Investing for Beginners: 3 simple steps

If you’re new to investing and you’re looking for a simple way to get started quickly, there are three steps to the process.  This article will walk you through them in an introductory way.

Step 1. Write a basic investment plan

Step 2. Put your plan to work

Step 3. Keep your plan up-to-date

As a new investor, you might feel intimidated by the sheer complexity of investing in the stock market.  Many new investors worry that their lack of experience will hurt them in such a competitive environment.  But there is some good news for you. As a new investor you have the great advantage of starting with a clean slate. You don’t have any bad habits to unlearn. You don’t have the usual baggage that more experienced investors carry around with them, like

– stocks in your account that are losing money
– false assumptions about how the market works
– overconfidence in your ability to ‘beat the market.’

As a new investor, you can write your plan and build your portfolio from scratch, without having to worry about correcting old mistakes or fixing old problems. You can use the best practices of the top investors, and customize them to fit your style, personality, and aptitude. You can design your plan any way you choose, and you can make it as automated as you want. Here are the basic elements of a simple but powerful investment plan.

Write a basic investment plan.  First, write down at least two goals you want to accomplish with your investments. For example, you might want to retire by age 55. Start with a general goal, and then work on making it more and more specific – and more useful- by putting a number on it, like “I want to have $750,000 in my 401k account by December 31, 2032.” The more specific you can be with this part of the process, the better.

Another example might be something like: “I want to have $15,000 in my Schwab brokerage account by June 1, 2015. This will be used for launching my online cooking class website.” Be specific, be detailed, and be bold. These goals will change and develop over time, and you will be constantly monitoring you progress towards achieving them.

One word of caution: don’t worry about making this step of the process perfect.  Goals change, and your investment plan will change along with them.  The important thing is to get something down on paper that you can develop into a plan of action.  The next step is to implement your plan.

Put your plan to work.  After you finish writing down your goals, you’re ready to start building the portfolio structure. Since you’re a beginner, you have the great advantage of time on your side.  This means that you can afford to take more chances than someone who is already in retirement. As long as you have at least 20 years until you retire, you can put most of your money into stocks, as opposed to bonds or other kinds of investments. Here’s what I recommend:

-If you have 20 or more years until retirement, put 80% of your money into stocks
-If you have 15 – 20 years, put 70% into stocks
-If you have 10 – 15 years, put 60% into stocks
-If you have less than 10 years, put no more than 40% into stocks

For the rest of your money, you can either invest in bonds or money-market funds. I’ll cover that in a later section. For now, you should have an asset allocation strategy that is comprised of 80% stocks and 20% bonds, or whatever your time frame works out to be. Once you have this figured out, it’s time to pick the specific investments.

For the specific investments in your portfolio, I recommend very broad-based mutual funds or ETFs. For example, you could choose Vanguard Total Stock Market Index Fund (ticker VTI) for U.S. stocks. For non-U.S. stocks you could use the Schwab International Equity Fund (SCHF). And for bonds you could use the Vanguard Total Bond Market ETF (BND).

If you already have accounts set up at a brokerage firm, you can get started right away. If you don’t, then take some time right now to figure out what kind of accounts you will need, and which brokerage service would be the best fit for your needs and circumstances.

At the minimum, you’re going to need two types of accounts –  a taxable account and a tax-deferred account. I suggest that you contact your accountant, or if you don’t have one, then talk to your financial adviser. If you don’t have anyone who you can turn to, who you can trust to give you fair advice, then send us an email at info@zeninvestor.org and we’ll help you find a qualified professional who won’t charge you an excessive amount for good advice on how to do this.  (We do not have ‘revenue sharing’ agreements with any outside parties, so we can avoid any conflicts of interest when we make recommendations to you.)

Keep your plan up-to-date.   Once your accounts are open, and your trades are executed, all you have to do is stay on top of things. I recommend that you set up a schedule of regular reviews, perhaps on a quarterly basis at first, and annually after that. During these reviews, you’ll figure out how far your allocations have strayed from their original percentages due to changes in the market. If a fund that you own has changed in price by more than 10% it’s probably a good idea for you to rebalance that position by buying or selling shares.

Once you get comfortable with the quarterly or annual rebalancing procedure, you can sit back and let your money, and the market, work for you.  If you would like more information about how to get started, we offer free consultations to new investors.  Just send your request for more details to us at info@zeninvestor.org.