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Beginner Investing Strategies

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Investors today have more investment options than were available to the average investor just a few decades ago. While having multiple options is usually a good thing, too many options can cause system overload and lead many people to avoid making decisions. Investing is a broad topic that often seems intimidating to people who are new to investing. And that is understandable – there are dozens of investment vehicles, hundreds of investing strategies, and thousands of investment options. Before we let analysis paralysis get the best of us, let’s take a look at investment options for the first time investor.

DIY Investing or hire a financial planner? This article is primarily aimed at someone who plans on starting their own investment plan. However, these steps can easily be done with the help of a financial planner. If you are beginning your journey into investing, you want to choose a financial planner that will walk you through these steps and be able to easily explain why each investment option is good for reaching your goals, and direct you to additional information so you can better understand how and where your money is being invested.

Defining Investment Goals

Choose investing strategies to help reach your goals.

Choose investing strategies to help reach your goals.

The first thing we want to do is look at our investing goals. This will help us determine what type of investment vehicle is best for our investment. Before we go much further, let’s define saving and investing; normally saving is a short term engagement and investing is a longer term engagement.

Saving goals often include major purchases such as a car, down payment for a home, college tuition, major vacation, etc. Many traditional “investments” would be inappropriate for savings because they may lose value. Most savings should be kept in low volatile accounts such as a high yield savings account at an online bank or in a CD. Here is a list of high online bank interest rates that you may find helpful.

Common investment goals include longer term goals such as retirement, keeping pace with inflation, college tuition,and other longer term goals. You will notice that I listed college tuition under both saving and investing. Which group you place each of these under depends on your time frame. You can probably take on a little more risk for an intermediate length investment. For example, my daughter is 8 months old, so I can take a little more risk with college fund money right now than I could if she were 16 years old.

Find an Investment Vehicle

Beginner Investment Strategies

Are you using these investment vehicles?

After determining your investment goals we need to find an investment vehicle that meets our needs. No, I’m not talking about buying a pristine 1953 Buick from the Barrett-Jackson Auction company. I’m talking about something more fun and exciting – things like IRAs, 401ks plans, college saving funds, brokerage accounts, and more. There are many specific investing plans that have tax breaks or other incentives that make them worthwhile to use. For example, IRAs and 401k plans are tax advantaged retirement plans that give users tax breaks either now or in their retirement years. 529 College Savings Plans and Coverdell ESAs offer tax advantages for college savings.

Open an Investment Account

Once you determine your investment goals and which investment vehicle you will use, you should open an investment account. This could be as simple as enrolling in a 401k at work (often done automatically), or starting an IRA, which takes about 15 minutes. Other options include opening a brokerage account. Opening an investment account is often as simple as providing your information, signing a form, and transferring funds into your account. But knowing the type of investment will help you narrow down the best place to open your investment account.

Stocks, Bonds, and Funds, Oh My! The Options are Endless!

There are thousands of places you can put your money, including stocks, bonds, index and mutual funds, REITs, real estate, commodities, small businesses, and more. Again, I will point to the concept of analysis paralysis and the importance of having investing goals. Before becoming overwhelmed by the sheer number of options, take a hard look at your investment goals and eliminate anything that won’t help you meet your goals. You should be able to eliminate a large portion of the available options just by checking them against your investment goals.

The best investment for a first time investor. If you are a first time investor, you are probably doing well to get this far (defining your investment goals, finding the appropriate investment vehicle, and opening a Roth IRA). If you are still overwhelmed with your investment options you may find it best to invest in a target date fund, which automatically diversifies your portfolio to a weighted asset allocation based on your target retirement date. Or, to put it more simply, a target fund is a mixture of stocks, bonds, and other investments that is designed to have more risk while you are young, then gradually transfer your funds to less volatile investments as you get closer to your target retirement date. The management is done automatically; all you do is invest and let the fund manager do the work.

Target date funds have some disadvantages, however. They are often less flexible than an asset portfolio you create yourself, and may come with higher expense ratios than a do it yourself plan. I am not advocating target date funds as the best plan for everyone, but I will say that they are a great place to get started if you simply don’t know where else to start. The idea is to get in the habit of investing and get your money in the game – particularly in accounts that have investment limits per year (401k plans, IRAs, etc.). Get started, get in the habit, then move your investments to a more appropriate investment one you have a better idea of how you can accomplish your investment goals on your own.

Start Investing

At this point you have it all – the goal, the investment vehicle, an open account, and an idea of what you want to invest in. The next step is to get started. If you are just beginning your investments it’s probably not a good idea to try and time the market. Dollar cost averaging through automatic contributions is a great way to get started because it will help smooth your investment returns over the long run. You can often set up an allotment from your paycheck for 401k contributions and sometimes investment contributions to brokerage firms or other investments. Automating your contributions will make it easier to stay on track, just be sure to be aware of any contribution limits that may affect your investment planning. You don’t want to contribute too much money to your investments!

