on the news that it was a “for sure buy”.
Now, don’t confuse what I mean here. I know that down the road, you are going to level up and be able to analyze stocks and make smart, informed decisions about them even if you aren’t living and breathing that wind turbine life.
What I mean is, you are just beginning your financial journey and since this is the first step into the investing world, I am assuming you aren’t experts in this yet. So, you need to be a bit more cautious with your choices. This is hard-earned money you are putting out into the stock market to do work for you. Don’t squander this money. Put it somewhere warm and loving and let it grow into a money tree that gives hundred dollar bills for years and years to come.
This is why you shouldn’t make rash decisions.
What Should Your First Investment Be?
What kind of stuff do you enjoy? What things do you know about, what are you interested in, what companies do you use?
The answers to these questions should lead you to your first investment choice and brings me to my final point.
Your first purchase in the stock market is probably going to be a blue-chip.
A blue-chip stock is a well-established company that has been operating for a long time and has a stable financial income.
These companies are household names that most everyone has encountered in their daily lives. These are companies with products that we use and know about and most likely have come to trust and rely on without even thinking about it anymore.
Coca-Cola, Proctor and Gamble, IBM —these companies may not mean much to you on the outside, but once you do a bit of research and realize how many things they make and produce that you use every day you will start to see what I mean.
Proctor and Gamble make all sorts of household items, as well as medical supplies. Coca-Cola is a beverage industry giant. Everyone has enjoyed an ice cold coca-cola at some point. IBM is a computer services tycoon. There are so many huge companies like this: McDonald’s, Walmart, Boeing. The list is massive. Check out more blue-chips here.
Better than buying a single blue-chip is buying a mutual fund or an index full of blue-chip stocks. These investments are beneficial because you buy one fund that is made up of lots of individual stocks. It’s instant diversification. They generally are low fee investments as well. If the idea of picking your own individual stocks sounds daunting, then mutual funds and index funds are more than likely for you.
Your first investment should be something you feel good about.
Think of the first purchase as a learning experience. Get to know your platform, buy a blue-chip stock or a fund full of them that you are familiar with and already know and trust. Get used to the steps you take to buy those stocks, see where your orders go on your website, click around and get used to the platform you are using.
By making your first buy a blue chip, whether it be an individual company or a fund full of them, you almost guarantee growth in the long run and it gives you the chance to grow your money while you are learning and researching more companies and learning the ins and outs of the stock market. You should be making money while learning how to use the stock market to make more money. It is a win-win.
The Everyday Experts investment disclaimer: Because the advice and content on this site is based on our personal experiences and opinions, it should not be considered professional financial investment advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. Our thoughts and opinions will change over time as we learn new things and gain new knowledge.