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One of the harder financial challenges I encountered in the start of my financial journey was learning how to invest. My dad started a small account when I was still a child and I borrowed several books from the library in high school to help me learn how to start investing for beginners.
Stocks vs. Mutual Funds vs. ETFs
My initial idea of investing as a teenager was buying individual shares of company stocks of products I used. Basically, I would have put all my money in Coca-Cola, Nintendo, and McDonald's. While two of these have had really good returns, it would have been a really risky portfolio. If any of these companies were to go out of business,
If any of these companies were to go out of business, I would have automatically lost a 1/3 of my portfolio value if the share price went to $0.
Instead, I recommend starting in Mutual Funds & ETFs if you don't have a large sum of money to invest or want to maximize your investment diversification to reduce risk. This doesn't mean you will profit or “beat the market” every year, but, your odds of losing money will be significantly lower.
If you already invest with a 401k, you invest in mutual funds. These funds invest in a basket of companies of different sizes. Diversification is key to limiting your downside risk (i.e. you don't lose everything in the next recession) so I recommend having Blooom perform a free 401k checkup.
Let's review what each investment type is:
We all dream of becoming an “instant millionaire” by finding the next Apple, Google, Microsoft, or Amazon…just like Forrest Gump.
The only problem is that you never know if putting all your money in a single stock will be the Google (huge success), Enron (terrible failure), or be a steady eddy (most stocks).
Let's assume you have $1,000 to invest. If you invest it all in one company, your entire portfolio depends on the performance of that one company. If it goes up great, if not, you'd be better keeping the money in the bank or under your mattress.
Mutual funds are my preferred method because you can invest $1,000 and own a portion of many different companies.
My first investment (the one my dad created my account with) was in the Schwab 1000 Index Fund (SNXFX), that invests in the 1,000 largest companies on the stock exchange. Because it's an index fund, it has an expense ratio of 0.05%. That's as low or lower than most ETFs & it has a really good performance record that tracks the performance of the S&P 500.
Along with index funds, I have also traded actively managed funds that try to beat the market & their benchmark index. I've had mixed results with these as I have had one fund liquidate (close), and others had sub-par performance. I still own some of these funds to invest in certain regions of the world, focus on dividend-yielding stocks, and just to see if I can pick a fund that beats the market instead of only matching the market with an index fund.
Now, I primarily invest in index funds & ETFs (mostly index mutual funds so I can buy partial shares and build on my current holdings instead of buying a new fund each month.
Exchange Traded Funds (ETFs) are mutual funds that trade like stocks. This means you can buy or sell them anytime the market is open, unlike mutual funds that only trade at the end of each market day.
I have begun investing in some ETFs that act as index funds but with smaller expense ratios and also for individual sectors because they also have lower expenses than a traditional mutual fund.
The one drawback with ETFs is that most brokerages require you to buy whole shares. So, if you have $100 to invest and a share costs $55, you need to invest $10 more to afford two shares or you only end up with one share & have $45 remaining in your account for a future trade.
Being unable to buy partial shares is why I still prefer index mutual funds. If I want to invest $100 and a share costs $55, I get 1.82 shares and all my money is in the market.
Best Investing Platforms
These are some of the brokerages I recommend for their low fees and large investment selections. I personally use a couple of these for my personal and workplace investing accounts.
With M1, you can buy ETFs and individual stocks for free. You assign each stock you buy a percentage. So, if you invest in 100 stocks, they each have 1% portfolio allocation for example.
What makes M1 awesome is that you can buy partial shares of stocks and ETFs. If you only have $20 to invest, but a share costs $100, you can buy one-fifth of a share. You can't do that with a regular broker.
Each week, I invest a small amount into my favorite stocks and ETFs.
Use this link to get a $10 cash bonus when you open an M1 account
Ally Invest offers free trades for select ETFs and individual stocks.
