Best Way to Invest: 5 Steps to Get Started in 2024

Nothing beats investing for building wealth over time. And while there are some steps you’ll have to take to get started, here’s the good news: It is not rocket science.

The first step to investing is figuring out exactly why you want to do it. The why informs the how. In this article, we’ll help you figure out that why, plus give you the tools and know-how to get started investing, all in five quick steps.

1. Decide on your investing goals
2. Choose an account type
3. Assess your risk tolerance
4. Choose your investments
5. Stay the course

1. Decide on your investing goals

Understanding what you want your money to do for you is crucial for figuring out the best way for you to invest. Your financial goals inform when you’re going to need the money, which determines the best investment account for that money.

Maybe you want to invest for your child’s college education, for your own retirement, or because that #fintok influencer said investing is the best way to earn money on your money (in this case, the influencer is right!).

Maybe it’s a combo of all of the above, or something entirely different. Your goals for your money determine where and how you invest. Here are some examples to get you thinking about your goals:

→ I want to invest because everyone else is doing it

Great! Investing is a smart way to grow wealth over time. There are different ways to approach this goal:

• If you want to be an active investor, researching market conditions, picking individual stocks, mutual funds, ETFs or other investments that you might trade in and out of, then write up a plan for your money. What’s your long-term goal with investing? What’s the maximum amount of money you want to put into the markets? Check out our free stock market education guide to learn more about active investing.
• If you’re not sure how to approach investing, start simple. Take a small amount of money — let’s call it play money — open a brokerage account, pick an investment and see what happens. These days, fractional shares, which allow you to purchase a portion of a company’s stock, make it easy to access high-priced company shares with as little as $1. The key with this approach is: Be aware your investments may lose value, which means you could lose money if you sell your shares when their value is lower than when you purchased them. If you’re not sure how you feel about that, then try paper, aka virtual, trading (pick one of the best brokers for beginners that allows paper trading). That way you can take some practice runs at investing — without risking your money.
• Or, if you want to create a set-it-and-forget-it investment portfolio, where the power of compounding builds your wealth over time, then welcome to the world of passive investing. You’re in great company. Take a look at some of the simple portfolios we describe in the article "Investing for Retirement: A How-to Guide." You can use the same portfolios for any investment that’s at least 10 years out (if you choose a target-date fund, pick the fund named for the same year you’ll need the money). If you let your earnings sit and grow — thus earning money on those earnings and reinvesting any dividends so they can grow too — you’ll be harnessing the magic of compounding. Take that, Jim Cramer.

→ I want to invest for retirement

Smart. Retirement is exactly the type of long-term goal for which investing in a diversified mix of stocks and bonds makes a lot of sense.

Since the government offers tax breaks that can supercharge your retirement-savings dollars, consider investing for retirement within a workplace plan like a 401(k) or a 403(b), if you’ve got access to one, and/or in an individual retirement account, or IRA. You can open an IRA at almost any reputable broker. Read our guide to retirement accounts to figure out which retirement account is best for you, and check out our sister site for the best brokers to open an IRA.

While stocks are more volatile than other investments, such as bonds, they pay investors for that risk with higher average returns over time. And long before you need to withdraw the money, you can choose to sell your shares — ideally, while their value is flying high — and shift to less volatile investments, thus avoiding the risk of being forced to sell your shares right when the market has tanked.

» Want to know more? Read our quick takes: What Is a Stock? and What Is a Bond?

→ I want to invest for my wedding/a trip to Fiji/some other two- to five-year goal

If the financial goal you’re looking to reach is less than five years away, investing probably isn’t the best plan of action. Why? Because that’s a fairly short time frame. If the market goes into freefall and doesn’t recover before you need to withdraw your money, you could end up losing your hard-earned savings.

Consider, instead, a high-yield savings account, a money market account, a Certificate of Deposit (CD), or the cash option in a brokerage account, so you can earn as high an interest rate as possible without putting this short-term money at risk of losing value.

All of that said, active investors may well buy and sell stocks much more frequently — for them, a short-term time horizon doesn’t preclude investing in stocks. If that’s how you roll, then be sure to do your homework: Research your investments and monitor the market conditions that will affect their value.

2. Choose an account type

Now that you know your goals for this money, you can figure out which account is the best type for you.

