How to Bury Your Fears and Actually Get Started Investing!

January 23rd, 2014 by 

You know something?  I can almost guarantee you're over-thinking this: it shouldn't be hard to get started investing.

Today we're going to give you some no-nonsense advice on where to get started with investing.  This seems an easy enough topic but, frankly, the amount of manufactured nonsense and controversy around this subject is ridiculous.

Seriously - most people go through this process backwards... worrying they don't have the chops to get stared, then, of course, never getting started.  This article will remove that fear and, hopefully, inspire you to help a few friends as well!

I should mention: this is US-centric.

How to Get Started Investing - Three Steps

1. Identify the Account to Invest With

Ever heard someone say "I'm invested in a 401(k)"?  Sure, it's technically incorrect to say that (you'd be invested in securities in a 401(k) account), but finding where to save is your first step.  A beginning investor really should decide between two account types to get started:


Named after a part of the tax code, a 401(k) is an investment account through your employer.  If you're not contributing, you should start - many employers will match your contribution up to a certain amount of salary (read: you are guaranteed a huge positive return just for playing!).  You need to contribute at least that much... anything less and you might as well withdraw money from your bank and burn it in the fireplace.

In 2014, you can contribute up to $17,500 of your money to a 401(k).  If you're in doubt, just open the "traditional" style 401(k) - you will pay no tax now, and you can worry about the taxes when you retire.  Over 55s get an extra $5,000 in contribution limits.

If you don't get started investing soon, this will be your money.

Not Investing? This is You.

If you don't have a 401(k) at work, you should definitely start with an IRA.  If you are in doubt, just open a Roth IRA - unlike the traditional 401(k), for "Roth" accounts you pay money now, but you will never pay income taxes again on your gains.

That means when you take money from your bank account (which you already paid taxes on, remember!) and deposit it into your shiny new Roth IRA... that money won't be taxed again on the back end.

An IRA will allow you to deposit $5,500 for you and $5,500 for your spouse (open a separate account!) in 2014.  If you are married and make under $181,000 together you can deposit the whole amount.  If you aren't married, that limit is $114,000... and, of course, you can only open the one account.  Over 55s get an extra $1,000 in contribution limits.

Other Accounts

This is a beginner article.  DO NOT worry about other types of accounts yet!

2. Identify Who to Get Started Investing With

This is an easy one if you are starting with a 401(k): your company will set it up.

If you have an IRA, it's slightly more complicated.  I've selected a few common places where investors often open accounts. Even with a $0 minimum, you should start with at least a few hundred dollars

CompanyMinimum Account SizeTrade Cost
T. Rowe Price$1,000.00--

Vanguard and T. Rowe Price have only mutual funds, so minimums may vary by fund.  All of them except TradeKing have "No-Transaction Fee" options.  You may have to dig a bit to see the limits on accounts near the minimum balances, or fees for 'low balances' but all the firms listed are popular, inexpensive, and trusted.

Honestly, you can't really go wrong with anyone on that list - so pick one and move on to the next section.

(I have accounts of various types with all of them except Vanguard - but I own some Vanguard mutual funds)

3. Identify What To Invest In

This is the area where most people completely lose it.

I'm going to free you from this trap: if you are a beginner, follow the basic strategy now.  Later, when you're more advanced, you can always change your investments.  Remember: most investors (and, for that matter, most professional investors) will under-perform the index they are targeting.  That means that you'll probably never need to change your strategy - treading water is just fine when the water is rising and most people around you are sinking.

Target Date Funds & Index Funds

Some advisers absolutely hate these type of funds, but let me tell you something: they're a great deal for the new investor.

In fact, they're likely the best deals in the market.  For generally tiny annual fees, you've got a team of professionals re-balancing your portfolio for you into retirement and beyond.

Seriously... that's a great deal.

To pick a target date fund, take your estimated retirement date - perhaps when you're 65 or so?  Figure out what year that will fall in.  Find the target date fund closest to that date (round 'up' to take on a bit more risk, 'down' to be a bit more conservative - companies generally put them out in 5 year increments).

If you opened a Fidelity, Vanguard or T. Rowe Price account, click those linked names to see their funds.  Scottrade and TradeKing?  Don't fret, you want to buy ETFs or mutual funds.  A list of suitable ETFs can be found here.  (Leave a comment if you want more detail.)  If in doubt on the fees charged, compare them to the Vanguard offerings - Vanguard is usually near the top in minimizing fees.

In a 401(k), look for something similar, but if they don't have target date funds... just buy "index funds".

If you go the index fund route, take 110 and subtract your age (say, 110 - 35 years old = 75%).  That's your percentage to put into 'stock' index funds (the remainder in 'bonds').  Stock index funds for the US will have names like "S&P 500" or "Russell 3000" or "Wilshire 5000"... all are broad and acceptable.  You can spice it up with international offerings too, but leave the complicated strategies for when you have more education.

Hurry Up and Wait

Investing is more of a marathon than a sprint.  If you later feel like you want more education?  Well, there is a ton of free material online and quality writing on the printed page for you to read as well (or print out this great "Get Started Investing" guide you're reading, mmm?).  If you don't care to ever grow more advanced?  You'll still beat a majority of investors through these simple strategies.

Just add more funds every year (or every paycheck!).  And wait.  And, actually, ignore most of the other articles on this site on investing - it's not worth it to fully embrace those strategies... yet.

You'll thank me when you retire: get started investing now!



PK started DQYDJ in 2009 to research and discuss finance and investing and help answer financial questions. He's expanded DQYDJ to build visualizations, calculators, and interactive tools.

PK lives in New Hampshire with his wife, kids, and dog.

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