How Would I Invest if I Were Just Starting Out?

How would I invest $20,000 – $30,000? That was a question that was recently asked of me by a reader on a recent post I did covering the number of stocks debate. The same question was asked by another reader through the comments section on this site, only his question was for around $100 – $300. I would like to thank these individuals for their questions and hopefully I can provide them with a framework they can apply in this post.

Now the first thing to consider from these two questions is that these are drastically different amounts of money! However, whether a person is investing $25 or investing $30,000 I beleive that the approach is the same. The only thing that more money gives you is the ability to buy into an appropriate asset allocation right away. With $100, investments need to be purchased as more money comes in while building up to an appropriate asset allocation.

Step 1: Park whatever money you have available for investing today into an Electric Orange from ING DIRECT (aff) or other high yielding savings account. These accounts are safe and you will earn some interest on your money while you go through the next few steps. It is not time yet to start investing.

Step 2: Stop thinking about making a quick buck in the stock market! Most beginner investors get lured into the promise of quick gains and many of the questions I get are how to make the most money in the least amount of time like turning $100 into $1,000,000. I don’t know the answer to that. As an investor, you need to start thinking in terms of years (at least five).

Step 3: Start reading as much as you possible can. Blogs are good and so are books. A couple books I would recommend to start out with are The Neatest Little Guide to Stock Market Investing by Jason Kelly and The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns. These books cover the basics of investing as well as good information on index funds which which we will talk about in a couple of steps! Both books also talk about the concept of fees and investment performance. In a nutshell, avoid high fee mutual funds.

Step 4: Determine your risk profile and asset allocation. Your risk profile and the subsequent asset allocation you choose are the most important decisions that you will make in your investment journey. I talk more about that in this post – Creating an Investment Plan. I came across a pretty cool asset allocation tool at the Smart Money website. Play around with that one until you find an asset allocation that meets your needs. Remember, in step 3 I suggested reading as much as you can get a hold of – look for books on asset allocation as well. One I recommend is The Intelligent Asset Allocator. Other blogs to check out that have covered asset allocation are here and here.

Step 5: Start selecting investments to fill out that asset allocation – selecting, not buying yet. I am also not talking about buying individual stocks now. The “Common Sense” book you read from above will have given you a good understanding of index funds. For an investor who is investing for the first time, it is not a good idea to start buying individual dividend stocks at this time. I think the better approach for new investors is to build a core portfolio with index funds. This will provide good diversification and provide you with a basis to build off of in the years to come. Start to look at iShares (US version) and Vanguard. Look for broad based funds that fit within each of your asset classes.

Step 6: Open up a brokerage account. There are literally thousands of options available. In Canada, I use the Canadian Shareowners Association to do my investing. There are also brokerages available through all the major banks. Sharebuilder is a good option for people in the US. For more information on Canadian brokers, take a look at Canadian Capitalist’s post on the Best Canadian Online Brokerages. In the U.S., genXfinance has done a bunch of broker profiles at his site.

Step 7: Start buying assets. This is the exciting part – now you get to put all the learning and research to good use! With your brokerage account open you can buy the index funds as you build your core portfolio. Remember, at this point it is only those index funds.

Step 8: Starting learning about individual dividend stocks. Now that your core portfolio is set up, we can move on to the sexy stuff. Individual stocks. However, at this point in your journey I am going to bet that you have read that an individual investor does not need to move away from index funds – individual stocks are not necessary. I don’t disagree with that, but I buy dividend stocks because I enjoy doing it and I enjoy getting those dividends all the time. I would recommend to anyone who has a core portfolio and has read and tried to learn as much as possible that they try adding individual dividend stocks to their portfolio. If it is something that you want to do as well then go for it. Just make sure you study up and practice a bit before hand. If this is what you want and you feel you are ready, then read this book, The Single Best Investment: Creating Wealth with Dividend Growth.

(Photo Credit: Lisa Morris)

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