• A brokerage account gives you flexibility — you can take money out when you need it and you’ll have access to any type of investment you’ll need, from stocks to mutual funds, bonds to ETFs. Here’s our round-up of best brokers for beginners at our sister site StockBrokers.com.
• A traditional or Roth IRA, opened at a brokerage, gives you tax benefits to encourage you to save and invest for retirement. (Ditto a 401(k) or other workplace plan.) Here’s our round-up of best brokers to open an IRA on StockBrokers.com. Also, see how to choose the best retirement account for you.
• Similar to a retirement account, a 529 college savings plan gives you tax breaks for saving for college costs.
• If you have a health savings account (HSA) and plan to invest that money and pay for health-care costs out of savings, then consider opening your HSA account at a brokerage.

Which investment account should I choose?

3. Assess your risk tolerance

Your risk tolerance is a measure of how comfortable you are with risk (e.g., the stock market’s inevitable ups and downs). Understanding your stomach for risk helps guide your asset allocation, which, put simply, is how much money you put in stocks vs. bonds vs. cash.

Investing is a classic example of the relationship between risk and reward: The more risk you’re willing to take, the higher the potential payoff. For example, stocks promise the highest returns over time compared to less volatile assets like bonds, but the stock market also comes with the highest risk that you’ll lose money.

Meanwhile, investing your money in, for example, a very low-volatility bank savings account does have at least one big risk of its own: Inflation will eat into your purchasing power.

Your asset allocation balances your tolerance for risk with your desire to make money on your money. If you’ve got questions about how to divvy up your portfolio among stocks, bonds and cash, check out our article on what asset allocation is and how it works.

Here’s a question to help you gauge your risk tolerance. Let’s say you opened your investment account statement and saw that your account’s value had dropped 50%. Would you:

• Immediately panic-sell all your investments?
• Sigh, and then go back to bingeing Netflix?
• Immediately invest more money, thinking that this market decline is a buying opportunity?

If you have a high tolerance for risk, you might be comfortable holding a big portion of your portfolio in stocks (hello, 90/10 portfolio), aware that there will be bumps in the road but happy to accept those in exchange for the higher returns offered by stocks.

If your response is to panic, then your risk tolerance is low and you should be wary of investing too heavily in stocks — otherwise, you’re likely to lock in your losses by selling as soon as the market drops, which it inevitably does. You may find that you prefer a conservative allocation weighted more equally between stocks and bonds.

You can find risk-tolerance quizzes online to get an idea of where you stand. And don’t forget that if you have time on your side and can ignore short-term market fluctuations, the stock market offers the highest returns over time.

4. Choose your investments

You know your goals, the account type you’re going to use, and you have a sense of your risk tolerance. It’s time to pick your investments.

→ If you want to be an active investor, taking a role in picking individual stocks and other investments, and timing your trades in and out of those investments based on market conditions and other factors, then you’re going to need to start doing research. Check out our free trading guide You may also benefit from using tools like stock screeners or trading journals. Or, if you just want to dive right in, you can start by opening an account at a top-rated broker.

→ If you’re a passive investor, looking for long-term gains without too much time commitment, the next question for you is: do you want to DIY it or call in the pros?

The DIY passive investor: Generally, passive investors with a long-term outlook invest using index mutual funds or ETFs, which make it easy to invest in thousands of companies with the purchase of just one investment.

Index funds track a set index, which is essentially a list of companies organized around a theme. For example, the S&P 500 index tracks the stock-market performance of 500 large U.S. companies. Index funds are essentially on autopilot — that means they tend to be very low-cost because a manager isn’t actively running the fund.

A note on costs: When investing in individual stocks, there’s generally no fee other than the trading fee, which these days is usually zero in the U.S. With mutual funds and ETFs, there are fees to watch for, including the so-called expense ratio (essentially a management fee), plus front-end and back-end loads and 12b-1 fees (essentially marketing fees).

Actively managed funds can have expense ratios north of 1%, and you might see front-end or back-end loads and 12b-1 fees added on. This is why we love index funds. They have much, much lower expense ratios. For example, the expense ratio for Charles Schwab’s Total Stock Market Index Fund is 0.03%. Vanguard’s Total Bond Market Index Fund’s expense ratio is 0.05%.

This is why we love index funds: They have much, much lower expense ratios than actively managed funds.

