Investing for Beginners
Every journey begins with a single step
Ok, so you’ve decided to start investing.
Great!
You’ve watched all the videos listing off companies using a combination of symbols like they’re decoding some secret message, AAPL, MSFT, NVDA, MELI, etc.. but you’re still not sure what exactly to do. Then this is the post for you. And don’t worry, I’ll provide some insights on what I would buy in this situation and much more importantly, WHY towards the end.
But first of all, congratulations, you’ve taken the first step towards financial independence!
Step 1: Set up a brokerage account
In order for buy or sell stocks, you need someone to act as an intermediary. That’s someone who brings the buyer and seller together. Think a real estate agent but for stocks and other financial instruments. You can pick pretty much any of the large brokerages with Fidelity, Charles Schwab, and E*Trade being some of the more commonly used ones. In the old days, executing a trade would cost a substantial commission like $10 so it mattered more. These days, most stock trades are commission free so the exact choice really comes down to which user interface you like more. Don’t worry too much at this point. if you end up not liking the brokerage, you can always do a transfer later.
Step 2: Fund your account
Now that you’ve created an account, you need to fund it. These are the funds you’re going to be investing. Consider setting up a regular deposit as well so you can invest in a systematic and regular manner. Since markets move up and down with sentiment, doing regular deposits help you avoid bad luck of buying at a time when the market happens to be really overpriced. We call this Dollar Cost Averaging (DCA). Note, the amounts doesn’t need to be large to be meaningful. The important thing here is being systematic.
Step 3: Start investing
So now, we’re finally on to the good stuff. Note, stock markets have trading hours so you can’t just trade stocks whenever the mood strikes you. At least not yet. In the United States for example, the market opens 9:30 am ET and closes 4:00 pm ET Monday through Friday. Outside of those times, there are some after hour trading allowed but starting out, I’d recommend just sticking to these hours.
What do I invest in? That’s the million dollar question. Now, everyone has a different risk tolerance level and a different end goal so it’s hard to find a one size fits all solution. Instead, I’ll pretend I’m traveling back in time to advise my much younger self and try explain why I propose what I do.
Don’t buy any individual stocks. None of those used to decode secret messages, not the stocks Warren Buffett bought, and not even the stocks I talk about in my Stocks section. The reason is individual stocks require you to have an in depth understanding of the company, their finances, and valuation methodology. Now the good news is there are plenty of resources to develop these skills including our Investing Academy section but this all takes time. Instead, start with something simpler.
Don’t buy any bonds. This one is a bit controversial as traditional advice suggests a breakdown of bonds and stocks with a shift towards more bonds as you get older. Personally, I think bonds are a good source of fixed income but the reduced growth potential is just not worth the cost as long as you have another source of income. For most people, that would be your salary when working. Instead, I’d advise my younger self to focus entirely on stocks.
Don’t VTI and chill. Ok, so this one will be more controversial. First, VTI represents the overall US stock market weighted by the market cap (that’s the total value assigned to each company). Many investors who buy ETFs (think of these as a ready made meal of stocks based on some defined criteria that provides natural diversification) would actually recommend this strategy. I personally wouldn’t advise my younger self to buy 100% VTI because I still believe international exposure is important and having some levers to pull in the initial portfolio introduces you to important skills in portfolio management that will be useful should you ever decide to migrate to individual stock investing. The more technical rationale is discussed in Modern Portfolio Theory but is too detailed for this purpose. Remember that investing is a journey and its important to be able to learn as you go too.
So what would I advice my younger self to buy instead? I would propose a portfolio allocation as follows:
45% in VTI broad based US stock exposure. This provides overall exposure to the US stock market
15% in SCHD a US dividend based ETF. This ETF will include generally more established companies who are paying a dividend. This should be a slightly more defensive position during downturns compared to VTI
20% in VEA a developed markets ETF for companies outside the US. This ETF provides international exposure to developed countries including those in Europe and Asia Pacific.
20% in VWO an emerging markets ETF for companies outside the US. This ETF provides international exposure to emerging economies with the greatest exposure in Asia.
These allocations could be adjusted based on preference up to maybe 5% in either direction would be reasonable depending on personal conviction. I think this type of portfolio provides a pretty broad exposure and has both sector and geographical diversification. The only potential pitfall is the limited exposure to smaller caps but that’s acceptable as a start.
Investing is a lifelong journey and this is just the beginning. I hope you subscribe to my Substack below to receive weekly updates and regular investing insights.
If you enjoyed this content, consider heading over to our Investing Academy to learn about other investing topics.
Disclaimer: Any information contained here is not intended as, and shall not be understood or construed as, financial advice. I am not a financial advisor and this is only a documentation of my personal investment journey and decisions. You should always do your own research before making any final decision on investments.