If you don't feel comfortable with self-directed investing, you can try their cash enhanced managed portfolios option instead. You only need $100 to start investing and the annual management fee is 0.00% APY. The only fees you pay are the ETF fund fees that every brokerage passes onto you. The cash enhanced managed portfolios are competitive with other robo-advisors and a lot cheaper than using a financial advisor who charges 1%+ and might invest in similar funds.
You might also like Ally Invest because of their in-depth research tools. Those resources plus these free investing research tools might be everything you need to get started investing.
If you don't want to take the time to manage your portfolio, Betterment is one of the better automated investing apps. This is a good option if you want a “robo-advisor” that is like having a financial advisor but for a fraction of the cost. After submitting a questionnaire, using Betterment only costs 0.25% of your assets annually and they are invested in an ETF portfolio of Vanguard funds.
If you want a managed portfolio, I consider Betterment a top contender.
This is a good idea if you want to invest at the cheapest possible price, but, do not feel comfortable doing it yourself with one of the above recommendations.
This is easily the fan-favorite in the DIY investing world because of their low fund fees and excellent choice of funds. It's why 6 of the 20 largest mutual funds are Vanguard funds.
Vanguard is best for index investing or ETFs, although their $7 commission fee for stocks & non-Vanguard funds is reasonable too.
Acorns takes a different investing approach than the other four recommendations. They invest your spare change into a basket of stock and bond ETFs. By linking your credit or debit card to Acorns, they round up the purchase and invest the difference. So if something costs $8.88, they “round up” the purchase to $9.00 and invest 22 cents.
When you shop online at Acorns “Found Money” shopping partners you can invest bonus cash. This is a different twist on the cashback app concept I love. If you know what Ebates is, then you know what Acorns “Found Money” is all about.
You can't retire on this investing strategy but it can build a small nest egg. They also have an IRA and fee-free checking account that you might enjoy too.
Choosing a Brokerage
Along with knowing what you want to invest in, you need a brokerage to begin investing. If you know absolutely nothing about investing, you can use a traditional financial advisor, but, I prefer DIY investing since it's cheaper, easy to do with the internet, and often better (or similar) results if you do index investing.
I use two different brokerages so I can have access to a good selection of index & actively managed funds from two different brokerages.
If you have a particular fund(s) in mind that you want to invest in, you will want to go with the brokerage that offers those funds commission-free. Otherwise, you will want to choose a brokerage that has the lowest fees for your trading needs.
What I Invest In
There are literally thousands (maybe 10,000+ different investments) to choose from.
I personally invest in the following types of funds:
- Large-Cap, Mid-Cap, Small-Cap Stock Index Mutual Funds
- Dividend Focused Mutual Funds and ETFs
- International Index Funds & some with a regional focus (Developed Asia, Large Cap Western Europe, etc.)
- Individual Blue Chip Stocks with steady dividend payouts
For individual stocks and ETFs, I rely on these stock investing newsletters to help make wise investments.
Books to Help You Start Investing for Beginners
There are dozens of books on investing. Two I recommend are:
The Little Book of Common Sense Investing
The Little Book of Common Sense Investing by Jack Bogle
My #1 recommendation for investors is index funds (mutual funds or ETFs). They help take the guesswork out of investing, provide broad exposure to the market, and have rock-bottom fees.
The Intelligent Investor
The Intelligent Investor by Benjamin Graham is the best beginner guide if you want to understand the basic of trading individual stocks.
Ben Graham trained Warren Buffett, so you know this has many nuggets of wisdom in it.
No matter how you start investing, the important part is that you do. It's the best way to save for the future and afford to retire on-time. Using an affordable brokerage means you will get more money to invest instead of lining the broker's pocket.
Who do you use to invest? What valuable investment advice have you received?
Josh founded Money Buffalo in 2015 to help people get out of debt and make smart financial decisions. He is currently a full-time personal finance writer with work featured in Forbes Advisor, Fox Business, and Credible.