With just two to five index mutual funds, an investor can be highly diversified, all while investing in a very low-cost portfolio. For example, “lazy portfolios” are designed around this very idea; read more about lazy portfolios on the Bogleheads website (the Bogleheads are named after John Bogle, founder of the Vanguard Group, who is credited with inventing the index fund).

The let-the-pros-do-it passive investor: You know you need to invest, but you really don’t want to deal with figuring out how to do it? No problem. The best bet for you might be a robo-advisor, which is a low-cost, automated financial advisor that operates based on the assumption that the vast majority of investors are well-served by the same handful of investment portfolios. You find a robo-advisor, answer some questions about your goals and risk tolerance, and then they put your money into the investment portfolio they’ve designed for investors like you. Many of the largest brokers, including Charles Schwab, Vanguard and Fidelity, offer a robo option. Another option is investing in a one-stop-shop target-date fund — check out how to invest for retirement for more on those.

5. Stay the course

If you’re a passive investor in it for the long haul, it’s best not to get too caught up in the day-to-day ups and downs of the market. It’s OK to ignore the daily headlines as the market gyrates — and gyrate it will.

Still, you don’t want to ignore your finances entirely.

First, once a year or so you want to look at your asset allocation (remember: That’s essentially the way you’ve divvied up your money between stocks and bonds, and different types of stocks and bonds). Market moves can shift your asset allocation out of whack over time, so once a year or so check to make sure you’re still in that 80/20 portfolio, or whichever allocation you chose for yourself. You might need to shift your investments a bit to get your portfolio back to where you want it.

Second, you want to revisit your overall financial goals once a year or so and confirm that you’re doing what you can to meet them. Obviously, most of us are dealing with limited resources to some degree — we can’t do absolutely everything we want to do because we don’t have enough money — so check that your money is working toward your most important money goals — including both shorter-term goals like that trip to Southeast Asia, and longer-term goals like retirement.

For active investors who might have a shorter timeframe than passive investors, the crucial to-do is to keep a close eye on your investing plan: What were your original goals for picking the investments you’re in, are those goals still in play for you, and are those particular investments the right tools to get you there?

How do beginners invest in stocks?

The first step for a beginner to invest in stocks is to open a brokerage account at a broker, such as Charles Schwab, Fidelity, Vanguard, Robinhood, etc. Check out our roundup of the best brokers for beginners on our sister site, StockBrokers.com.

Next, pick your investments. The best investments for you will depend on your goals, time horizon and risk tolerance. Put simply, you can invest in stocks directly, by buying shares of a company, or you can invest in many companies at once through an ETF (exchange-traded fund) or mutual fund, both of which pool investors’ money to purchase shares of many companies.

A couple of simple ideas to get started:

• Purchase a total stock market ETF or mutual fund. Because a total stock market ETF or mutual fund invests in every publicly traded company, this type of investment gives you a highly diversified portfolio in one easy purchase.
• Pick a company you want to invest in, such as Apple, Amazon or any one of the thousands of publicly traded companies in the U.S. If one share of that company’s stock is too expensive for you, find a broker that offers fractional shares.

Don’t forget that if you’ve got a retirement plan at work that you’re participating in, then you’re already investing. Pat yourself on the back.

What is a robo-advisor?

Robo-advisors are low-cost, automated investment advisors that reduce costs by harnessing the idea that a handful of investment portfolios are well-suited for most long-term investors. Many brokerage firms now offer a robo-advice component, where you pay a small fee and they invest your money in a preset portfolio. Robo-advisors can be a useful low-cost alternative for people who want to invest but are afraid to take the first step, or prefer not to spend the time researching and monitoring their own investments.

What is a stock?

Companies issue shares of stock to raise money for a variety of goals, such as paying off debt, expanding operations, launching new products and more. Company stock is also called equity, and its value can rise and fall based on the company’s situation as well as broader market conditions.

When you buy a share, you become a part owner in that company. You become eligible to receive dividend payouts (if the company offers those). You get to vote at shareholder meetings. When you visit HQ, go ahead and grab a stapler on your way out the door. Or depending on the company’s market cap, maybe just a staple.

