Investing for Dummies: A Short, Simplified Plan to Getting Started

Overwhelmed by investing? Don't be. We've created an "investing for dummies" plan to simplify investing concepts and help you get started!

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Need an “investing for dummies” manual? Are you looking for somebody to help you cut through the noise, simplify concepts, and just cover the basics?

We can do that.

Learning how to start investing doesn’t have to be overwhelming or scary. Trust me, this isn’t as difficult as investment pros make it seem.

In this piece, we’ll give you the “investing for dummies” version of getting started. You won’t find any complicated steps or “shop talk” jargon here. We’re just covering the basics – which is really all you need to get started anyway.

Investing for Dummies: Getting Started

Before you start investing, you’ll need to set some investing goals. Some common reasons to start investing include:

  • Saving for retirement
  • Investing to meet other financial goals
  • Investing to generate income streams now

The most common reason people start investing is to save for retirement. They might accomplish this through an employer-sponsored retirement account – like a 401(k) – or through an individual retirement account like a Roth IRA. Often, it’s a great idea to do a little bit of both.

If you’ve already started saving for retirement, you may also consider investing to meet some of your other savings and financial goals. This may include saving for things like college, a new house, or even vacations.

Investing in real estate is another option to help you meet your long-term financial goals. This might include buying physical properties or investing with a company like Fundrise for as little as $500. (Psst…you can read our complete Fundrise review here.)

Finally, some people invest to generate income they can use now. While this is generally done through investing in stocks that produce dividends (which are, usually, quarterly payments to stockholders), other securities and certain real estate investments can produce income as well. Unless you’re already investing for retirement and meeting your other financial goals, this is probably something to stay away from for now. My gut tells me since this is a piece about the basics, you’re probably not ready for all that yet 😉

Regardless of your goals, in order to invest in the stock market, you’ll need some type of brokerage account. Personally, I like M1 Finance because it’s basically a hybrid between a robo-advisor and a traditional brokerage firm. Plus, they offer $0 commission on trades.

Of course, investing with M1 Finance is completely self-directed. If you’re looking for a little more help, an automated advisor like Betterment may be a better fit. More on that in a bit.

Understanding the Basics of Investing & Diversification

You’ve heard the saying “don’t put all your eggs in one basket,” right? The same goes for investing.

Whenever you invest your money into something, regardless of whether it’s a stock, fund, business, etc., you are putting your money at risk. That means the possibility exists for losing some (or all) of your investment.

Don’t let this scare you off.

One of the best ways to invest and limit your risk is by spreading your money into different investments. This concept is called “diversification.”

Getting to the point where you are sufficiently diversified can take a lot of time and money – especially if you only buy single stocks. However, there are some easy ways to get around that – including mutual funds and exchange traded funds (ETFs).

Essentially, buying one of these funds pools your money with a bunch of other investors. The fund then spreads your money out, helping you to diversify quickly and cheaply.

When it comes to purchasing an investment, you also want to pay extremely close attention to the fees. In addition to other differences, ETFs tend to have much lower fees than mutual funds. Although you can’t control your returns, you can control your fees. If performance is equal, choosing investments with lower fees could end up saving you thousands over time.

Types of Investments

Warren Buffett, arguably the most successful investor in the world, has said that the best strategy for the average person is to simply invest in the market as a whole. He advises against trying to “beat the market” because it is exceptionally difficult to do so on a consistent basis over time. Investing in the whole market is also an excellent way to diversify in a snap.

So, how do you go about investing in the market as a whole? By investing in index funds.

Index funds are investments that are meant to mimic the rise and fall of a particular index. Although an index fund can technically invest in any type of index, an S&P 500 index fund is meant to deliver approximately the same returns as the market. It’s passively managed, so it’s not subject to the emotional highs and lows of an individual investor. As importantly, aren’t tied to the success or failure of any one security.

As for Buffett, he famously put his money where his mouth was. The “Oracle of Omaha” extended an open-ended $1 million dollar bet, claiming that he would fare better over a ten-year period with index funds than any group of stocks picked by a professional broker. He had only one taker…and, of course, Buffett won.

Put the market up against a plan from a financial salesperson, and – personally – I’ll take the market every time.

That’s not to say that financial advisors can’t be valuable. The biggest benefit they provide is talking you out of doing something silly when the market is down. They’re also there to keep you accountable. With that said, if you’re going to use an advisor, I’d look for a financial planner who takes a holistic look at your finances rather than just trying to sell you products.

So, how do you actually find these index funds? Again, you can look for a low-cost ETF that mimics the S&P 500 at an online brokerage house like M1 Finance. Then, just keep dumping money into it.

Let Somebody Do the Heavy Lifting for You

What’s even easier than setting up your own brokerage account and doing this yourself? Letting somebody else do it for you.

These days, there are several online advisors that can help you automate the entire investing experience. After completing an initial interview, they’ll help you choose investments and create a plan that is suited to your needs, risk tolerance, and time horizon (i.e. the amount of time you have before you start cashing out). You can automate your deposits, and – to help you from investing too much into a single area – most of them will automatically re-balance your investment portfolio when needed.

While there are several robo-advisors to choose from, we tend to like Betterment. They have a fairly long track record of being easy to use, plus they’re considerably cheaper than a traditional advisor. For more information, check out our complete Betterment review.

Stock Investing for Dummies

Thinking about investing in single stocks? If you’re new to investing, it’s typically best if you don’t. Again, it’s extremely difficult to diversify properly with single stocks. It’s also super expensive. So, unless you know what you’re doing, investing in solo stocks isn’t much different than straight up gambling.

How’s that for short and sweet?

Investing For Dummies: It’s Not as Hard as It Seems

Investing doesn’t have to be as complex or overwhelming as some people want you to believe. Heck, if dummies like me can do it, so can you.

Don’t overcomplicate things. As Warren Buffett says, stick with simple investments like index funds and you’ll likely do just fine.

Thanks for reading and good luck! Overwhelmed by investing? Don't be. We've created an "investing for dummies" plan to simplify investing concepts and help you get started!

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