an image of a one hundred dollar bill

How To Start Investing in Stocks and ETF’s – [8 BEST] Ways

Are you wondering how to start investing in stocks and etf’s? When it comes to investing, the first thing that often comes to people’s minds is real estate, such as rental properties or even investing in yourself (i.e., education). Indeed, the stock market is often considered risky, akin to gambling. And, who can blame them? A stock market crash is big news for the media! But, when the S&P500 gains 25% in a year, it doesn’t seem to have as much clout.

In this article, we reached out to the experts and asked them their best tips for investing in stocks and ETF’s. The list is indeed comprehensive and, if you’re thinking of investing in the stock market, I think this will give you a head start!

So let’s dig in about what you need to know about investing in stock and etf’s!

Get educated about investing

Before making any investment decisions, getting educated about investing in stock and etf’s is always the best advice. Jumping in without knowing the risks is a fool’s game.  

It’s your money! No one will care more about your financial situation than you, says Michael Lewis from Tutor Financial Advisors LLC. Do not solely rely on information provided by others. Get educated. You don’t have to be an expert, but you should know how to identify one, says Michael Lewis from Tutor Financial. Do not solely rely on information provided by others. Get educated. You don’t have to be an expert, but you should know how to identify one.

Read books about investing in stocks

a millennial woman reads a book about investing in stocks and etf's

Get educated about personal finance 101 by reading a few classic books.  Bruce Harpham’s favorites include: “The Latte Factor” and “The Wealthy Barber” and “The Bogleheads’ Guide to Investing.” I would also suggest The Money Master, and my very own book, The Financially Independent Millennial, both available on Amazon.  

Invest in a plan

I would tell my younger self first to assess their financial situation and map out their financial goals, before investing in the stock market. If you don’t know why you’re learning to invest in stocks and what you are trying to achieve, it will be challenging for you to measure your success, says Sandy Yong, the Award-Winning author of The Money Master.  

Figure out what kind of lifestyle you want to accomplish in the future. What are your short-term/medium/long term goals? Write them down, set dates, figure how much it will cost and how much time you have to achieve them. Doing so will set the foundation for your investing roadmap. 

Additionally, Marc Frau from Opinatron would tell his younger self to simplify as much as possible. The most important thing when investing is time, so the earlier you begin, the better. I know starting something new is always a challenge, so keep it simple!

Create an investment policy statement

A written plan, called an Investment Policy Statement (IPS), helps you get organized, sets goals, and determines your investment criteria. Your goals may be paying for a child’s college education, funding your retirement, or just growing your wealth, adds Eliza Nimmich from Tutor The People. With the goals in mind, it will dictate how much return you need on your investment, and how quickly it will be required. 

Putting it all together, you will now know the amount of risk that you may need to take to get a reasonable return when you start investing in stocks and etf’s. How and where would you invest it, too? There are many low-cost online brokerages, such as Schwab, Fidelity, and Scottrade, where you can easily open a small amount of money account by transferring funds from your bank account.

Stick to the plan

Plan out your investing strategy first and stick to it, says Christian Steinmeier from Koala Pets. Having a system and sticking to it is by far one of the most critical factors which determine your success. Think about how much you want to invest in stocks, how much you want to have in an emergency account, and what more significant purchases you wish to make in the future. However, be sure to have an emergency fund available when a crisis hits. You have to make sure that you don’t need to touch your portfolio in an emergency when markets are down or because you want to make a big-ticket purchase.

Psychology of investing in stocks and etf’s

Understanding your investor profile is also essential. Are you a conservative, moderate, or high-risk investor? Your age, lifestyle, and time-horizon can be factors in determining what your risk tolerance is, says Sandy Yong

Typically, the younger you are, the more risk you can take because you have decades ahead of you to ride out the stock market’s highs and lows. Whereas, if you are nearing retirement, you would generally have a more conservative portfolio because you’ll soon need to withdraw your funds.

Remember…this is investing, not gambling! 

investing in stocks and etf's is not a casino.

Save your gambling money for the sportsbook or the casino, says Jeff Burgess from Commerce Trust Company! If you think you can get lucky and make a fortune through day trading a few hot stocks on a “free-trading” website, think again. If it were that easy, everyone would do it! You may win every so often, but when you lose, you can lose big. It is important to diversify across different investments so that all your eggs are not in a few “hot stock” baskets, Burgess says.

