The oldest rule for thinking about how to start investing money investing is also the simplest: “Buy low, sell high.” While it seems blindingly obvious and begs the question of why anyone would want to do anything else when investing, you might be surprised how hard it is to put into practice.
Investing is a discipline which plays not only on astute analysis and remarkable luck but also on people’s behavioral responses. Holding onto your stocks during periods of intense market volatility takes a lot of courage and isn’t what the human brain is wired to withstand.
But how do you approach investing if you don’t have a background in it? Without much prior experience, it’s tough to say. There’s an ocean of information out there and sorting through it requires deliberate, thoughtful reflection when piecing together what you’ve read.
When it comes to growing your wealth and working toward financial independence, investing is an important tool. Through investing, you can buy assets which, hopefully, grow in value, whether it is a home, a retirement account, stocks, or bonds.
Let’s walk through some simple steps on how you can begin your investing journey.
First, Invest in Yourself
Recently, I attended a wedding with my wife and her family where my brother-in-law approached me with a conversation about investing. He wanted to know how he could replicate the performance seen by the world’s greatest investors and learn how to start investing with little money and turn it into an account balance with two commas in quick fashion.
Boy, if only I knew the sure-fire way to make that path my own reality, we wouldn’t have driven to the wedding in a rented subcompact.
I cautioned him that those investors are truly gifted and the exception to the norm. While it is important for him to know how to start investing young, I told him the common trait these legendary financiers share: following a systematic and disciplined approach to investing.
I told him that regardless of investing style, timeframe, or philosophy, they all have discipline, transact based on logical, informed thinking and do not let emotions drive their decision-making. These are the most important elements required for investing success. But don’t just take my word for it, many folks seem to agree,,,.
The aforementioned investing strategies are merely a means to an end and come later. Any investor starting out should develop these core principles and learn to stick to them during times of good and bad.
How to Begin Investing: Develop Your Investing Approach
As I explained this to my brother-in-law, I could see his disappointment in my not knowing any shortcuts to overnight investing success. However, we launched into a discussion around how he could develop his own disciplined investing approach by first becoming a student of markets.
Knowing that this discussion could become overly cumbersome in just one conversation, I decided to share only introductory steps.
Investing isn’t easy but, at the same time, it shouldn’t be seen as a frightening endeavor. If done wisely and consistently, investing can separate you from retiring comfortably at a reasonable age and working into your golden years out of necessity. We all want a Millennial retirement, so why shouldn’t we make smart decisions to get there?
So, with that thinking, I will do the same here and be sure to follow up with more detailed posts in the future. Short of a formal education in finance, my five high-level steps for gaining familiarity with investing in the market are as follows:
Read a Lot About the Market.
Sounds logical, right? You’d be surprised by how many people I’ve heard say they got into a stock simply because so-and-so recommended it.
This person winds up not doing a lick of due diligence before investing. This person didn’t know what was happening in the market, nor anything about the company beyond it being a hot stock tip.
To counteract this, I suggest first beginning by reading reputable sources that discuss markets (e.g., MarketWatch, the Financial Times, the Wall Street Journal, Reuters, Yahoo Finance, among others). As you read more, I really suggest approaching every article with a heavy dose of skepticism.
This will make you more likely to piece together content from multiple sources and form your own thinking about markets and the companies in them.
As an exercise, take a moment to read this article about the earnings estimates for public companies. After you’ve read it, what were the main, salient points that stood out to you? I found the following to be most important:
- Many investors seem to think lackluster stock market movement during this quarter’s earnings announcements indicates peaking corporate profits. When companies announce record earnings and markets barely move, it must mean expectations were high and future earnings don’t look to get any better.
- Analysts, or those people who follow stocks and publish opinions on them, disagree, are increasing their profit projections at the largest rate in 6 years. This is where the skepticism should come into play. This conflict means someone is wrong, but who? Perhaps both are right and yet both are wrong. The truth likely lies somewhere in between.
- A growing economy and corporate tax reform have benefited companies but trade war activity makes for an uncertain outlook. To illustrate uncertainty, reporting companies have seen the most volatile trading in two years immediately after announcing earnings results. However, it appears this trading reaction could be the result of poor understanding of the effects of the recent tax reform legislation and clouds the visibility for accurately forecasting future earnings. So the volatility merely highlights poor forecasting abilities, not necessarily anything indicative of market direction.
- A lot of positive developments exist to push markets higher but looming risks serve to temper optimism usually present with such strong earnings growth. Bottom line: there doesn’t appear to be a strong case for a plummeting market but neither for a sustained rally.
