We’ve covered a lot of ground in the Beginner’s Guide to Investing series. However, sometimes the most difficult step is the first one: knowing where to start. In this fifth and final article, I’ll explain an effective, but simple, way to begin investing. Here are the steps we’ll take:
Open a Brokerage Account
First, you’re going to need an online brokerage account. I’ve been a long-time, satisfied customer of Charles Schwab, but there are a number of quality brokerages you could use. Pick one of the large, reputable firms (e.g. Schwab, Vanguard, Fidelity, etc.) and open an account that allows you to place trades online at little cost. For Schwab, go to schwab.com, and click Open an Account.
You will need to choose between a regular investment account and an individual retirement account (IRA).
Link Your Checking Account
Next, you’ll want to be able to easily move money from your checking account into your brokerage account, and vice versa. At Schwab, choose the Accounts tab, select Transfers & Payments, then Manage External Account, and finally Add External Account. The process should be similar at other brokerages; if you can’t find the right page, call their help desk or do a search on the brokerage site.
Set Up a Monthly Transfer
Next, set up a recurring monthly transfer from your checking account to the brokerage account. That’s the easiest way to get cash into your brokerage account on a routine basis for eventual investment. For example, you might decide to transfer $100 into the account every month.
Set Up an Automated Monthly Investment
Finally, invest that monthly sum into specific mutual funds. Decide what fraction of your portfolio to invest in stocks, bonds, or other investments (e.g. 80% stocks, 20% bonds). This decision depends on how much risk you can tolerate and when you will need to use the money you’ve invested. For more on risk tolerance, read my previous investing article Know Thyself.
For simplicity, you might initially invest in just one broad stock fund reflecting the entire U.S. stock market and one broad bond fund reflecting the U.S. bond market. At Schwab, the ticker symbols for these mutual funds are SWTSX for stocks and SWLBX for bonds.
To purchase your initial shares in each fund, you’ll need to make manual trades. Select Trade and then Mutual Funds if you’re using the Schwab site. Once that initial purchase goes through, you can set up automatic future purchases of a fixed amount. To do this, select Trade, Mutual Funds, and Automatic Investing.
Those four steps will get you started. Check your online account monthly for at least the first few months to make sure the transfers and purchases are working properly. If you have any questions or problems, contact the help desk at your brokerage.
As your investment base grows and your income increases, you might consider:
- Increasing your monthly investment
- Diversifying your stock investment by adding specific exposure to foreign stocks or U.S. small stocks
- Re-balancing your portfolio annually
With this system of consistent investing (called dollar cost averaging), your monthly investment will buy more shares when stock prices are dropping, and your total investment will grow when stock prices are rising. The key is to continue investing regularly and methodically.
For more on this simple investment strategy, I highly recommend the short book titled The Elements of Investing by Burton Malkiel and Charles Ellis.
About the Author
With a BS degree in geophysics, I took a job exploring for oil for a major energy company. I was able to save money, but knew absolutely NOTHING about how to invest it. Didn’t know what a stock was, how the price was set, how to buy a share, etc. So … I headed back to school part time—primarily to learn about stocks and bonds—and eventually earned an MBA in finance (which the oil company put to great use).
I’ve maintained a continued personal interest in investing, and read some outstanding books that have helped refine my investing strategy and goals over the last three decades. I’ve been with Leggett & Platt since 2000, where my professional responsibilities now include strategy, investor relations, financial communications, and analysis. But for 13 years I’ve also served as Chair of the Investment Committee that oversees our pension and 401k investments. Given that latter job role, employees sometimes ask me how they might start investing. These brief articles explain one approach that novice investors might take.
The opinions expressed by contributors are theirs alone, and do not reflect the opinions of Leggett & Platt (full disclaimer).