Saving money

Now that you have a little background about investing in the stock market, discovered some books, and perhaps even started thinking about a plan, it’s about time to think about savings.  

Take control of your money

Take control of your accounts ASAP! The only way to get in control of your money is to take control, says Tali Goldman from Like a Girl Academy. For so many years, she says she took the backseat, allowing her parents to run her accounts without knowing the mechanics.

Goldman says she would transfer her Venmo balance to her account and never see that money because she didn’t have access to her savings account! 

So download your bank’s apps, debit card, credit card, and discount broker on your phone to easily access your money and see how they “flow” into each other. 

Every dollar is worth saving

The 15-year-old me believed that savings had to start at around $100 every month, says Swati Chalumuri from HearMeFolks. Looking back, I wasted so many opportunities to kickstart savings at an early age. If the younger me saved as little as a dollar for the long term, my life could be much more comfortable, and I would have cemented a firmer saving culture.  

How much should you invest?

Invest at least 60% minimum of your disposable income. Disposable income is your “wants” in your budget, not the “needs.” Stop spending money on going out, buying tables in nightclubs, and invest in your future rather than a hangover, offers Katie Mellor from KLM Media

Secondly, investing is a LONG TERM undertaking. Don’t believe the “Guru’s” on social media who tell you to deposit $300 into a trading account and become an overnight millionaire. 

Thirdly, starting to invest

in stocks and ETF’s doesn’t need to be complicated.

Commit to investing a minimum amount each week or month. And, in no time, you’ll be surprised how much will be in your account!

Open a round-up savings account

a piggy bank for saving money to invest in stocks and etf's later

The biggest piece of advice I would give my younger self is merely opening a ’round-up’ savings account, says Michaela Boulton from Hoxton Capital Management. Round-up accounts round up the money you spend and put the change into a separate savings account. It is a perfect option that will let you spend and save as you spend, adds Boulton.

The savings you slowly accumulate from this account can then be put into an investment account weekly. Indeed, this is a simple measure, but a significant one to make any savings more worthwhile in the long run.

The world is modern, and so should be your savings. Take advantage of simple online banking solutions, as the more automated you make your savings decisions, the easier it is to accumulate this money, adds Boulton.

Then increase your savings rate, annually

The best way to prepare for your retirement is to increase your savings rate yearly, says Michael Hammelburger from Expense Reduction Group. For instance, Hammelburger advises his clients to take advantage of the automatic escalation clause, which increases the savings rate by 1% yearly. 

Typically, people forget about increasing their savings and later realize that the extra money they’ve spent on unnecessary purchases would have been better if channeled to their 401(k) plan, adds Hammelburger.

When should you start investing? 

Graph Showing the performance of US stock investments since 1926

The idea that you need to wait until you reach a certain age or income level to start investing is a fallacy with potential repercussions. The sooner you begin investing, the sooner you can make your investments work for you through the power of compounding, says Mindy Yu from Stash.

Ultimately, when it comes down to investing in stocks and etf’s, from the start, it’s about time in the market, not timing the market. The only thing predictable about the stock market is that it will go up over the long term, and it will go down. 

For example, consider the performance of the S&P 500 since the beginning. While stocks’ price tends to go up, there have also been some pretty steep sell-offs (rapid selling of securities leading to a price decline).

Up until the first quarter of 2020, we were in a bull market for about eleven years. And when stock prices fall, as we’ve seen in the past few months, it can be a chance for you to add more or purchase other investments at lower prices. 

Timing the market

Don’t try and time the market. Investors need to learn that attempting to time the market is “fools gold.” Vanguard founder, the late Jack Bogle, was quoted as saying on market timing — “After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently”. 

JP Morgan Asset Management’s 2019 Retirement Guide provides some data on the effect of market timing, says Robert R. Johnson, PhD, CFA, CAIA, Professor, Heider College of Business, Creighton University. Looking back over the 20 years from Jan. 1, 1999, to Dec. 31, 2018, if you missed the top 10 best days in the stock market, your overall return got cut in half.  

