How the hell do I start investing?

*Disclaimer: this isn’t professional financial advice — just regular, educational info to help you learn! Investing comes with risks (yes, even losing money), and past performance DOES NOT guarantee future results. Always do your own research!

So, people are telling you to invest your money.

While this is good advice, as your money could be earning interest rather than sitting in a savings account, people rarely explain how you should go about doing it.

As a result, there are so many questions and concerns around investing, such as: what to invest in, which companies to work with, how much to invest, etc. All of these questions make investing seem like a much more complicated and scary process than it actually is. (p.s. the industry wants you to think it’s complicated so that you pay people to invest for you, but that’s a whole other post!)

So, here is your basic instruction manual for investing:

1. Evaluate whether you have enough money to start investing.

   1. The general rule is that you should have an emergency fund that can cover 3 to 6 months of living expenses (6 to 12 months for those with unpredictable incomes), as well as any debt paid off before you start investing your money.

   2. The reasoning behind having both an emergency fund and no debt before investing is that you generally want to keep your money invested so that it grows. Therefore, you should not be pulling it out to pay for everyday, monthly, or unexpected expenses.

      1. Everyday expenses: groceries, dining out, etc.

      2. Monthly expenses: rent, memberships, etc.

      3. Unexpected expenses: flat tire, medical bill, etc.

         
         

2. Choose the amount you are going to invest.

   1. Generally, it is suggested that you should have 5% to 10% of your portfolio (meaning all of the money you have) in cash.

      1. For example, if you have 10,000 dollars in total, 1,000 dollars should be in cash. This does not mean it has to be dollar bills sitting in your house, just that it should be easily accessible, like in a checking or savings account.

      2. Please note: this 1,000 dollars should be SEPARATE from an emergency fund. You should not be dipping into an emergency fund for day-to-day bills. If you are doing so, you should be saving rather than investing. See step 1 for more details as to why this is.

         1. You should have something like this before investing: 1) Emergency fund (3 to 6 months of expenses) AND 1,000 dollars in savings (10% of 10,000).

   2. So, continuing with the example of 10,000 dollars, if 1,000 of it is in a checking account, that leaves 9,000 dollars to be invested.

      1. If you are not comfortable investing this much of your money, feel free to put more of it in your checking account and start with a number you are comfortable with.

         1. Even if it is only 1 dollar that is invested, it will grow!

            
            

3. Invest your chosen amount (in our example, 9,000 dollars) with an investment management company.

   1. Now I personally adore Vanguard, as its creator, John Bogle, popularized the index fund (which was the first time someone presented the idea that any normal citizen could invest, rather than just those from wealthy families); however, there are lots of investment management companies you can work with, such as Fidelity, JP Morgan, Charles Schwab, etc.

   2. So, you pick which of these companies you want to work with (look into their fees, ethics, etc.) and go on their website to open an account with them.

      
      

      Here is how to do it on the Vanguard website (the process should not differ greatly on other sites):

      
      

      1. Go to the company's website

      2. Gather your personal information to enter (SSN & current bank details)

      3. Choose the type of account you want to open

         1. A brokerage account is opened for general investing. If you want to invest specifically for retirement, there are options such as 401(k), IRA, Roth, etc.

      4. Open the account

      5. Fund your account (using the banking information from Step 2)

      6. Pick the stock index fund you would like to invest in (for example: S&P 500 Index, Total Stock Market Index, etc.)

      7. Pick the bond fund you would like to invest in (for example: Total Bond Market Fund, Intermediate-Term Bond Fund, etc.)

      8. Buy your funds (actually transfer your money into the bond and/or stock index funds you selected. There should be a button labeled ‘buy,’ followed by a question asking how much you want to invest)

         
         

4. Choose your investments

   1. Now, as seen in steps vi and vii, you will need to pick what you want to invest in.

   2. For the majority of the population, there are two big things to invest in: the stock market (aka stocks) and bonds.

      1. In very simple terms, here are the definitions for the two

      2. Stock market: a financial marketplace where investors buy and sell shares of publicly traded companies, helping businesses raise capital (money) while allowing individuals to grow their wealth over time

      3. Bond: A loan/money that you give to a company or government, which they pay you back in full with interest (a fee that is paid to you as well, for having loaned them the money)

         1. For example, I bought a U.S. Treasury bond for 100 dollars with an interest rate of 1% for 1 year. This means I loaned the US government 100 dollars, which they will pay me back after one year. In addition to paying me the amount I lent, they will also pay me one additional dollar for having borrowed the money (1% of 100 is 1).

   3. While this all sounds complicated, there are two very simple things to invest in: stock market index funds and bond funds.

