Getting Started with Investing
From Knowledge to Action
Introduction
You've learned why investing matters, what investment vehicles exist, how risk and return relate, and how retirement accounts work. Now it's time to actually start investing. This lesson provides a practical roadmap for opening accounts, making your first investments, and building a sustainable investing habit.
Before You Start Investing
Ensure these foundations are in place:
Checklist:
- $1,000+ emergency fund (ideally 3-6 months expenses)
- High-interest debt paid off (credit cards)
- Consistent monthly budget surplus
- Understanding of your investment timeline
- Clear about your risk tolerance
If these aren't in place yet, focus on them first. Investing with high-interest debt is like running forward while walking backward.
Step 1: Choose Your Account Type
For Retirement:
- 401(k) if employer offers one (especially with match)
- IRA (Roth or Traditional) through a brokerage
For Non-Retirement Goals:
- Taxable brokerage account for goals before retirement
- No contribution limits
- No withdrawal penalties
- Less tax-advantaged
Step 2: Select a Brokerage
For IRAs and taxable accounts, you'll need a brokerage. Top choices for beginners:
Major Brokerages:
| Brokerage | Highlights |
|---|---|
| Fidelity | Excellent funds, no minimums, great research |
| Vanguard | Pioneered index funds, investor-owned |
| Charles Schwab | Full service, bank integration |
App-Based Options:
| Platform | Highlights |
|---|---|
| M1 Finance | Free automated portfolios, fractional shares |
| Robinhood | Simple interface, fractional shares |
| Betterment | Robo-advisor, automated management |
What to Look For:
- $0 account minimums
- $0 trading commissions
- Low-cost index funds available
- Good mobile app
- Strong customer service
Step 3: Open and Fund Your Account
Opening the Account:
- Choose your brokerage
- Select account type (IRA, taxable, etc.)
- Provide personal information
- Link your bank account
- Set up funding method
Funding Options:
- One-time transfer: Move a lump sum to start
- Automatic recurring: Set up weekly/monthly transfers
- Direct deposit: Route portion of paycheck directly
Start with whatever you can—even $50/month matters.
Step 4: Choose Your Investments
The Simple Approach (Recommended for Beginners):
Option A: Target-Date Fund
One fund that handles everything:
- Choose fund based on retirement year (e.g., "Target Date 2055")
- Automatically diversified across stocks and bonds
- Automatically becomes more conservative as you age
- One decision and done
Option B: Three-Fund Portfolio
Build your own diversified portfolio with three funds:
- Total US Stock Market (e.g., VTI, VTSAX, FSKAX)
- Total International Stock (e.g., VXUS, VTIAX, FTIHX)
- Total US Bond Market (e.g., BND, VBTLX, FXNAX)
Sample allocation for a young investor:
- 60% Total US Stock
- 30% Total International
- 10% Total Bond
What NOT to Do:
- Don't try to pick individual stocks
- Don't time the market
- Don't chase "hot" investments
- Don't invest in things you don't understand
Step 5: Automate Your Investing
Set up automatic contributions to invest consistently without thinking.
Automation Options:
- Payroll deduction: For 401(k) contributions
- Automatic transfers: From checking to IRA/brokerage
- Automatic investment: Many brokerages let you auto-buy specific funds
Dollar-Cost Averaging:
Investing fixed amounts regularly means:
- You buy more shares when prices are low
- You buy fewer shares when prices are high
- Average purchase price smooths out over time
- Removes emotion and timing from investing
How Much Should You Invest?
General Guidelines:
- Minimum: Enough to get full employer 401(k) match
- Target: 15-20% of gross income for retirement
- Starting out: Whatever you can afford, even $50/month
Building Up:
Start where you are and increase over time:
- Year 1: 5% of income
- Year 2: 7%
- Year 3: 10%
- Eventually: 15-20%+
Staying the Course
The hardest part of investing isn't starting—it's staying invested during market downturns.
When Markets Drop:
Remember:
- Volatility is normal and expected
- Downturns are temporary; markets have always recovered
- Selling during drops locks in losses
- Downturns are buying opportunities if you're still contributing
What to Do During Crashes:
- Don't panic
- Don't check your accounts obsessively
- Continue your automatic contributions
- If anything, consider buying more
- Revisit in 6-12 months (markets usually recover)
Common Beginner Mistakes
1. Waiting for the "Right Time" There's no perfect time. Start now.
2. Investing Too Little Something is better than nothing. Start and increase later.
3. Checking Too Often Daily checking leads to emotional decisions. Check quarterly at most.
4. Selling in Panic Selling during downturns locks in losses. Stay invested.
5. Chasing Performance Last year's winners are often next year's losers. Stick to your plan.
6. Overcomplicating A simple target-date fund or three-fund portfolio beats most complicated strategies.
Your Action Plan
This Week:
- Verify you have an emergency fund and no high-interest debt
- Choose a brokerage
- Open your first investment account (IRA or taxable)
This Month:
- Make your first investment (target-date fund or three-fund portfolio)
- Set up automatic monthly contributions
- Increase 401(k) contribution to get full match
Ongoing:
- Increase contribution rate annually
- Rebalance once per year
- Don't panic during market drops
- Stay invested for the long term
Key Takeaways
- Ensure foundations are in place before investing: emergency fund, no high-interest debt
- Start with employer 401(k) (get the match), then IRAs, then taxable accounts
- Choose a low-cost brokerage with no account minimums
- Target-date funds or three-fund portfolios are ideal for beginners
- Automate investing through recurring contributions
- Dollar-cost averaging smooths out market volatility
- The hardest part is staying invested during downturns—don't panic sell
Summary
Getting started with investing requires ensuring your financial foundation is solid first. Choose appropriate account types (401(k) for employer match, IRA for flexibility, taxable for non-retirement goals) and open accounts at a low-cost brokerage. For your first investments, target-date funds or simple three-fund portfolios offer diversification without complexity. Automate your contributions to invest consistently without willpower. Start with whatever you can afford and increase over time. The biggest risk isn't market volatility—it's selling in panic during downturns or waiting too long to start.