How To Begin Investing When You’re New

Unless you’ve been hiding from all things money, you’ve probably heard that you should be investing.  But how do you begin investing when you’re new?  Although this has probably been drilled in over and over that you must invest, there is usually no one there to hold your hand while you take that first step.

For some of you, automatic 401k/403b accounts have been set up at your employer and you may be inadvertently investing whether you actively chose to or not.  And for others, well, you just haven’t taken the step.

At least not yet.

The problem is, unless you’ve learned how to invest you’re probably doing it wrong.  Well, let’s correct that:  you’re probably not doing it in a way that’s in your best interest.

And who’s to blame you?  Unless you’ve opened your eyes to what’s out there, you’re simply unaware.  The world is filled with other people who want your money.  They are highly trained professionals who know how to fund their own retirement accounts from the money you contribute to your own.

And they’ll gladly take if from your accounts if you let them.

The world is also a busy one that demands a lot of your time and money.  So it feels like you don’t have much to invest or the time to do it properly.  Often, you’re left with nothing in your bank account after all the bills have been paid, the kids are taken care of, and you’ve shifted those dollars around among the million things out there demanding your attention.

And to top it all off, when you do find the extra money, you’re really not sure what to do or where to begin, correct?

But it’s important, right?

Statistically speaking, there are many out there who cannot come up with $500 in an emergency fund for those unexpected nasty surprises in life.  Also, people are generally underfunded in their retirement accounts.

And guess what?  Come retirement time many are going to find out that they’re not going to have that Golden Years glorious retirement everyone promises.  You know, the one you see on commercials.  Funds are going to be tight.  Really tight.  Right when you have no more income regularly coming in.  Well, except for Social Security, right?  Well, I’m sure you’ve figured out by now (hopefully) that this is barely survival money.  Not the luxurious life you had expected.

Sounds grim, huh?  Well reality can bite sometimes.  Because the truth is no one cares about your money more than you do.  No, wait.  Remember what I said earlier?  There are companies out there that have a vested interest when it concerns your money.  Advertisers spend massive amounts of money to figure out how to put your money (and lots of others) into their own pocket.  Mutual funds will gladly siphon tens of thousands, heck hundreds of thousands, from you if you let them.  So they definitely care about your money and what you’re doing with it.

So you should care more about your money as well.  Simply, you need to learn to invest.  And that’s why you’re here, right?  To know how to begin investing when you’re new.  You want your financial life to be more disciplined.

To have your money work for you instead of someone else.  You want to invest a better way.

But unless you learn about investing, unless you spend just a little time picking through the basics (and they aren’t hard by any means), your education will remain minimal and others will benefit from your lack of experience.

Don’t let them.

Unless you’re a bit more aggressive with your learning and investing, you’re probably not doing enough.

And guess what?  The basics of understanding this can put hundreds of thousands more in your pocket.  Forget about complicated rituals.  Let’s keep it simple for now.  So, no excuses for not doing enough, right?

So, let’s fix that.  Right now.

Let’s Start Investing

Figure out your starting point – what are you going to invest in?

One of the first things you need to decide is what style you’re going to invest because there are a few flavors and varieties out there.  Let’s look at a few basics first.  Now let me remind you, these are “loose definitions” and certainly not complete.  My goal is to bring you up to speed, not bore you with the vast amounts of info out there!  (There are literal books about each style!)

So let’s look at where a new investor may start for now.  The following are easy to set up, generally don’t require a lot of time to manage, and can be considered a complete strategy (you don’t need to get fancy unless you want to!).

• Stocks
• Mutual Funds
• Employer Plans
• Index Funds
• Dividend Stocks
• ETFs

Stocks

• These are the beauties we all love!  Or hate.  This is what you hear about when people talk about investing!  Honestly, this was my first introduction as well.  When my co-worker began looking up her Hershey stock many years ago, I became hooked!
  • You can make a lot or lose a lot depending on the stock you buy.
  • When you buy a stock you’re actually buying a little piece of that specific company – when they do well, you generally do well. But these can work the other way too if the company fares poorly you may lose money.
  • Stocks like Apple (AAPL is the “stock ticker” or symbol for it), Amazon (AMZN), and Netflix (NFLX) could have made you rich had you bought in at an early stage. Heck, even buying now and holding for a long time (not a recommendation, by the way!) “could” bring great returns as well.
  • There are plenty of other stocks that have gone bankrupt so these can certainly be extremely risky!
  • It’s wise to do an in-depth analysis on the ones you want to make sure you’re buying a strong company (so this can be for the more intermediate investor – we’re not going to get into the mechanics right now).
  • You can move in and out of them any time you want during stock market hours (09:30 – 4 pm EST, 0630 – 1 pm PST). Many brokerages nowadays have eliminated their trading fees but this can certainly change.  Not too long ago I was paying about $10 to buy and $10 to sell.