Stocks come in different flavors:

• Growth stocks are expected to grow — increase in value — faster than other types of companies.
• Value stocks are seen as a good deal for the money — their price-to-earnings ratio is low and they’re undervalued by the market.
• Income stocks pay a sweet and steady dividend.
• Small-cap stocks are companies that have a small market capitalization (market cap is the price of the stock multiplied by all outstanding shares), while large-cap stocks have a — you guessed it — large market capitalization.

» Find out more: Read What Is a Stock?

What is a mutual fund?

A mutual fund is an investment product that lets a group of investors pool their money to expand their purchasing power. So everyone puts money in, and the fund manager goes out and buys shares in companies (or buys bonds) as per that fund’s investing objectives.

For example, a total U.S. stock market fund will buy shares of all publicly traded companies in the U.S. If you didn’t have access to that total stock market mutual fund, assuming you’re not a wealthy person, it would be extremely challenging to invest in every single company on your own — there are literally thousands.

There are actively traded mutual funds and index mutual funds. Actively traded funds have managers buying and selling based on their insights into how to beat the market. Index funds track a specific index with the aim of matching that index’s returns.

What is an ETF?

An ETF, aka exchange-traded fund, is a type of mutual fund, but, as its name suggests, an ETF’s shares are traded on an exchange, just like stocks are. That allows for intraday trading, unlike traditional mutual funds, which trade once per day only.

ETFs are often — but not always — cheaper than traditional index mutual funds, and there may be tax advantages, too. Plus, now that most brokers offer free trades, you don’t have a trading fee to worry about.

You can find mutual funds and ETFs that offer exposure to the exact same investments. Choosing between them comes down to comparing costs: Does the broker charge a trading fee on either investment? What is the expense ratio for each investment?

What is an index fund?

An index fund is a mutual fund or ETF that tracks a specific index. An index is essentially a list of companies. For example, the S&P 500 is an index of 500 large U.S. companies. Charles Schwab, one of the major mutual fund providers, has an index mutual fund that tracks the S&P 500, and Vanguard, another fund provider, offers an ETF that tracks the S&P 500.

The very frequently cited Dow Jones Industrial Average, aka DJIA or the Dow, is an index of 30 major U.S. companies. There’s an ETF that tracks it: the SPDR Dow Jones Industrial Average ETF Trust.

Index funds offer investors an extremely low-cost path into the stock and bond markets because, unlike actively managed funds, index funds aren’t paying a fund manager to try to outperform the market. Instead, an index fund is set to mimic an index by investing in the companies listed on that index.

What is a bond?

A bond, aka fixed-income security, is issued by a company as a means to borrow money. When you buy a bond, you’re loaning money to the borrower — which could be a company, the federal government, or a state or local municipality — and the borrower is promising to pay you back with interest.

The borrower owes the lender (that would be you, if you buy a bond) both the stated interest and the face value of the bond. That face value gets paid back at the bond’s stated maturity, that is, when the loan comes due. Bonds offer investors both steady income from the interest payments as well as the promise of getting the bond’s face value back in full at the end of the term.

» Learn more: Check out What Is a Bond?

What is cryptocurrency?

Doesn’t this seem like the perfect question for ChatGPT to answer? Here’s what our favorite AI had to say:

Cryptocurrency is a digital or virtual currency that uses encryption techniques to secure and verify transactions and to control the creation of new units. It is decentralized, meaning it is not controlled by any government or financial institution, and is often based on blockchain technology, a distributed ledger that records transactions in a secure and transparent manner.

Also…

Bitcoin, the first and most well-known cryptocurrency, was created in 2009 by an anonymous individual or group of individuals under the pseudonym Satoshi Nakamoto. Since then, thousands of other cryptocurrencies have been created, each with its own unique features and potential applications.

That pretty much sums it up. All we’d add is: Proceed carefully if you plan to buy this highly volatile currency.

What is an NFT?

What, indeed, is an NFT? Seems appropriate here to check in with the infamous ChatGPT to see how one tech innovation views another…

An NFT, or non-fungible token, is a unique digital asset that is stored on a blockchain, a distributed ledger technology similar to that used for cryptocurrencies. Unlike cryptocurrencies, however, NFTs are designed to represent a specific item, such as a piece of artwork, music, or other digital content, and are not interchangeable or fungible.

Perhaps the more important question is, why do you ask? If you’re going to put your hard-earned money into an NFT, proceed at your own risk. We’ll cover our eyes.

References

Bogleheads

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