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Getting started investing

If you're reading this article, then we'd like to hazard a guess that you've considered or are considering investing. If so, then our first order is to review and check the way you think about investing and investments.

The root cause of our money issues (and not just people's hesitation to invest) stems from our earliest lessons in money management.

Often, our first lesson in money management is to drop quarters into a piggy bank. We're taught saving for the future involves stashing cash. We're taught that our earning potential comes from our job prospects alone. We're taught that home ownership is the pinnacle of our personal financial journey, and that our homes will be our single largest investment in our lifetimes. We're taught to be extremely risk-averse and that all money is hard-earned.

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Break from investment mentality traps

So, as a first-timer trying your hand in the world of investments, beware of these investment mentality traps that can make or break your drive to invest or your investments itself.

'I don't want to lose my hard-earned money.'

This statement is a classic example of a highly risk-averse mentality. You can always do things to mitigate risk, even when it comes to an investment as volatile as stocks. There are always investment options and strategies available depending on your individual knowledge and risk tolerance.

Your investment advisor will ask you to rate your investment knowledge, and to allocate a set percentage of your funds for investment to low, medium and high risk categories. There's no shame in ticking the "limited knowledge of investing" box and allocating 90% of your funds to low risk investments.

'I like keeping my money in one place.'

Perhaps this stems from our very human habit to stockpile and the pleasure we get from seeing an assemblage of our possessions under one roof.

When it comes to investing, you'll do well to diversify across different asset classes, sectors and geographies. Your bank balance will go down initially when you first purchase an investment, but the goal is to grow your net worth over time. The point of investing is to make your money work for you by maximizing its potential.

The same rationale applies when you're investing. An advisor will recommend diversifying your investments. It's as much a wealth protection strategy as it is a way of growing your money.

'I feel good about this venture.'

While it's true that some of the most successful investors and personalities in the business world have made billions by going after a venture that their "gut says is right," this isn't always the case for everything and everyone. A smart investor knows how to balance gut feel and proper information to make an informed decision.

'I don't see any significant results right now.'

An investment doesn't automatically pay off the moment you put in the money. Investing is for the future, which means that benefits can only be enjoyed at a future date.

6 frequently asked questions about investing

Here are some of the most frequently asked — and other not so frequently asked but equally important — questions when it comes to investing and investments.

How and where do I start?

This is often the major issue plaguing first-time investors. Admittedly, the world of investing at first glance can be intimidating. For an amateur investor, you may come up with more questions than you could have imagined after that first quick Google search.

  • Your bank - Banks and credit unions employ financial advisors, and they can arrange an appointment for you.
  • Family and friends - Your family and friends may already work with a trusted financial advisor, and will be happy to refer you.
  • The Internet - Search online for financial advisers in your neighbourhood, and read online reviews before calling or sending an email.

What's the best thing to do with money that I might need soon?

You may be advised against investing this money, and instead advised to sit it in a high-interest savings account. Investments like stocks are highly "liquid," meaning you can buy and sell on a whim; however, a stock may have lost some value by the time you need to sell. Buying high and selling low isn't an advisable strategy.

I'm ready to make long-term investments. How do I prioritize?

By "ready" this means that you have:

  • Paid off most, if not all, of your consumer debts (i.e., short term loans, credit card debts), as well as settled most of your high interest debts
  • Have built up an adequate emergency fund. This means that you now have a certain amount of money that you can allocate to long-term investments.

The issue of priority will always be a personal, subjective matter. If you're still working, your goal may be to save for retirement, or to retire early. In this case, you may wish to learn more about tax-deferred investment savings. If the goal is to grow your money, then you may wish to learn more about stocks, ETFs, bonds and mutual funds. You might also consider investments such as real estate.

More: Start investing your spare change today with Acorns

I'm interested in stocks and bond funds. What's the difference between actively managed and index funds?

Actively managed funds are, as the name implies, managed by a fund management team that works to grow your money by actively buying and selling stocks as a way to "beat the market". It is relatively high risk, but can theoretically bring in outsized returns if your management team makes good decisions. Actively managed funds come with administrative fees, typically in the range of 1% to 2%.

Index funds are theoretically lower risk as your portfolio is constructed to match or track the components of a broad market index such as the S&P 500 or the Nasdaq. Since the cost of managing these funds are lower, index funds are cheaper to hold when compared to actively managed stocks.

Certain index funds have beaten actively managed funds. Certain actively managed funds have beaten index funds. Before investing your money, it's important that you take the time to learn as much as possible on your own, and listen to the advice and guidance of a trusted financial advisor.

What expenses should I be aware of when I start investing?

At first glance, fees and expenses may appear small and negligible, but as they compound over time, you will realize that you are losing a considerable portion of your money to these fees.

The U.S. Securities and Exchange Commission explains that a portfolio with a 1.00% annual fee can reduce its value by as much as $30,000 in 20 years. So, while it's impossible to control the market, you can control how much you're losing to fees by paying attention to them when selecting an investment.

These expenses and fees may include:

  • Expense ratio - the percentage of your investments assets that are paid off to the team handling your actively managed funds. Ideally, this should be less than 0.18% every year.
  • Sales load - an administrative fee you pay for every share you buy or sell.
  • Commissions - these are fees paid off to the broker if an investor buys or sells shares or bonds that are exchange-traded.
  • Asset management fee to investment advisors or financial planners - most financial advisors work on a fee-only basis, which means that they typically charge their client through third-party managers that charge the client a percentage of their asset.
  • Wrap fees and surrender charge - are often charged to life insurance products and annuities like 401(K) plans.

What's the difference between lump-sum investing and dollar cost averaging?

These are two strategies used as a form of asset allocation.

Dollar cost averaging is the more common strategy that allows investments to spread out time. Essentially, you contribute a set amount of money at set intervals. This could be on a monthly or quarterly basis. It's a good strategy for investments on the volatile side like stocks or mutual funds.

It's also a good strategy if the money you're investing arrives at regular intervals, such as an employer match program that's automatically deducted from your semi-monthly paycheck.

Lump-sum investing is an all-or-nothing approach. This is higher risk but it could outperform dollar cost averaging over the long haul. A Vanguard study that looked at data from the U.S, U.K. and Australia found that investing $1 million using lump sum strategy yielded 2/3 more compared to DCA.

For a lot of us, after we pay our monthly bills, there's barely enough left over to establish an emergency fund. In any event, you should keep investing in mind.

Unless you choose to making investing a priority as much as any other monthly expense, it becomes more and more difficult over time to secure your future.

It's important to remember that investing is not just about living the good and comfortable life; it's also about securing the future for you and your family, 10, 20, and 30 years out, when you're no longer earning an income out of choice or force of circumstance.


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Brian Pacampara, CFA Investing Editor

Brian is an editor for MoneyWise. A long-time stock junkie, his work has appeared in The Motley Fool, Seeking Alpha, and Yahoo Finance. He believes in owning "Forever Stocks" — a rare group of businesses that have paid out dividends for decades. Brian holds the Chartered Financial Analyst (CFA) designation.


The content provided on Moneywise is information to help users become financially literate. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional. We make no representation or warranty of any kind, either express or implied, with respect to the data provided, the timeliness thereof, the results to be obtained by the use thereof or any other matter.