Mutual Funds

• These are very well known.  And well marketed.  They are professionally managed funds you buy as a “package deal”.  They generally consist of multiple stocks (bonds and other investments) as one “unit”.  Meaning when you buy a mutual fund, you’re actually buying a set of products that make up one fund.  It’s like “one box filled with various investments”.  The way I think of it is “you buy the box, you get all the cereal it contains”.  So, no you can’t pick out the raisins if you don’t want them.  You get what you get.  Or pick another box.  This was considered a solution to investors who didn’t want to take the time to choose a smart portfolio of many stocks on their own.  “They” would do it for you.  And, yes, there are many varieties of mutual funds out there.
  • Many investors participate so you can be one of hundreds of thousands of other people involved. You share the risk with lots of other people.  You’re all sharing from the same giant box of cereal.  There are more than 8,000 different mutual funds out there so needless to say the variety of cereal out there is truly dependent on your taste.  There are some estimates that over 56 million households in America participate in the mutual fund industry.
  • These are offered in regular brokerage accounts as well as many employer sponsored plans.
  • When you invest in these funds, you’re buying a little piece of each company the mutual fund has. So if you put $100 in, you’re buying almost $100 worth of all those stocks together (almost because you have to minus the expenses which we’ll get into later).  Your money is spread out across this box of cereal.
  • These funds may have an active management leader. He/she is someone who tries to have their fund perform well according to its “set purpose”.  Meaning they’re trying to accomplish a specific goal.  For some, they’re value-driven (investing in stocks deemed to be undervalued) trying to eke out a good deal and ride the profits higher.  Others might have their emphasis on growth long-term (designed to appreciate over time).
    • The downside is you will have to pay the privilege of them managing your money.  This means the costs could be high.
  • The “benefit” of these funds is that you’re trying to diversify your investments (not having all your money in one area) because of all the various stocks/bonds the mutual fund holds (so you’re not trying to pick individual stocks/bonds yourself).
    • Instead of buying a grain cereal and having to add your own fruit, you’re buying one fund that has raisins and pecans whereas another fund might have all those plus 20 other special ingredients to keep you diversified (satisfied).
  • You’re then able to capture the return of a “segment” of the market (hopefully without being at more risk because you tried to choose yourself as an amateur). Smarter people are choosing for you.  The goal behind that is safety.
    • The idea is that they know the perfect blend of ingredients versus you just guessing what you’ll like.
  • Mutual funds trade your cash end of the day. Meaning you can only get in at the close of the day.
  • These funds tend to have a bit higher turnover (trading in and out of stocks) and other fees which get passed along to you, unfortunately.
    • One year you might have liked the brown sugar they included in your cereal but next year it may be gone in favor of honey. And of course, you’ll have to ultimately pay for the change.
  • Many mutual funds have a hard time beating the S&P 500 (an index that measures the performance of 500 large U.S. companies. It is often used as a yardstick of the U.S. economy to compare against other funds).  This is generally the case because they usually have much higher fees associated with them.

Employer Plans

• These typically include the standard 401k (for-profit organizations), the 403b (for non-profit organizations), 457 (state and government-related)
  • These are very popular and very well known.
  • They often generally consist of the above-mentioned mutual funds.  You are often just offered a few to choose from.
  • These plans are easy to get started. In some organizations, you are even automatically enrolled when you’re hired.  At times you may have to sign up for it.  And, unfortunately, not all employers offer it.
  • At my hospital, you are automatically enrolled upon hire (unless you opt-out which I wouldn’t recommend) with a 3% contribution rate into what’s called a target-date fund (a fund that shifts your money between stocks and bonds according to your estimated retirement date). This gets you started but you need to increase the contribution rate if you can and consider your investment options while you’re at it.
  • These plans usually don’t offer a wide variety of choices but they offer enough to set you on a good path. They are invested primarily in mutual funds and company-specific index funds.
    • So, no, you can’t purchase individual stocks unless your plan has what’s called a “brokerage window” allowing you to buy individual “securities” like stocks of your choice.
  • Sometimes employers will offer an “employee match”’ where they will also contribute free money on your behalf to a prefigured percentage of what you’re contributing (yay, bonus!).