However, fully invested in the S&P 500 for that same 20-year time period, the return was 5.62%. If you missed the ten best days, the return was 2.01%. Miss the 20 best days, and the return was negative. Many people have been preparing for a recession for years and have exited the stock market. The opportunity cost of such a strategy is high, adds Johnson. These folks have lost out on substantial gains in the market for the past few years while holding cash.  

Start early, become financially independent, and retire early (FIRE)

As someone who could not start investing until age 35 due to career training, Brooke Jeffy MD would tell her younger self to start investing as soon as possible, even if just a small amount. For example, Play around with a compound interest calculator to see for yourself how starting early is the key to success in long term stock market investing.

Indeed, Sam Hawrylack from HowToFIRE says her journey to Becoming Financially Independent (FIRE) was worth it. All of the sacrifices and limited social life would allow her to reach her financial goals before turning 30! It’s definitely not easy, but completely worth it, Hawrylack adds. Just make sure you have your plan in the right order. Pay off debt and have an emergency fund before you start investing. 

Determining when is a good time to invest

When it comes to investing, when the theater’s on fire, that is the time to run in. As everybody’s selling, it’s time for you to buy, says Lou Cannataro from Cannataro Park Ave Financial. However, the real key to success is buying every month on an automatic basis, whether the theater is on fire or not. 

Remember, you came into this world without a dollar, and that’s precisely how you’re going to leave. However, if you want to enjoy your time in between, building wealth does not guarantee happiness, but it sure makes it a lot easier. Cannataro suggests building wealth, not for the money, but for buying you time. More time to spend with your family and the ones you love, more time doing the things you enjoy doing.

Invest regularly by dollar-cost averaging

Aviva Pinto from Wealth Spire would tell her younger self to put money aside each month and dollar cost average. To be sure, don’t worry about whether the market is high or low – Just invest every month. The easiest way to do that if you are working is with a 401k plan, says Pinto. Your company will take the same percentage from your paycheck each month. It goes in pre-tax and accumulates tax-free and becomes forced savings and is a painless way to invest, says Pinto.

What I’d tell my younger self about investing sooner, than later

If I were speaking to my younger self, I’d say A Small Start is Smart. Sometimes the inherent risk associated with investing and the complexities of the different financial instruments is the thought you need to start with significant amounts of money for the biggest anticipated return. Unfortunately, that’s not always the case. A small start is a smart way to begin, says Bishop Foreman from Harvest Church.

Foreman suggests investing a modest amount monthly using mutual funds to begin developing risk tolerance. The greater the risk, the greater the reward. 

Where to start investing in stocks and ETF’s

Online brokers

You can start investing in stocks and etf’s with an online broker. There, you often have access to the lowest fees. If you DIY, you get to create your portfolio and have full control over managing it, says Kit Eizenga from Wasatch Smart Finance. For those who don’t want a hands-on approach, they can go with a Robo-advisor. Generally speaking, I think it’s good to have a diversified portfolio consisting of low-cost index funds or ETFs that are passive and focus on the long-term. 

What is the Ideal brokerage account?

Opening a brokerage account is easy, and many brokerages offer free stock trades these days. However, I would recommend against the newer app-based brokerages, as some have seen network issues during days with high volatility, Eizenga adds.

When you’re young, ETF’s and index funds are your friends. Let’s face it most young investors are not going to do Warren Buffet style fundamental analysis.

The average investor will not read the 10-Q, quarterly report, annual report, or 10-K. If you invest in stocks alone, you should, at a minimum, listen to the quarterly conference calls that each company you invest in has. If you do not feel like doing that type of work, look into a newsletter such as Forbes, TipsRank, or Motley Fool to guide you. 

As a young investor, Eizenga suggests Etrade because it offers analysts’ rank of stocks. It breaks down earnings on one page so you can compare the past with the present. Also, they offer the fundamentals and a page to see what the insiders are up too. Indeed, this is fast and accessible information to make investing decisions.  

Using apps to invest

When my younger self was around, we didn’t have fantastic apps that let you invest in ETFs or fractional stock shares, says Wade Schlosser from Solvable. But that’s the first advice I’d give to today’s young investors. Technology has changed everything and made investing more accessible to nearly anyone with a few extra bucks to spare. For that reason, all young people should begin investing – even if it’s just a high-yield savings account providing compound interest. 