Monitor and Adapt Your Investing Strategies

Ahh, you thought we were done, didn’t you? Not quite. Investing and saving are two different things. It’s easy to set up a savings account or CD Ladder and leave them alone until the term is up. But investing requires a more hands on approach. I’m not advocating day trading, but you do need to be aware of how your money is allocated and how your investments are performing. It’s a good idea to track your investments with money tracking software tools so you can see it all in one place, and it is good to perform periodic spot checks and adjust your asset allocation as necessary. My favorite software program for investors is Personal Capital, a free online investment tool.

Some people prefer to do this on an annual or semi-annual basis, or any time they have a major life event that changes their investment goals. (Maintenance is one of the reasons I recommend a target date fund for beginners; it removes one step from the equation until they can learn more about asset allocation and other investment vehicles).

Does anyone have any other helpful advice for the beginning investor?


Published or updated November 29, 2012.
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{ 24 comments… read them below or add one }

1 basicmoneytips.com

Nicely written article. I think one of the best things to start with is a mutual fund. That is where I started almost 16 years ago fresh out of college. My company was actually doing some work for the company that is now American Century. I was in Kansas City working for them, and I got some literature while there and opened an account. Things are easier now, as there is so much information online.

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2 Ryan

Great tip – I think mutual funds and index funds are a great place to start for beginner investors. I would like to add a little to that though, because not all of them give a complete picture or provide much diversification among types of investments (stocks, bonds, cash equivalents, etc.), which is why I recommended a target date fund for a first time investor who just wants to get started. Most target date funds include different mutual funds so that can help the investor more easily diversify his holdings, but target date funds usually have other investments as well, such as bonds, REITs, etc.

If someone wants to get started with mutual funds they should definitely research their needs and options, then consider the importance of adding additional investments as well, so that all their money is not in one form of investment.

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3 Olivia

I totally agree with your suggestion to go with a target date fund. Vanguard offers one made entirely of index funds that has an astoundingly low 0.20% expense ratio. The only downside to the fund is that you need a $3000 opening deposit. I can’t wait until I have my deposit so I can open mind. It really eases the burden of having to decide how much of each type of fund to keep.

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4 Ryan

Olivia, I think target date funds are a great choice for people who are either looking for a very low maintenance investment plan, or simply don’t know where to start. Obviously, they are not a once size fits all approach to investing and won’t work for everyone, but they certainly have benefits.

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5 Craig

Don’t get so caught up in the terms and lingo but just read basic beginner strategies to learn the basics of what can happen and how you can benefit by investing smart.

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6 Ryan

Definitely. I remember when I was first starting I was so overwhelmed by the options that I almost didn’t do anything. But I sat down with some papers and books and learned enough about the different types of investments to get started. It turns out I didn’t make the best investment decision, but I got started and I learned a lot!

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7 Kevin Khachatryan

I think an article that goes into the differences between saving and investing goals, including how much to allocate into each of these purposes, would be a great article for beginners.

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8 Ryan

Kevin, I previously wrote an article about the difference between saving and investing, but I didn’t go into how much someone should do for either one. That is a good idea. :)

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9 Daddy Paul

The beginning investor just needs to start. A Roth IRA is an excellent vehicle. I would start with a mutual fund. My first recommendation is the Royce Low price Stock Fund RYLPX.
Once you are up to 10K it is time to develop an asset allocation. When your investments are 10 to 25K it is time to look at a large fund family such as Fidelity or Vanguard where you can invest in a host of funds with no fees.
I harp in my articles at length about not investing in penny stocks; single stocks loaded funds and leveraged investments. I am a big fan of no load funds and prefer managed funds over index funds except for large cap US investing where I prefer index funds.

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10 Monevator

Hmm, I absolutely see why you’re suggesting a target fund, so don’t take this as a criticism please.

But just to present the other side of the argument, is it really that much more suitable than say a three-way split between a cheap Total Market ETF or tracker fund, a bond ETF and cash until the new investor has more confidence or learning?

As you rightly say, the expenses will really add up with managed funds and I’m not sure they’re really that much easier to get started with.

I agree they give a sense of confidence to new investors… but is that confidence misplaced?

Just my two cents.

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11 Ryan

I don’t take it as criticism at all, nor do I think a target fund is the best answer for everybody. I just think it is a great option for people who have absolutely no idea where to start. If the decision boils down to “don’t invest at all” or “give me something quick and easy to invest in until I can learn more” then I think target date funds win hands down because they are easy to understand, require no maintenance, and can often be found with very low management fees (some as low as index fund fees).

Your solution would work just as well for someone to get started. That’s the thing with investing, there is no “one-size-fits-all” approach, and there are a number of methods that could work for each situation.

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12 Monevator

“If the decision boils down to “don’t invest at all” or “give me something quick and easy to invest in until I can learn more” then I think target date funds win hands down.”

