How Would I Invest if I Were Just Starting Out?
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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
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
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)
21 Comments on this post
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Beginner said:
Hi, Dividend guy. Thanks so much for your suggestion! It is very helpful. But i got one question, why not buy the individual stock in the beginning? My plan is to buy some dividend Aristocrats stocks. I will hold it and keep reinvesting the dividend. Is there any risks for that?
December 11th, 2007 at 11:59 am -
Dividends4Life said:
Well done! I remember Buffet once saying that he couldn’t find anything to buy, everything was over-priceed. That struck me as odd at the time, but the more I have become a studet of investing the more I find myself in the same position.
Best Wishes,
D4LDecember 11th, 2007 at 6:50 pm -
FourPillars said:
Thanks a lot for the link!!
Mike
December 16th, 2007 at 8:09 am -
Gean Oliveira said:
Hi Dividend. Thank you for sharing with us this information. As a beginner, it is really important to know the steps involved - as you are doing. I have read some books and of them is from Derek Foster - The Lazy Investor. Do you think it is a good idea to buy DRIPs in the beginning until you have at least $20K? Or doesn’t make any sense at all?
I don’t have $20k to start buying stocks, but my plan is start with $100
It is a long way, but at some point we need to start, right?Thank you for your help!
February 29th, 2008 at 11:51 am -
miragana said:
Good day!
It is very informative and has a very good quality in it.
I like it…http://www.Squidoo.com/MPI
mliragana.blogspot.comThank you very much for your time.
September 2nd, 2008 at 9:16 pm -
Ray The Money Man said:
Click on my name for some good insight into starting out! Welcome to the greatest game in the world.
October 27th, 2008 at 10:56 pm -
http://www.jeremydelgado.com/blog said:
well put, we need more good info out there…
October 29th, 2008 at 1:24 pm -
Bearly Investing said:
I would start DCA small amounts of gold bullion too.
May 29th, 2009 at 4:45 pm
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