      1. Index fund: a collection of stocks that you invest in rather than one individual stock

         1. A common index fund to invest in is the S&P 500 Index Fund. This is a collection of the top 500 companies on the stock market. When you invest 500 dollars in this index fund, you are investing in 500 different companies rather than, say, just Google.

         2. This is GREAT for you, as the future of one company does not decide if your investment does well. For example, if you invested that same 500 dollars in only Google, and tomorrow they went bankrupt -- you would be screwed.

         3. However, if you use the first example and Google goes bankrupt, there will be 499 other companies in that index fund to protect you and your investment from the drop in Google’s stock price.

            1. In case you were confused by the last sentence, if a company does poorly, its stock price will drop. This means you lose money on the investment, as you will have bought it for a price that no one will be willing to buy it for now.

      2. Bond fund: a collection of different bonds you invest in, rather than one individual bond

         1. Bond funds follow the exact same logic as index funds. They invest in many different types of bonds rather than just one. There are many types of bonds, such as: corporate (goes to companies that need capital, aka money), municipal (goes to local government and public projects), government (goes to the government that issued it, e.g. the U.S., Finland, or another), etc.

      3. The reason stocks and bonds are a good combo is that while the stock market can be risky, bonds are quite stable.

         1. Note: The riskiness of the stock market is mitigated by long-term investing, and the stability of bonds is a result of their lower returns (lower risk, lower reward)

         2. The combination of stock index funds and bond funds is a great investment allocation as they are both diversified (meaning they are invested in more than one thing), so that you are protected if one stock or bond ends up performing poorly.

         3. Note: Diversification is your best friend when investing!

            
            

5. Choose your investment allocation percentage (choose how much of your money you want to invest where)

   1. The most common thing to invest in is, of course, the stock market, so the real question is what to make your asset allocation (how much of your money is invested in which things)

   2. The most common allocation formula is to take your age and subtract it from 100. Then take that number and put that percentage into stocks, and the remaining percentage into bonds.

      1. For example, if I am 24 years old, I should be 76% invested in stocks and 24% invested in bonds. However, for such an age, rounding to 80% stocks and 20% bonds is very common.

         1. This 80/20 allocation is suggested for two reasons:

            
            

            1) At 24, you are young

            2) As a result of being young, you will not immediately need this money for something like retirement.

            
            

         2. Please note: If you plan to pull your money out of these investments, you SHOULD NOT be investing. One of the realities of investing returns is that they are seen over long periods of time. You will not see much in terms of gains if you continuously pull out the money. If you find yourself needing to do so, you may not currently be in a position to invest, and THAT IS OK.

            
            

   3. Leave your money to grow!

      1. The key to investing is to start early and leave your money invested! Then your money, as the old saying goes, makes money while you sleep!

      2. If we finish with our same 10,000 dollar example:

         1. You invested 9,000 dollars today with an 80/20 stocks-to-bonds allocation. Assuming a 7% annual return from the stock market (which is the average historical return of the market) and a 2% return from the bond fund (conservative historical average).

         2. In 30 years, your investment would be worth somewhere around 57,000 dollars. And, all you did was not touch it!

         
         
         
         
      
      

      VERY IMPORTANT CAVIAT :

      
      

      Statistically speaking, the stock market will go up and down from year to year as well as decade to decade. If you believe in the economy, the stock market, etc., you will agree with the idea that over the long term, it will correct itself. For example, if there is a 50% drop, the subsequent rise needed to return to its original value (in this case, a 100% rise) will occur. That is not to say this will happen overnight, but that it will at some point in the future. If we look at the Great Financial Crisis of 2008, the drop was 57%, and the return to the pre-crisis average took four years. However, it did return to its pre-crisis average.

      
      

      Now, this is obviously terrifying. The idea that you could open your investment account app and see that you have half of what you had yesterday is very scary. However, it is something you must get comfortable with if you are going to invest over the long term.

      
      

      Statistically speaking, you (and I) will experience three or more recessions in our lifetime. This is based on the fact that historically, recessions occur about every 7 to 10 years. This means we will likely see our assets drop at least once, if everything is dandelions and roses, and more realistically at least three times, if history repeats itself (as it often does). The point of all that being that, each time this happens, we need to be prepared for it and to weather the storm.

      
      

      Now, if all of this just made you dislike the idea of investing in the stock market, that is ok. However, for those who are willing to stick it out, history has proven that you will see a reward. And, for those who don't believe the stock market will recover after every crash, I always say that if it doesn't recover from a drop, well, then we have much bigger problems on our hands.

      So, with that: good luck in whatever you choose! No matter what it is, you'll be great!