Updated: Oct 2, 2020
Let’s be honest: Investing is kind of scary.
The stock market itself is difficult to understand — you earn money by spending money? And it’s not even necessarily real money, but this virtual number that moves and shifts on a moment-to-moment basis?
Seriously, who thinks this is a good idea?
Well, as it turns out, just about every single financial professional — as well as the army of everyday people who’ve used the power of compound interest to fund major financial goals, like home ownership and retirement.
There’s a reason a 401(k) account is one of the most common workplace perks: You pretty much need to invest if you’re going to build a big enough nest egg to one day throw in the towel.
Investing is also one of the easiest ways to earn passive income — that is, making money without putting in any extra hours at work. Once you set up your investment portfolio, it takes relatively little management to see significant returns: The average investor has seen 10% growth annually over the last hundred years.
So what’s the best way to get started with your own investments? And what do you need to know before you take the big leap? Is it actually possible to start an investment portfolio from a smartphone app, and should you?
Hang on tight, Penny Hoarders. We’re going to dive into all of that and more.
Getting Started: What is Investing?
Before we dig into the nitty-gritty of how to get started on your own investments, let’s clarify some basic terms.
Investing is spending money on something — be it a share of a company on the stock market, a house, or a painting — in the hopes that its value will grow. If it does, the investor can later sell the item, also referred to as an asset, and earn a profit.
There are four main types of investments, which are also referred to as asset classes.
Stocks, otherwise known as equity investments
Fixed-income investments, like bonds
Money market or cash equivalent investments
Property, including real estate and other tangible assets
These are probably what you think of when you think of the stock market: shares, or fractions of ownership, of publicly traded companies, which increase in value as the company performs well and earns a profit.
Shareholders are paid dividends when this occurs, but are, of course, also vulnerable to downswings in the market — and the possibility of the company performing poorly or even going out of business.
Mutual funds and ETFs, which are pre-built pools of investment options, are also grouped under this asset class, though they sometimes include bonds and other types of securities. (We’ll go into more detail on mutual funds and ETFs below.)
These are investments that offer a prearranged, fixed interest rate and usually pay at regular intervals or after a set amount of time. Bonds are the most common example. When you purchase a government bond, specifically, you’re actually giving the government a loan, which it agrees to repay after a certain amount of time (the bond’s “maturity”) at a set interest rate.
Bonds are considered safer investments than stocks, which are more vulnerable to shifts in the market.
Money Market or Cash Equivalent Investments
These are highly liquid (meaning they can quickly be converted to cash), short-term investments, like CDs (certificates of deposit) or short-term debt securities, like U.S. Treasury bills. This asset class offers relatively little growth — meaning you aren’t likely to reap a big profit quickly — but also comes at a relatively low risk.
It’s just what it sounds like: tangible, physical investments, like real estate or fine art, which can appreciate (read: grow) in value over time.
(Psst: depreciation is the opposite, when a tangible asset loses value over time. One of the biggest culprits? Cars, trucks or SUVs, which can lose as much as 10% of their value annually, according to Carfax.)
For the purposes of this post, we’re going to focus primarily on stock market investments, as these are the most accessible to — and rewarding for — average folks. But we’ll also briefly cover property investments, including bitcoin. (Yes, it’s still a thing — and yes, we know you’re curious!)
Why Should You Invest?
Chris Zuppa/The Penny Hoarder.
One thing we should make clear: Even the “safest” investment options do carry some risk. There’s no such thing as a sure investment.
For that reason, many savers feel a lot more comfortable stashing their cash in a low-interest savings account… or even under their mattress in the form of paper bills. But investing is one of the easiest ways to earn a passive income — and if you want to build serious wealth, the stock market is the surest-fire place to make it happen.
Malik S. Lee, a Certified Financial Planner and the founder of Atlanta-based Felton & Peel Wealth Management, understands why some people are reluctant to enter the market. But he also knows it’s imperative for meeting many common financial goals.
Maintain the Value of Your Money
In fact, if you take inflation into account, investing isn’t just a way to grow your money — it’s a necessary measure to maintain its current value.
According to Lee, inflation has historically averaged between 4-5%, and so over the course of 20 or 30 years, that can make a big difference.
“If you would like your money to spend the same way then that it’s spending today, you’ll need the power of the stock market,” Lee said.
Even a low-growth investment like a CD might actually net you a negative return, given today’s rate of inflation.
And, of course, it’s important to remember that investing is all about playing the long game. Yes, you’ll likely see some scary stock market headlines over the course of your investment career. But so long as you hold tight and don’t run for the hills, the overall odds are in your favor.
Make Money on Your Money
The average investor who reinvests dividends within a broad-based index, such as the S&P 500, has a 94% chance of positive return over 10 years, according to Lee. If you extend that timeline to 20 years, investors can increase that chance to 99%.