Index Funds

• These are generally in your 401k/403b accounts as well (as part of their mutual fund choices) and they’re great options.  Each company has its own variety/name associated with them.  For example, in my plans they offer a fund called VFIAX (which is the Vanguard 500 Index Fund) and VBTLX (which is the Vanguard Total Bond Market Index Fund.  I use both in my investment strategy.
• They are also offered in many popular regular brokerage accounts (generally as an ETF, see below) as well as employer plans (as a mutual fund).
• These are a “basket” of stocks or bonds designed to mimic the performance of a specific financial market (confused yet?).  This “fund” is made to match or track the components of a market index and is “passively” managed, meaning it just follows a segment of the market, not attempting to beat it (think of it as matching a segment or specific “section” of the overall market).
  • As an example, there is the S&P 500 Index Fund offered in many employer plans that just follow this specific market (my favorite is called SPY).
  • For instance, if you really like our imagined Cheerios market (because they’re awesome and they have a very specific sector of stocks that you love), often your employer plan will offer an index fund that mimics Cheerios. It may call it CheeriosX Index fund.  There may also be an ETF that will function similarly (in our fictional example we’ll call it CHX ETF).  But it will taste the same and give you a very similar experience.
  • These are great because they have very low operating expenses, low turnover, and thus lower cost to you!
  • These in my opinion are quickly becoming the gold standard to use! They have track records that beat most mutual funds out there (often because of low fees) and they are very simple to use.  So, look for the word “Index” but verify the lower fees.
  • For example, the S&P 500 Index Fund would invest in all 500 companies of that index (representing 500 of some of the biggest companies in America and it’s a popular yardstick we compare other funds to). So when you hear the news that the “S&P made all-time new highs”, your specific 500 index fund is geared to essentially match that performance.  If the S&P 500 goes up 12% for the year, you can assume your fund will closely match the performance (although not guaranteed and may not be exact because there are some fees although usually much lower than the general mutual fund and it may not track exactly)
  • Employers offer their plans through different sponsors, but all the great investment companies out there (Fidelity, Vanguard, Schwab, and others) all generally also offer Index Funds.

Dividend Stocks (and also DRIP plans)

• Dividend stocks are company stocks that “reward” you by giving you money back in the form of “dividends” for each share of stock that you have.  Not all stocks do this, but these are very popular and many have been around for decades.  DRIP is just a fancy term for Dividend Reinvestment Plan (which is offered directly from some companies to purchase shares directly from them vs a broker).  A dividend is money that is given from a portion of the company’s earnings to you the shareholder.  You can consider it basically a reward for investing with them.
  • These types of stocks are very popular with investors.
  • What’s often looked at is the dividend “yield”. Just like in your savings account where you might earn a 0.2% yield on your money, these plans pay various “yields” on the money you hold in the stock.  It is generally paid out as a certain amount per share you own.
    • Let’s say a stock priced at $89.37 is paying $3.76 a share per year as a dividend. Its yield would be 4.2% ($3.76/$89.37).
    • A stock paying a $2 dividend that trades for $20 a share has a 10% yield.
    • This is certainly more attractive than keeping your money in the bank!
    • The benefits are twofold: the dividend yield and the stock price can increase as time goes on.
  • This is essentially done all the time in your 401k/403b plans since they often hold stocks that pay dividends. Any dividends paid by the funds are then automatically reinvested into buying you more shares of that same fund.  And this is good news!  This allows the extra money from that dividend to buy more investments for you, the goal being a larger retirement account!
  • In this specific case, I’m going to limit the talk now to individual stocks in a personal brokerage account. Generally when a stock pays a dividend (not all do), that extra money is deposited into your brokerage account generally every three months (unless it’s a monthly dividend stock).  It doesn’t buy you more stock unless you “trade” that money in your brokerage account purposefully purchasing more.  The problem with this method is this dividend money (unless you have a large account) isn’t generally enough to buy you a full share of stock.  And you have to remember to do it.
    • However, in some accounts, you can set up the dividend to “automatically reinvest” which is a great option. Many of the well-known highly public companies allow you to do this.  A popular brokerage account that does this is TD Ameritrade.  Go to My Account and then under Dividend Reinvestment.
    • Let’s say you own 20 shares of a company.  According to its dividend schedule (usually every 3 months), it will purchase you more shares.  Let’s assume it will then buy you say 0.245 shares of your stock bringing your total from 20 shares to 20.245.  Now your future payment is on this larger amount.  As time goes on this gets bigger and bigger as this buys you more and more shares with money you didn’t contribute!  The company was buying on your behalf!  It’s the traditional snowball effect!
    • Most stocks, mutual funds, and ETFs are eligible
  • You can also set up accounts without a broker (such as TD Ameritrade, Schwab, etc) with individual stocks in what’s called a DRIP plan. It’s as easy as applying for a credit card directly with the company itself.  You apply through the specific company you like.  You then send them a check and voila, you just bought stock.
  • This will buy you full and even partial shares of stock. And generally, there are no fees (but possibly a small one in some cases) to do this.  However, if you go through the individual companies, this is generally done as a taxable account.
    • However, these dividends are considered “qualified dividends” meaning they’re taxed more favorably than ordinary income.
    • One option is to just buy these stocks through your Roth IRA as a tax-free option!
  • Some of the great companies that offer this are 3M (MMM), Kellogg (K), ExxonMobil (XOM), Johnson and Johnson (JNJ), and AbbVie Inc. (ABBV).
  • The best ones (in my opinion) to choose from are those who are increasing their dividends each year! The Dividend Aristocrats are a very popular group because they have raised their dividends for at least 25 consecutive years!  This is a raise, each and every year (no guarantees, however) although some have been doing this for over 50 years in a row!
  • It’s a wealth builder (not a quick one, but it’s solid): this allows you to “dollar-cost average” your money.  Meaning you’re dropping a little bit of money in the form of dividends back into your stock which buys you more over the decades to come.  This will compound your money.  As the dividends add up, they buy you more and more stock (which means even more dividends).  This has been a strategy many long-term wealthy investors have used.
  • Over long periods of time, dividend stocks have been considered to perform better than most stocks that don’t pay dividends (there are exceptions of course!).
  • As dividends increase, retirees can benefit greatly – it’s like getting great raises while you’re in retirement! That’s something many people won’t have otherwise.  Also, if you have enough income from your dividends to live on later, you won’t have to sell your stocks to live on.  You just keep getting those dividends that rise (generally) every year!
  • Just go online and type in Dividend Reinvestment Plan and see what pops up. You’ll be surprised at the results.