Are fees something to consider? 

Fees are something vital to consider. A massive advantage of widely diversified passive index funds is their low fees. Just as stock market returns compound over time, high fees’ deleterious effects also compound over time, says Robert R. Johnson, PhD, CFA, CAIA Professor, Heider College of Business, Creighton University.

The late Jack Bogle, the founder of Vanguard, has referred to this phenomenon as “the tyranny of compounding costs.” That is, suppose you have an account that grows in value by 8% annually before fees and that you pay 1% of assets under management to have that account managed — in effect, you earn effectively 7% compounded annually.

If you had $1 million to start with, in 20 years, you would have $3.87 million — not bad. But, if you didn’t pay 1% annually in fees, you would have accumulated $4.66 million. That seemingly innocuous 1% annual fee cost you $790,000, adds Johnson.

How do you open a brokerage account?

Opening a brokerage account is easy — the challenging part is deciding which brokerage to use. Some brokerages cater to people who just want a user-friendly app and the ability to buy and sell stocks, says Matt Frankel from The Ascent. And others are for people who want to save for retirement, learn how to use stock options, and want features like stock research and educational libraries. It depends on the specific investor’s goals.

But once you decide on a broker, it’s typically about 10-15 minutes of forms to fill out and an initial deposit, and then you’re good to go, adds Frankel.

Types of brokerage accounts

Roth IRA

Tali Goldman asks, “Why did no one ever tell me about the magic of a Roth IRA?” You contribute after-tax, earned money in this retirement account, invest it, and let it grow until you are 59 1/2 and then when you do take out your contributions and your gains completely TAX-FREE! Goldman wishes she invested more in her Roth IRA to make the most of cumulative interest over the next 40+ years! Indeed, the Roth IRA is the darling of retirement.

At the same place you have your Roth IRA, open a standard brokerage account

In this account, look at purchasing one or two stocks in companies that you like, and believe in suggests Andrew Creme. If all else fails, buy companies from where you shop, and you’re familiar. By doing this, you will see the ups and downs of the markets more than owning a mutual fund or index fund, and just having a little exposure in this way can excite you to want to invest more in the future.

Investing is as much about psychology as it is about learning, says Creme. Do this, but keep the majority of your investments in the Roth IRA diversified.

Take advantage of your employer match

The second I land my first job, I would make sure to take advantage of my employer match in the 401(k), then open an investment account and start investing. I wouldn’t let a bunch of research get in the way. Instead, I would go with a Robo-advisor or Vanguard and start investing consistently every month, even if it is just $50 a month, says Jared Andreoli from Simplicity Financial LLC.

Too many times, I and others over analyze and don’t start. You can make adjustments along the way, update your investment strategy, and be more efficient from a tax standpoint down the road. All of it means nothing if you don’t start.

Can I start Investing for a child?

Anyone who is younger or has young children can open either a brokerage or ROTH IRA account, and Kirk G. Meyer recommends doing it as soon as possible. If they are a minor in the state where they reside, they need to have a custodial account opened for them, says Meyer. For either of these situations, Meyer recommends brokerage accounts from either Schwab or Vanguard. Further, you may speak to one of their helpful associates. These two firms are the leaders in no-fee brokerage accounts and offer thousands of options as far as investments

For younger people who do not have any work experience, I would recommend a simple brokerage account to invest in until they have earned income and can open a ROTH IRA. There are a few important reasons for opening a ROTH IRA at a young age, Meyer adds. First, it allows the account four or five decades to grow tax-deferred and ultimately be tax-free withdrawals upon reaching age 59½.

That means even small contributions to a ROTH account can grow to tens of thousands of dollars over this period. A definite plus. Second, a ROTH account makes sense because the taxes paid now are minimal compared to what they could be later in life. Indeed, it’s growth and tax advantages will be supercharged.

Consider paper trading first

It’s not only children who learn while playing monopoly. You can do it too. When it comes to investing, many brokers offer paper trading, says Dan Raju from Tradier. Paper trading lets you trade virtually with monopoly money before opening a brokerage account. Once you are ready, open a real brokerage account. Keep it simple by opening a simple cash account where you can put a few dollars in and start getting your feet wet, adds Raju.