“If you invest for the long term, your chances of obtaining a positive return increase dramatically,” Lee said.
In other words: when it comes to investing, “keep calm and carry on.”
But first, you have to cough up the ante!
How Do You Get Started Investing?
If you’ve read this far, you’re (hopefully) at least a little more comfortable with the lingo, and convinced that investing is the way to go if you want your money to be fruitful and multiply.
So now, how do you get started on your own investments? And what if you don’t have very much money to get started with?
1. Choose an Investment Vehicle
First things first: you’ll need to decide on what type of investment account best fits your needs. A variety of different account types, or “investment vehicles,” correspond to different financial goals, some of which carry special tax incentives when used correctly.
For instance, if you’re investing to save for retirement, an account like a401(k) or traditional IRA allows you to make tax-deferred contributions, which can help lower the amount you pay in income tax today while simultaneously building your nest egg for later.
A Roth IRA works a little differently: your contributions are taxed today, but then grow, and are more importantly withdrawn, tax-free thereafter.
These retirement accounts do come with certain IRS regulations, including strict rules regarding when the funds can be taken out. (The short story: you’ll have to wait until age 59.5, with a few circumstantial exceptions.)
There are also investment accounts geared specifically toward paying for college (529 plans) and health care (HSAs, or health savings accounts), which carry similar restrictions.
The most flexible option: opening a plain-old individual investment account, which allows you to withdraw your funds at any time to pay for miscellaneous objectives.
Even then, it’s a much better idea to leave your contributions invested as long as possible — not only to maximize your returns through compound interest, but also to avoid short-term capital gains taxes, which can be levied at a higher rate than what you’d pay on long-term holdings.
Taking a look at your own financial timeline and plans for your future can help you decide which type of investment vehicle is right for you.
Our suggestion? If your workplace offers access to a 401(k), start there — and if there’s a percentage match on offer, be sure to take advantage of it. Your contributions will be deducted directly from your wages and are tax-deductible, so it’s a pretty pain-free way to get started.
Then, you can consider opening an auxiliary account — whether that means accelerating your retirement savings with an IRA or investing your pocket change with a digital app like Stash.
Speaking of which…
2. Open a Brokerage Account (or Download an App, or…)
If you’d asked somebody how to invest in stocks 20 years ago, you would have gotten one resounding answer: Call up a stockbroker and place your order. I mean, you’ve seen “Wolf of Wall Street,” right?
Fortunately today’s technology has transformed the investment landscape, creating a spectrum of easily accessible options regardless of how hands-on you want to be with your portfolio.
Of course, you can still hire a full-service brokerage, like Morgan Stanley, staffed by investment advisers who will allocate your assets and manage your account for you, insofar as you allow it.
While you’ll always maintain the final say-so, you can offload the research and strategizing to someone who does it for a living. And if you don’t want to pick up the phone, you’ll find a huge range of features and resources available through the firm’s online client portal.
This kind of hands-on, human-powered advice does come at a cost, though — usually expressed as a percentage of your assets under management (AUM). These firms may also have lofty minimum account balances, so you’ll probably need to deposit a significant chunk of change (think: several thousand dollars) to get started.
Robo-advisers use computer algorithms (backed by human research) to create and manage portfolios for their clients, and thus are able to offer their services at a much lower fee than a human investment adviser.
If you’re looking for a more hands-on experience, you can open a DIY brokerage account through a firm like TD Ameritrade. Many of these brokerages offer free accounts with low or no account minimums, but you will be on the hook to pay for trade fees and commissions on the assets you buy or sell — and to do the research to make those trades good ones.
Finally, there’s a growing class of investment apps, like Stash and Acorns, that make it simple to invest right from your cell phone, even if you have very little cash to get started with.
Stash, for instance, will let you open an account with just $5, and Acorns uses “round-ups” to slowly grow your account with spare change you’ll barely even notice has gone missing from your bank account.
3. Research Your Investment Options
Having an active investment account is a good start, but it’s not enough. Now it’s time for the real fun: actually investing your money!
Of course, as we mentioned above, investing is risky. You don’t want to just throw your money into any old set of stocks.
And by the way, stocks aren’t the only asset you should look at: You’ll also want to consider adding some bonds and mutual funds to the mix.
“Baskets” of Assets: Mutual Funds and ETFs
So what, exactly, is a mutual fund? As mentioned above, a mutual fund as pre-built set of stock market assets — which means it’s an easy way to bring diversification into your portfolio.
Diversification is uber-important when you’re investing, and the reason why can be summed up in a well-worn cliche: You don’t want to carry all of your eggs in the same basket.
By investing across a wide range of asset types, including companies in different industries and locations, you can help safeguard your portfolio against a total meltdown should any one sector have a downturn.