ETFs

• This stands for Exchange Traded Funds.  Ok, break time.  From now on (if you’re new to investing) you’re going to hear about all kinds of “vehicles” for investing.  ETFs, CEFs, REITs, etc.  They all differ, but for now, let’s not get bogged down in the minutia (and let’s stick to these basics to get you started).
  • These are investment “funds” (I like to think of them as mini mutual funds although there is nothing mini about some of them!) that trade like stocks. Meaning you can go in and out of them (buy or sell) any time you want.
  • Each ETF owns “assets” like stocks/bonds/commodities and has shares like regular stocks. But you’re not buying individual stocks.  Instead, you’re buying a “basket” of them as mutual funds do.  So you can invest in an entire index with one click of the mouse.
    • For instance, there are ETFs that trade only the financial markets, those that trade only the oil industry, and those that trade small-cap stocks, etc. Vanilla certainly isn’t the only choice here!
  • I like to imagine them like mutual funds on steroids. Plus they generally (yes, you have to check) have a lower fee associated with them (not always).
  • For instance, the SPY ETF tracks the Standard & Poor’s 500 Index (500 large and mid-cap U.S. stocks). It’s very popular, very tradeable (liquid), and has low fees.
  • BEWARE: there are also 2x and 3x ETFs.  These are designed to give 2x or 3x the performance of the “basic regular version” ETF.  For example, the SPY trades the S&P 500 but the ETF SSO is designed to double the return.
    • The danger is that if the SPY falls, the SSO can fall 2x (or more). These are very dangerous and should only be used by experienced traders, so my recommendation is to stay away for now!

It’s Intimidating To Start But It’s Easier Than You Think

For the newer investor, it’s a little scary stepping into the unknown waters of investing.  It’s not a lake out there, it’s a virtual vast sea.  There are trillions of dollars trading hands and very experienced companies out there.  And most of them are trading against you.

So, how do you begin investing when you’re new?

• There are many ways to trade.  But your first step is just to figure out your style.  Find out what interests you.  Do you prefer to just start an employer plan going where you don’t have to think about it much and let it compound over time for you?  Generally, mutual funds are offered here with limited choices.
• Do you prefer to have more say about your money an invest directly in mutual funds or individual stocks through a brokerage account?
• Or are you a dividend investor mainly seeking passive recurring dividend payments that come through year after year?  (Yes, there are many websites out there dedicated to this one style of investing!).
  • TIP:  my personal choice in the first two options are to invest in Index Funds (whether through an employer plan or ETFs).  These perform well and have lower fees, so consider this option!

Keep it simple with options that were discussed here.  Even by keeping your style relatively simple, you can achieve great wealth over your lifetime.

And no one says you have to stick to one style.  For myself, I utilize a few different styles of trading.  For some, I go really simple and let the accounts do the heavy lifting for me by not messing with them much such as my employer sponsored plans and DRIP plans.  On others, such as in my personal brokerage accounts, I play a more active role trading in and out of ETFs and individual stocks.

The secret is to choose one and just start.  You’ll soon realize it’s much easier than you thought.  The hardest step is usually the first one, but don’t let that intimidate you.  Just pick a style and let’s move on to step two in your investment journey!

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David the Wealthy RN

David is the creator of The Wealthy RN. Although I'm not your financial advisor [nor offering financial advice], I can share what 20 years of hard financial lessons have taught me: how to effectively budget, save, and invest creatively. Read my story on how I went from tens of thousands in debt to accumulating hundreds of thousands of profits.

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