Investing for dummies is not a one-size-fits-all strategy for wealth building.
We all want our money to make money. But there are rules to investing that beginners should know to be successful.
Investing isn't complicated as long as you arm yourself with information similar to the book “Investing for Dummies” and a little patience to watch your money grow.
Let's get started with this guide to investing for beginners.
Investing for Dummies: 9 Facts Every Beginner Should Know
1. Build your savings first.
Savings should come first. Every investor should have an emergency savings fund to cover expenses during an unplanned event like car repair, unemployment, medical bills, or home repairs. Generally, at least three to six months' worth of living expenses is a reasonable goal. The national savings rate is currently 0.30% APY, so it's best to consider online savings accounts that typically offer better rates.
Savings should come first and here is why.
- It's always important to have easy access to cash when you need it.
- When you invest your money with a brokerage firm, it can take a few days to access your money compared to a savings account.
- Savings involves minimal risk because your funds are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per FDIC-insured bank, per ownership category.
- Investing does not guarantee a return, and it is possible to lose some or all of the funds invested.
- Savings accounts earn a lower return than investments but you will always earn interest simply by depositing money into your savings account.
Here's our list of the best high-yield online savings accounts.
2. Pay off high-interest debt.
It's important to understand how to manage debt. By paying off high-interest debt in full, you’ll reduce the total amount you owe faster and free up money to put toward savings or investing.
Having a good credit score also reduces the amount of interest you pay on your debt which results in significant savings. Credit card debt can carry high-interest rates that result in your paying significantly more than the original purchase price of the product or service purchased with a credit card.
If you make monthly payments on debt try to limit debt to mortgage or HELOC debt that allows you to deduct the interest on your primary and secondary residence. Even student loan debt interest may be deductible up to a certain amount.
3. Start with the best wealth-building investments.
Ownership in assets is the most common way anyone, at any level of income, can begin to build wealth. The most common wealth-building assets are:
- Stocks – a piece of ownership in a company.
- Real Estate – property, land, buildings, air rights above the land, and underground rights below the land.
- Bond – a piece of debt of a company.
- ETF – a basket of stocks or bonds.
- Mutual Fund – a basket of stocks or bonds.
Stocks must be purchased through a broker. The first thing you need to do is open a brokerage account with a brokerage firm. When you buy stocks, you purchase a personal stake in a business.
Steps to take when investing in stocks:
- Decide what stocks you like by researching the company.
- Make a list of companies to learn about and pay attention to the price of the stock to determine whether the price is reasonable and how the price fluctuates.
- Do your research by looking at a range of factors — such as the company’s financials, historical data, leadership team, and competition in the company's annual report.
Company research tools:
Publicly traded companies must file an annual report showing the balance sheet, income sources, revenues, and expenses on a Form 10-K.
- Company website – Most companies post their annual report on their website under a section labeled “For Investors” or, “Investor Relations.”
- EDGAR – The Securities and Exchange Commission offers the EDGAR database that provides free public access to corporate information, allowing you to research a public company’s financial information and operations by reviewing the filings the company makes with the SEC.
Tools to Monitor Stock Price:
If the stocks that interest you are in the higher price range, such as Tesla or Amazon, consider purchasing fractional shares where you own a percentage of equity that is less than one full share. Not all brokerage firms offer fractional share purchases.
Investing in real estate can take several forms. When you purchase land, homes, office, or retail buildings to rent, lease, or sell, they are considered investments.
- One of the primary ways investors can make money in real estate is through rental property that can create an ongoing income stream.
- Real estate flippers can purchase undervalued fixer-upper property, make some improvements then sell it.
- Investing in real estate investment trusts (REITs) is another option. REITs are companies that invest in real estate such as single-family homes, apartments, retail locations, hotels, offices, warehouses, or shopping malls. When investors purchase stock in the REIT, they become part owner of the company.
DiversyFund is a REIT that makes it possible to invest in Commercial Real Estate making it possible to diversify your portfolio. Everyday people can invest in apartment complexes through the REIT with as little as $500. Diversyfund reinvests dividends, so investors won't be able to realize income from the investment until the properties are sold.
For people interested in real estate investing, the Reddit real estate investing forum lists several investors, deceased and living, that have been extremely successful.
Bonds are typically considered less risky than stocks plus they yield income. When corporations and governments (city, town, state, or federal) want to raise capital, they will issue bonds. The bond issuer borrows capital from the bondholder and makes fixed payments to them at a fixed (or variable) interest rate for a specified term. Bonds can be purchased from brokers and U.S. Treasury bonds can be purchased directly from the government.
An exchange-traded fund (ETF) An ETF is a collection of assets that may include stocks, bonds, commodities, or foreign currency. ETF stocks trade on the stock market over the course of the trading day much like other stocks. ETFs provide greater diversification than owning an individual stock.
Main points on exchange-traded funds:
- Actively bought and sold throughout the day
- Passively managed
- Prices go up and down throughout the day
A mutual fund is a collection of stocks, bonds, or other securities owned by a group of investors. Mutual funds share certain similarities with ETFs, but are actively managed by fund managers that pick different stocks on a daily basis in an attempt to beat a benchmark index. Your profits come from dividends, interest income, and capital gains.
Main points on mutual funds:
- Bought and sold once per day
- Actively managed
- Prices are set once per day after the market closes
Below is a diagram of how mutual funds work:
4. Consider an online robo-advisor.
You don't have to know everything about investing before getting started. While you're educating yourself and discovering your investment style (risk tolerance), using a robo-advisor offers a way to invest without thinking about it.