Mutual funds are usually put together and managed by a financial professional or firm, and require a significant minimum investment — often $3,000 or more depending on the management company.
There are, however, mutual fund companies that offer lower minimums for beginners; Vanguard’s STAR Fund, for instance, carries a minimum initial investment of $1,000.
ETFs, or exchange-traded funds, are similar to mutual funds in that they bundle a range of investment products in one simple asset, but in general they’re not actively managed by a human being — which means they carry lower expense ratios than mutual funds do. And unlike mutual funds, you can buy ETFs on the market directly just like you would shares of stock; an ETF’s price varies based on market value, just like stocks do, and there’s no expensive minimum buy-in amount.
How Much Control Do You Want?
The specific type of investment account you choose will depend on how much control you want.
For example, the average 401(k) plan only offers about a dozen different investment options, often exclusively made up of mutual funds. But if you open an IRA through a brokerage, you’ll have access to the whole wide (and sometimes overwhelming) world of the stock market.
Many of the investment apps on the market deal exclusively with ETFs, though you may be able to choose specific investment options based on your financial goals or values. For example, Stash offers ETFs that specifically back companies that support green initiatives and LGBT equality, and also allows you to buy fractional shares of individual stocks at major companies, like Amazon.
Determining the Best Assets for Your Portfolio
Once you have an understanding of what your account offers, you can start to look into the specifics of individual assets.
Note: We are not investment experts, and are in no way shelling out any specific investment advice here at The Penny Hoarder, but we can help explain how to do the research.
For one thing, you can look up the historical performance of a prospective asset by searching its ticker symbol — that three- or four-character abbreviation next to its full name — through an investment research firm like Morningstar. (Honestly, these days, you can also just use Google.)
And if you have your heart set on investing in a particular company or industry, it’s worth doing some additional homework.
For example, major companies like Amazon issue quarterly results and annual reports for shareholders, all of which are available to the public and can give you an idea of how well those stocks are performing. Want to put your money behind, say, medical marijuana? Keeping tabs on legalization proceedings could work to your benefit.
Finally, don’t forget the golden rule of investing: diversify, diversify, diversify! Purchasing assets across a wide range of industries and classes can help you ride out market turbulence.
4. Contribute to Your Investment Account Regularly
The power of compound interest means your money makes money… so you need to make sure you keep putting money into your account! The more you invest, the more you’ll earn, and it’s all too easy to stop, or “forget about,” making contributions.
Your 401(k) will defer your wages automatically with each pay period, but if you have a separate account with a brokerage, we recommend setting up regular, automatic withdrawals.
PRO TIP Even saving $10 a week adds up to a contribution of more than $500 in a year’s time -- which could easily become a hefty four-figure sum over the course of a decade.
Play around with a compound interest calculator to see how quickly that petty cash can grow. For instance, given a modest interest rate of 6% and a 10-year timeline, your $10 a week would grow to about $7,200 — and about $2,000 of that would be interest, passive income earned at no extra effort of yours.
Mobile investing apps make this even easier, often allowing you to connect your primary spending accounts and “round up” each dollar, essentially investing the spare change you wouldn’t miss anyway.
5. Keep an Eye on Your Portfolio’s Performance — But Don’t Get Hasty!
The long-term, “buy and hold” investment strategy doesn’t mean you should ignore your portfolio entirely, of course. Sometimes, making performance-based changes can increase your returns… but again, reacting to scary headlines is short-sighted.
The best way to get help with allocating your assets is to talk to a financial professional, but keep in mind that even they can’t predict the future. That said, if you notice one of your holdings continually underperforming, it might be worthwhile to seek out a different option.
Alternatives to Investing in the Stock Market
Tina Russell/The Penny Hoarder
We’ve covered investing in the stock market, which may be the most accessible way to start earning passive income, but other ways to invest may better fit your financial goals.
Property investments can be a viable alternative to stock investments, especially if you’re not super jazzed about putting your money behind virtual ownership. Having a tangible item, be it a piece of real estate, a bar of gold, or a hand-crafted urn, can feel a lot more reliable than watching numbers inflate and deflate online.
Of course, this investment strategy requires a lot of knowledge to pull off successfully. You need to be able to identify what goods or properties will increase in value over time.
Real estate is a relatively low-risk asset — though, as evidenced by the 2008 fiasco, even that’s not foolproof. But if you want to learn more (or get started even if you don’t have the kind of cash to make a down payment), check out our guide to real estate investing.
If you’re wondering about bitcoin, that’s basically a form of property investment, too: Investors might purchase a bitcoin — or, more realistically, part of one, now that they’re worth over $3,500 apiece? — not to spend it as currency, but rather in the hopes that its dollar value keeps increasing.
For more information on exactly how this weird cryptocurrency thing works, learn how bitcoin works from this post, written by