How to Start Investing as a Beginner: A Step-by-Step Guide

Follow general guidelines by FBS — they can help anyone, no matter where you are in your investing journey.

Assessing your risk tolerance

The more you know about yourself, the better. What’s your financial reality and prospects for earnings? In addition to evaluating your goals, also take your personality into account. How comfortable are you with risk? How hands-on do you want to be? How stable are your other income streams? What are your obligations? Planned expenses?Look into online risk assessment tools for a more concrete grasp of these things.

Step 2: Build an emergency fund

Why you need one before investing

An emergency fund is a financial safety net.

• It protects your investments, so in case of an emergency like health issues or a job loss you won’t have to sell your assets or withdraw money prematurely.

• It helps avoid high-interest debt like credit cards in a situation of unexpected expenses.

• It helps reduce stress — knowing you have savings set aside makes you more confident.

How much should you save?

Usually saving from three to six months’ worth of average expenses is optimal. The exact sum depends:

• on your job stability (consider saving more if you have irregular income);

• dependents (save more if you have family relying on you financially);

• insurance (health insurance can reduce the amount needed in your emergency fund);

• risk tolerance (aim for saving up to a year’s worth of essential expenses to ensure peace of mind);

• current financial conditions (for example, inflation rate).

The word on the street among financial experts is that the optimal amount to invest is between 10 and 25 percent of your income, after taxes. That may be a little steep for a lot of people, though. Don’t worry; with the right tools, you can profit from investing even a small amount.

One popular rule to follow in your personal finances is to use half of your income for essential needs, a quarter to a third for optional things that you want in your life, and the remaining fifth for repaying debts, saving, or investing.

Step 3: Understand different investment options

Now that you have a clear understanding of what you’re in this for, the next question to answer is: what are you going to put your money into? The different options out there are suitable for different people for various reasons. Figure out what will resonate with your goals and fit your lifestyle.

Stocks (aka equities)

You buy a fraction of a company at a given price, and then your share becomes more valuable over time.

Mutual funds and ETFs

You buy a bunch of different investment assets all at once, and if you don’t want to, you don’t have to even manage them yourself. These can include equities and bonds. If you get what’s called an index fund, your investment package will mimic the motion of some big time market index while you sit back and watch your coffers fill.

Exchange-traded funds are the same as mutual funds, but they’re even more liquid, so you can buy and sell them anytime throughout the day.

Bonds

You essentially chip in with a bunch of other people to raise the money for a loan to a big corporation, or the government. This loan will pay off very handsomely once it ripens.

Real estate and alternative investments

You can also invest into real estate or similar assets like REITs (real estate investment trusts). Real estate is good for hedging against inflation and provides stable income.

As for alternative types of investments, you can choose from metals, cryptocurrencies, hedge funds, etc.

Here’s a table that compares different types of assets.

Step 4: Choose an investment account

Let’s break down the differences between various types of investment accounts.

Brokerage accounts vs. retirement accounts

A lot of people opt to do their investment through a brokerage account. Anyone who is legally an adult can open one, and it does the work for you. Each type of brokerage account is designed for a type of investor, so find your match and light it! You can deposit and withdraw cash whenever you want, just like with a bank account.

Step 5: Start with low-cost, diversified investments

The power of dollar-cost averaging

Instead of trying to time each market entry, which isn’t for everybody, just deposit a certain amount at regular intervals. It might get a little steep with the transaction costs (so don’t make the intervals between entries too short), but it’ll average out the impact from whatever market volatility your investment is subject to, and relieve a lot of stress.

Step 6: Create a simple investment strategy

Investment strategies

Active vs. passive investing

You’re either using technical analysis to predict market moves, and buying and selling your assets yourself in an attempt to profit from your correct predictions, or you’re allowing an index to perform on your behalf.

Growth vs. value investing

You’re either investing with high risk for a higher and faster payoff, like in a tech company, for example, or in steady, gradual growth.

How to diversify your portfolio

Embrace diverse investments

You need to spread out across different asset classes. Don’t put your eggs in one basket, as they say. Stocks, bonds, commodities, even unusual assets - get some of all of them. That way, even if a whole sector fails, you’ll still have your other investments.

Keep an eye on costs and fees

Do your math and do not invest more than you can afford to lose.

Stay engaged, don’t go on autopilot

Even if you’ve got a manager running your portfolio for you, or you’re invested in what is considered a sure-fire index, it’s still a good idea to check in with it once in a while, and if anything is not to your liking, you should do something about it. It’s your money! Set a regular check-in and rebalancing routine. It’ll give you peace of mind, and make your investments more profitable.

Step 7: Common mistakes to avoid

Beginners tend to make the same mistakes. So, if any of these seem familiar, it might be time to rethink your investment approach:

• Ignoring fees and taxes — Hidden fees, such as expense ratios, trading commissions, and management fees, can eat into your returns over time. Choose low-cost index funds or ETFs, and always check the fees before investing.

• Unrealistic expectations — Build a diversified portfolio based on your risk tolerance and goals. Don’t let others’ experiences shape your expectations, as market returns are unpredictable.

• Overinvesting — Patience is key in investing. Frequent changes to your portfolio can incur costs and increase risks. Focus on learning about your current holdings instead of overreacting.

• Getting swept up by media hype — Don’t let sensational headlines dictate your decisions. Conduct thorough research from reliable sources to inform your investments.

• Chasing high yields — High-yield investments can be tempting, but remember that past performance is not indicative of future results. Focus on the overall picture and manage risk.

• Timing the market — Market timing is challenging and often ineffective. Consistent contributions to your portfolio are typically more beneficial than trying to predict market movements.

• Forgetting about inflation — Evaluate returns in real terms, considering inflation’s impact. What you can actually buy with your investment gains matters more than nominal returns.

• Failing to start or stay invested — Don’t let fear or lack of knowledge stop you from investing. The greatest minds agree that success requires ongoing effort and a willingness to learn.

FAQ

How much money do I need to start investing?

The amount you start with depends on your goals, the type of investment, and how comfortable you feel. But generally, you don’t need a huge sum to start investing. At FBS, beginners can start investing with an initial deposit as low as $5. Plus, with leverage options, you can stretch that deposit significantly.

Should I invest in stocks, bonds, or mutual funds?

Beginners might want to focus on stocks because they have the potential for higher returns over time, plus it’s exciting and lets you own a share of companies you believe in. Bear in mind that they’re more volatile and carry more risk, so start with a few well-researched stocks. Bonds are a less risky and more conservative type of investment, suitable for supporting long-term financial goals. Mutual funds are a highly diversified basket of assets that are managed for you, and the risks are moderate.

How do I create a diversified investment portfolio?

Choose a mix of asset classes, including stocks, indices, forex, and commodities, to spread the risk. Within each asset class, select a variety of individual investments, like different sectors for stocks. Regularly check and adjust your portfolio to keep your ideal asset mix as markets shift.

How do I choose the right investment strategy?

Consider your time horizon — how long you plan to invest before needing access to your funds. Longer horizons allow for more aggressive strategies. Evaluate your knowledge and experience with different investment types, and research various strategies, such as growth investing, value investing, or passive/active investing, to find one that goes with your objectives and comfort level.