Knowing the amount of risk to take

Counterintuitively, the biggest mistake people in their 20s make is Not Taking Enough Risk, says Robert R. Johnson, PhD, CFA, CAIA & Professor, Heider College of Business, Creighton University. Individuals need to be taught to invest for retirement, not save for retirement. The surest way to build real long-term wealth for retirement is to invest in the stock market. Starting early is the key to successfully building wealth because of compound interest, says Johnson.

Albert Einstein said that “compound interest is the greatest mathematical discovery of all time.” Time is the greatest ally of the investor because of the “magic” of compound interest.

Mistakes begin early in life, and people’s biggest financial mistake is taking too little risk, not too much risk. A recent UBS study showed that millennials and the World War II generation have similar asset allocations — low allocations to equities and inordinately high allocations to cash. 

You have to start early

Both generations saw cataclysmic financial events in their formative years — the WWII Generation with the Great Depression and Millennials with the Financial Crisis. Millennials need to begin compounding early and let that compounding work its patient magic over the decades.

According to data compiled by Ibbotson Associates, large-capitalization stocks (think S&P 500) returned 10.0% compounded annually from 1926-2018. Over that same period, long-term government bonds returned 5.5% annually, and t-bills returned 3.3% annually. 

The surest way to build wealth over long time horizons is to invest in a diversified portfolio of common stocks. Someone with a long time horizon should not have exposure to money market instruments, yet many investors do because they fear the stock market’s volatility adds Johnson.

Find the right advisor

Kali Roberge from Beyond Your Hammock offers the following information when it comes to finding the right advisor:

If I could go back and tell my younger self a piece of advice, I would tell my younger self to do far more research into the financial services industry. I initially talked to an advisor in his mid-50s who essentially told me, “open up a Roth IRA and max it out. That’s all you need to do for the next 20 years.” 

This advisor never asked me about my goals, what I wanted to do with my life, or what I valued. “Just max out your Roth IRA and go away,” he said! — which is CRAZY because there is a lot of changes between your early 20s and retirement age. And what I needed was financial planning guidance, advice, and coaching, says Roberge. What I got was someone charging high fees to do nothing, essentially.

Thankfully I caught on pretty quickly because I kept doing my research and asking questions. Within a few months, I moved my Roth to Vanguard and also opened up a brokerage account. I invested in low-cost index funds and target-date funds, set up automated contributions, ignored the news’s noise, and avoided speculative market bets.

The result

This simple, straightforward strategy allowed me to go from nothing to having a net worth of six figures by 25. Today, my investment strategy is a little more sophisticated — and I ended up working in the financial services industry myself.

Knowing what I do now, I wish to go back and tell my younger self that having a financial advisor’s support is a good idea. But, that it’s far more essential to get started with something simple, affordable, and straightforward. When life and finances get more complicated, then it’s time to find the RIGHT advisor.

The right advisor is someone who listens to you, who starts with your values, goals, and priorities — and doesn’t just dole out cookie-cutter advice.

The right advisor should also be:

  1. Is a fiduciary 100% of the time (and will put that in writing for you)
  2. Holds a CFP designation
  3. Is fee-only (which is NOT the same as fee-based!) Fee-only advisors do not sell products or earn commissions. They are only paid directly by you as their client; they’re not getting kickbacks from other companies incentivizing them to push products or investment solutions.
  4. May offer investment management, but doesn’t REQUIRE that to provide you with financial planning advice. Indeed, investment management and financial planning are two separate functions, and you can’t create a sound investment strategy without first understanding someone’s financial planning needs. You shouldn’t HAVE to invest with an advisor if you just want financial planning advice.
  5. And, just as important as all of the above — the right financial advisor for you should be someone who understands clients like you. Ask who they work with — if it’s “individuals and families,” that essentially means everyone, which might not be helpful if you’re a 30-something entrepreneur who is married but doesn’t want kids and is interested in selling your business and then starting a charity, for example. That’s so specific — and there ARE advisors out there who can help people like you! You can get someone who specializes in the kinds of financial planning issues you’re dealing with, and it’s worth doing some research to find a planner like that to help you.