As you read more pieces like this, reflect after each one and begin to piece together content from what you’ve read. Building this understanding won’t happen overnight.
2. Start Looking into Individual Companies.
Naturally, you will come across individual companies. You should identify companies consistently performing well or making strides to improve. I recommend starting by researching five companies you admire (preferably in different industries) and cultivating ideas about the strategies of each firm, their competitive advantages, and the core value they provide.
If you don’t believe any of these items to be durable over time, I would suggest moving on. Recognize what sets these companies apart from their peers, the prospects for the markets in which they operate (e.g., growing market vs. declining market), and how the market values them. Cast aside companies if you uncover something you don’t like. Don’t let sunk costs guide your thinking.
Ultimately, a stock represents a piece of a company, so sustainable profitability is an important factor. You really want to assess how profitable these companies can be, because before you decide how much to pay for a stock, you need to understand how much money that company makes. If the company makes a lot of money consistently, you will likely have to pay more to acquire the stock.
3. Consider Investing in ETFs.
Investing is hard. It’s more art than exact science. By writing this investing step-by-step guide, my goal is not to simplify it. In fact, what I want to convey as clearly as possible is just how difficult it is to invest in individual stocks.
Investing is so much more than following some rules of thumb. Getting an edge is difficult so you shouldn’t develop irrational self-confidence and think you have an investing edge when you really don’t.
Usually, being humble and saying to yourself that you don’t really know can be great to steady your decision-making.
If you don’t have confidence in selecting individual companies to outperform the market, another strategy is to use exchange traded funds (ETFs) to invest. You can consider investing in low-cost ETFs through brokerages (e.g., Vanguard) or robo-advisors (e.g., Betterment).
4. Take Action.
Once you’ve gotten a decent handle on the overall market’s activity and analyzed a set of attractively-valued companies you think stand out from the rest, it’s your time to pull the trigger. Alternatively, as I mentioned in step 3, consider investing in low-cost ETFs through brokerages (e.g., Vanguard, Fidelity) or robo-advisors (e.g., Betterment, Wealthfront).
I personally use Betterment for most of my investing and the link above will grant you 90 days of free investing to use the service. There are a number of retail brokers you may use to invest in individual stocks (e.g., TDAmeritrade, Interactive Brokers, E*Trade, etc.).
5. Continue Following the Companies and Markets.
By doing your due diligence, you will be able to follow these companies and see if they continue to perform as you expect. If a company makes a decision you don’t agree with or think will adversely impact its value going forward, it might be a good idea to cut your losses short and move on.
Investing well can produce very rewarding experiences you share with those you love. For me, it allowed me to buy my first home and now to grow the assets necessary to purchase my next one together with my wife to start our family.
In general, developing your own disciplined investing approach based on rational, informed decision-making can lead to financial peace of mind.
Learning how to invest wisely at a young age will have you maximize your youth by allowing compounding to work to your benefit. Do yourself a favor and invest in yourself by following these 5 steps on how to start investing money.
Finishing the conversation with my brother-in-law, as I laid out this process to meet his interest in becoming a student of markets, I stressed how these are the first steps to developing a disciplined investing approach.
Taking the mindset that informed investing can lead to real gains, I saw he wanted to jump in and work toward developing his own investing approach. He may not become the next Warren Buffett but following through will allow him to have his (wedding) cake, and eat it too.
About the Author and Blog
In 2018, I was winding down a stint in investor relations and found myself newly equipped with a CPA, added insight on how investors behave in markets, and a load of free time. My job routinely required extended work hours, complex assignments, and tight deadlines. Seeking to maintain my momentum, I wanted to chase something ambitious.
I chose to start this financial independence blog as my next step, recognizing both the challenge and opportunity. I launched the site with encouragement from my wife as a means to lay out our financial independence journey to reach a Millennial retirement and connect with and help others who share the same goal.
Some of my favorite things to discuss include investing in index funds, how to save money, travel hacking with help from the Reddit churning community, house hacking and optimizing the benefits of my condo vs. apartment living, and tax topics like the earned income tax credit, common tax deductions, tax reform in 2018, or other useful tax topics. I want this to be a journey for us all to learn how to make a lot of money and pursue the lives we want.
Please continue to watch the site for more to come and post below with your questions or comments.
I have not been compensated by any of the companies listed in this post at the time of this writing. Any recommendations made by me are my own. Should you choose to act on them, please see my the disclaimer on my About Young and the Invested page.