Robo-advisors are automated investment management services. Your money is invested for you based on your specific goals. Most robo-advisors allow you to be hands-on like picking stocks on your own, or they will choose the stocks for you, depending on you're how much risk you're comfortable with.
Here are our top robo-advisor picks:
SoFi Automated Investing offers beginning investors access to real-life financial advisors for free. SoFi allows investors to be hands-on or hands-off with pre-built portfolios based on risk tolerances and personal finances. Plus, SoFi offers investors the opportunity to invest in newly public companies with IPO investing.
- Suggested account minimum $100.
- Broad range of low-cost investments.
- The ability to invest in fractional shares of company stock.
- Multiple investment choices like Stocks, ETFs, cryptocurrencies
- Cryptocurrency trading available for bitcoin, ethereum, and other digital assets.
- Access to Certified Financial Planners at no additional charge.
M1 Finance is a type of hybrid robo-advisor that offers blend of automated hands-off investing with a wide selection of tailored investment portfolios and hands-on investing with the option to pick individual assets to create a customized portfolio of your choice. Buy fractional shares for as little as $1 worth of a security.
- Suggested account minimum $100.
- Get started quickly with pre-baked Expert Pies designed for a multitude of goals or investment styles.
- Offers 80+ tailored portfolios, spanning a variety of investment strategies.
- Fractional shares let you buy as little as $1 worth of a security, regardless of price.
- Option to choose from 6,000+ stocks and ETFs to build a customized investment plan.
Acorns offers one of the best hands-off approaches to investing. Acorns is well-suited for beginner investors who don't want to think about setting money aside every month to invest. Plus, there's lots of educational content designed for beginners.
- Suggested account minimum $100.
- Acorns uses a series of questions to determine how to allocate your assets, then assigns your funds to a specific portfolio of ETFs.
- Automatically invests spare change in a diversified portfolio.
- All-digital banking with a metal debit card that saves & invests for you.
- Easy, automated way to invest for retirement.
- Earn money feature adds money to your Acorns account when you shop with one or more of 350+ top brands like Walmart, Chevron, Apply, Sam’s Club, Sephora, Kohl’s, Old Navy, Macy’s.
- Diversified ETFs which include more than 7,000 stocks & bonds.
Axos Managed Portfolios builds portfolios that align with each investor's risk tolerance, time horizon, and investment return goals supporting personal investment accounts, traditional IRAs, Roth IRAs, and SEP IRAs.
- Suggested account minimum $500.
- Earn a $100 Bonus to open new account.
- Highly customizable portfolio options.
- Goal-based planning tools.
- Fractional shares mean all your cash is invested.
- Low account minimum and fees.
- Robust goal-based tools.
5. Set realistic expectations for returns on investment.
Investing may help you reach long-term goals, such as paying for a child’s education or planning for retirement. But you must set realistic expectations.
Stock market returns vary, however, the stock market has returned an average of 10% annually over the past 50 years before inflation. It's important to keep in mind that purchasing power is diminished by 2% to 3% every year due to inflation.
The 10% average return is based on the S&P 500 index which comprises about 500 of America's largest publicly traded companies and is considered the benchmark measure for annual returns.
Note: Short for Standard & Poor's 500, the S&P 500 was introduced in 1957 as a stock market index. A market index is a collection of investments, such as stocks, that are grouped together to track the performance of a particular segment of the financial market. The S&P 500 provides financial data, credit ratings for investments, and various equity indexes.
There's no crystal ball for knowing your return on investment. But knowing how an asset's price behaved under certain circumstances in the past, provides some insight as to how it might perform in the near future.
6. Max out your 401(k).
One of the most common ways for beginners to start investing is an employer’s 401(k) plan. A 401(k) is a company-sponsored plan where the employee contributes and the company matches the contribution. If your employer offers a rare 100% matching benefit make sure you maximize the amount of money you contribute.
According to T. Rowe Price's 2021 benchmark report, the most popular match offered by employers is 50% up to 6% of the employee's pay. Whatever your employer's contribution, never leave free money on the table.
Self-employed people can also take advantage of a 401(k) designed for solo business owners. The self-employed 401(k) works the same way as a standard 401(k) in many ways.
Participants make contributions from their pre-tax earnings, and those savings can be invested in a range of vehicles to grow tax-deferred until withdrawn in retirement. With the self-employed 401K, business owners have a higher earning potential because they can set aside more money each year than they could under a traditional 401(k).
7. Diversify investments.
When the value of one asset rises, the value of another may fall. A diversified portfolio can lower overall risk by offsetting losses, especially during a financial downturn. A typical diversified portfolio has a mixture of stocks, fixed income, and commodities that don't move in tandem in different market environments.
Diversification is a powerful investment strategy that helps to reduce risk.
8. Allocate your assets.
Asset allocation refers to diversifying your investments among a variety of different types of assets. How you divvy up your investments can help protect you from large losses in your portfolio. Spreading your money among different assets like equities, fixed-income, and cash equivalents will help minimize losses during a market downturn.
Each of the asset classes may react differently. Younger investors have a longer investment period in which to make up losses if they occur, so they can invest in a greater percentage of equities.
9. Start with the buy-and-hold strategy.
Buy-and-hold is a long-term passive investing strategy that involves purchasing securities and keeping them in your portfolio for a long period of time. You simply pick a stock or ETF, buy it, and hold onto it for years.
How long you hold onto stocks depends on why you're investing. For instance, if you use the buy-and-hold strategy as your retirement plan, you may hold stocks for decades until you decide to retire.