Agreed! :)

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13 Ted

I think the hardest part for me is the initial decision. That first investment decision (beyond a simple savings account), is somewhat scary, weird, and says a lot. I want to start broad and small. A little in a CD, a little in a simple IRA, and save lots of cash. Build a broad base of cash, have a little safety in the CD, then start pouring money into the IRA. That way, if i make an early mistake, i still have 2 other resources to draw from to build up that base and begin the long process of saving for retirement. Once I have a decent beginning, then I can use some cash to take great risks early.

Also, first thing- make enough money to put away. Yeah, now that we are there- its time to start thinking of smart ways to save.

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14 Ryan

Ted, You can still invest with cash or CDs in an IRA, that way you are getting the tax benefits and locking in part of your retirement investments now – hopefully giving them more time to grow between now and retirement. But I certainly understand starting slowly.

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15 Ted

Thanks for the advice!

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16 Kristine

I think that if someone is a beginner investor, then he/she needs to educate him/herself first. Learning about investing puts the responsibility on the investor, and not the market or the fund manager. It is too easy to blame someone or something when things go wrong, and then too easy to repeat the mistake later.

I agree with Ryan in that there is not a one size fits all option. Do your due diligence. There aren’t risky investments, only risky investors.

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17 Bill

hi there to all i have read every1′s comment & will be doing sum kind of
investment weathere it’s in the share market or sumthings i have noted
down, yes i am a beginner & i think i will do good at this path from knowin of
my knowledge i kind of like have a strong mentality for bussiness in the
hospitality industry iv’e always wanted to do investment & time is around the corner ex. i can come up with great ideas to boom sales, as far as i know money makes money, but i have a question for all if it’s ok, have any of use reached the expectations that you invested in or reached your goal so far,thanks for the advice i will never invest in anything without a financial advicer. cheers

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18 Hammachi Yakimono

Mutual funds charge fees for investing. Minimums are $2500 or more and stock funds don’t beat the market average. By using direct purchase an investor can buy an individual stock for $300 or less, add money and reinvest dividends often with no fees. His chances of beating the market average are much better also.
I own several stocks all in large cap US Corporations. Most have been in business more than 100 years and all are good dividend stocks. I also have some money in no load mutual funds. I am switching some of the stock mutual funds to bonds. I think this will work much better.

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19 Ryan

Great points, Hammachi. Not everyone is disciplined or educated enough in the stock markets to purchase individual stocks. But if you are willing to do the research and track you investments properly for tax reasons, direct purchases can save you money in the long run.

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20 Hammachi Yakimono

I started buying stocks more than 30 years ago. It was hard to get much information back then so I used lists from the almanac. My plan was to buy one stock and evaluate it, then buy another similar stock. I still have the first stock and recently sold the second.
Today there is much more information available, maybe too much. Investing in stocks is much like learning to ride a bicycle or use a computer. That is to learn by doing it. Wells Fargo is one of many stock transfer agents. Their shareholder services has a list of companies offering direct purchase plans. Some like Kraft Foods or General Mills are well known. Wells Fargo might be a good place to start. Information on these plans is available right there. A potential investor could ask a Wells Fargo representative what they recommend.

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21 dennis

Ryan,
have you been recommending any type of dollar cost averaging strategies for people trying to put away a specific amt of money on a monthly or quarterly basis?? i use a process that is a form of DCA that not only buys , but sells at specific junctures nailing down profits in overbought markets and buying into oversold ones…..its just hard to stay disciplined….any thoughts??

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22 Ryan

Dennis, DCA is a rough concept that can work fine by itself, or if you take the concept and run with it, like you have done. The most important factor, in my opinion, is to make sure your actions reflect your investment goals and risk tolerance. It sounds like you have modified the concept for your situation in a way that works for you, which is wonderful. Just be sure to periodically review your trades for performance and compare the results to other possibilities. Investing is a situation where there is no one-size-fits-all solution. :)

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23 Randa

If you start out with a target date fund, do companies charge you for changing the companies you’re investing in at a later date? Also, does anyone know of an IRA fund that is FDIC insured? I’m having trouble finding one at a brokerage firm. I’m looking at Fidelity, ING, or a similar company. Any advice would be appreciated.

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24 Ryan Guina

The only funds that are FDIC insured are typically Certificates of Deposit (CDs) or money market accounts, both of which don’t usually offer very good long term returns – at least, not enough to grow wealth over the long run. If you have risk aversion, then consider visiting with a financial professional who can give you a better idea of how the markets work in the long run.

As far as charging you to change companies, that all depends. Almost all target date funds have some sort of associated management fee which is charged to maintain the fund. If you decide to move to a different company, you can often leave your funds with your old company and just open a new account, or you can liquidate the account (convert it to cash), then transfer the funds to another IRA at a different company (just be sure to do a rollover IRA to preserve the tax benefits; if you cash it out, you may owe a substantial amount of taxes). Some firms charge a small transaction fee to buy or sell shares of a stock or funds, but it shouldn’t normally be a substantial amount. So in most cases, the cost to move your funds to a new brokerage will be either nothing, or very minimal. Just be sure to research this topic before opening your account so you have a better idea of which fees you may owe under different circumstances.

Here is a list of the best Roth IRA companies in our opinion.

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