How to find an advisor

Fortunately, financial advisors are much more accessible now and don’t just serve high-net-worth individuals. The XY Planning Network has a directory of fee-only fiduciary advisors in different niches. You can also reach out to the National Association of Personal Financial Advisors, says Noa Hoffman from Singleton Foundation for Financial Literacy and Entrepreneurship. The two main questions to ask when interviewing an advisor are ‘how are you paid’ and ‘are you a fiduciary.’ Stay away from advisors paid through commissions-only because they might not have your best interests in mind, Hoffman adds.

Set up automatic deposits

The best, most straightforward way to start investing is to set up automatic deposits into your investment account, so it is on auto-pilot, aka you don’t even have to think about it. Set it up, so you automatically deposit $x into your investment account every two weeks, once a month, every other month, etc., says Taylor Hoffman. Whatever works for you. Then each year, increase the amount you are depositing by a set percentage like 10%, so you get used to saving more and more.

What stocks and ETF’s should I choose?

Stacy Caprio from Fiscal Nerd suggests putting half of her savings into stocks of companies that I use every day, that have positive, growing profit in their financial statements. Caprio never knew stocks’ financial statements were available online and had no idea how much they could grow. Giving myself this small piece of knowledge would have helped me tremendously to invest and save well over the years if I had been aware. But, whatever you do, Keep it simple.

On the other hand, Dave Hicks from Perast Capital Management believes investors starting out should not pick stocks:  Don’t try to beat the market, or try to time the market or churn through lots of trades– even most professionals can’t do better than a low cost index fund!

Diversify

A balanced portfolio should have 10-20 stocks without too much disparity in amounts invested in each, says Rick Wallace from Tackle Village. Try to achieve balance in sectors. For example, for every biotech stock that has potential but is yet to earn a dollar, own shares in a toll road or similar type of investment with steady earnings and regular dividends, says Wallace. Make sure you are geographically diversified as well! For example, Wallace suggests owning good companies in Asia (Hong Kong, Singapore), Europe, Australia, and the US.

What to put in an IRA and 401-K

With regards to your IRA and a 401-K, John Kilpatrick recommends: MAX THEM OUT. Now, what do you buy in those?  Kilpatrick adds: My wife and I tried a bit of an experiment with our IRAs. Hers is in a simple high-cap index fund. Mine was “curated” by an investment advisor. Guess which one has performed the best? Yep, and it’s not even close. So, cram the max into the 401-K & IRA, stick them in an excellent blue-chip index fund, and forget about them. The earlier you start this, the better off you’ll be in the long run.  

Target-date funds

What to invest in? Keep things simple. It is usually NOT recommended to invest everything into just one stock even though it might be tempting. Instead, Taylor Hoffman suggests considering a one-stop-shop fund called a “target-date” fund that will automatically invest your portfolio according to how far you are away from retirement. Target date funds are labeled with different years, so you’d just choose the one closest to your desired retirement date. For example, if you’re 20 and want to retire at 70, you’d select a target-date fund with Hoffman’s year 2070.

Consider how much you’ll need in retirement

The rising cost of living and stagnant wages have made financial independence a challenge, says Sean Gould from Waddell & Associates. No matter how much (or little) money you have, the basis of any financial plan is to make a budget and work toward mitigating unnecessary spending. 

If you desire to maintain your current standard of living during retirement, you should plan to replace 70-80% of your income before that point. With uncertainty surrounding Social Security for a future retirement income source, saving more has become essential. Even if your budget doesn’t allow for significant retirement savings early in your career, starting with even a small amount is vital.

Final thought: listen to those who had investing success

To get started in investing in Real Estate or stocks, focus on one, and then talk to people you know who have done it successfully to learn. Don’t listen to people who say investing is risky, says Tamar Hermes from Wealth Warrior Woman. Most of those people have lost all their money on a bad deal or never even invested.

Hermes recommends surrounding yourself with people you admire and had success investing. Invite them to a socially distanced coffee and see what you can learn. Then dip your toe in buy signing up for your account on Vanguard or finding a realtor in the area you want to buy in, and start shopping. Neither of those options will cost you a dime.

I hope you enjoyed this piece. If you have anything to add about how to start investing in stocks and ETFs, please leave a comment below!

-Rick

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