Investing 101 - How to Get Started
Investing can often seem daunting, but it's easier than you might think. With a wealth of resources and tools available, even beginners can start building a solid portfolio with an initial investment of $1,000 or less.
An easy way to get started investing in the stock market is through diversified, low-cost index funds or ETFs, combined with a disciplined, long-term approach.
Low-Cost Stock Market Index Funds
Investing in individual stocks can be risky because it’s hard to predict which ones will do well or not. The easiest way to diversify is to buy an index fund comprised of many different companies in different sectors of the economy. For example, the S&P 500 Index (about 500 stocks), or the Total US Stock Market Index (more than 3,000 stocks), or Total International Stock Market Index (more than 5,000 stocks) provide broad diversification. This way the risk is spread across many companies, reducing the impact of any single company's poor performance.
Some mutual funds are actively managed by a portfolio manager who picks which stocks to invest in. The problem is that these “actively managed" funds charge a fee of typically 1-2% per year that eats away at growth. In fact, the overwhelming majority of actively managed funds don’t beat their target index over long periods of time. Passive index funds are ones that automatically invest in everything within a given index, enabling very low fees, typically less than 0.05% (20-40 times lower than actively managed funds). This enables these funds to match the returns of their target index without the burden of large fees.
Another advantage of index funds is that your initial investment can usually be small, typically $1,000 or less. This makes it easy to get started even if you’re only beginning to save and invest for your future.
Creating a Balanced Portfolio
Ideally you want to have a mix of stocks and bonds, depending on how long you plan to hold the investment, and a mix of US and international markets in order to maximize returns for a given level of risk. This has become easy to achieve using portfolios of more than one index fund. You can construct a well-balanced "3 fund portfolio" using just three index funds: a US total stock market fund, an international total stock market fund, and a US total bond market fund.
Here are some index funds to consider, depending on which broker you're using to invest:
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Vanguard
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VTSAX - US total stock market
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VTIAX - International stock market
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VBILX - US total bond market
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Fidelity
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FZROX - US total stock market
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FZILX - International stock market
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FXNAX - US total bond market
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Charles Schwab
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SWTSX - US total stock market
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SWISX - International stock market
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SWAGX - US total bond market
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Alternatively you can invest in a “target date fund” that is comprised of multiple underlying index funds and automatically shifts the investments in these stock and bond funds for you as you age and get closer to retirement.
Investing in Low-Cost Index Funds
This four-minute video from Personal Finance Club explains a “3 fund portfolio” and a “target date fund,” as well as giving examples of some popular low-cost target date funds from Vanguard, Fidelity, and Charles Schwab.
Building a 3 Fund Portfolio
If you like the idea of creating your own “3 fund portfolio,” here are two videos that explain the concept, provide examples of popular low-cost index mutual funds and ETFs, and discuss the concepts of asset allocation and rebalancing.
Humphrey Yang
Jarrad Morrow
Start Investing Early and Contribute on a Regular Basis
Tap the power of compound growth by starting early. The earlier you start, the more time you give compound growth to work its magic. By investing on a regular basis, for example every month, you leverage a principle called “dollar cost averaging” which lets you take advantage of dips in the market to purchase more units for the same monthly investment. This ensures that no matter how much the market goes up and down, your cost of buying in is smoothed out.
Where to Invest & Types of Accounts
This four-minute video describes the different types of investment accounts, where you set them up, and the types of investments held there. It also includes helpful terminology for getting started with investing.
Action Plan
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Determine how much you want to invest at the beginning and how much you’ll contribute on a monthly basis going forward. Remember that you can always start small and contribute more over time as you get more familiar with how it works.
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Choose the type of account you’ll use to invest (e.g., a 401k, Roth IRA, or taxable brokerage account). If you have a 401k at work, reach out to HR to find out how to begin contributing to it. If you qualify for a Roth IRA, you’ll want to start investing in that. Any extra investing you want to do beyond the annual contribution limits of the 401k and Roth can be done in a taxable brokerage account.
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Decide which approach you want to take to start investing—a target date fund or 3 fund portfolio. If you’re just getting started and not sure which approach to use, we recommend starting with a target date fund. You can always refine how you invest later as you get more experience with investing.
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If you want help with the logistics of setting up accounts and buying funds, these videos from Personal Finance Club provide a nice explanation of what brokers do, the different types of investment accounts, and the logistics of how to buy an index fund.