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How Do I Invest?

You're ready to get started -- what now?

Once you've figured out why you should invest, the next step is learning how. We'll break that question
into two parts. First, we'll talk about how you can structure your financial life to make it possible to
invest. Then, we'll delve into the mechanics of investing, such as opening a brokerage or mutual fund
account.

What is investing?
Any time you invest, you're devoting your own time, resources, or effort to achieve a greater goal. You
can invest your weekends in a good cause, invest your intelligence in your job, or invest your time in a
relationship. Just as you undertake each of these expecting good results, you invest your money in a
stock, bond, or mutual fund because you think its value will appreciate over time.

Investing money involves putting that money into some form of "security" -- a fancy word for anything
that is "secured" by other assets. Stocks, bonds, mutual funds, and certificates of deposit are all types of
securities.

As with anything else, there are many different approaches to investing -- some of which you've
probably seen on late-night TV. A well-dressed, wildly positive (though somewhat whiny) young man sits
in front of lazily waving palm fronds, shaking his head about how incredibly easy it is to amass vast
wealth -- in no time at all! Well, hey! That sounds fine! But if it were so easy, wouldn't everyone who
saw the same pitch be rich? And how come you always have to send in money to learn those wealth-
building secrets?

We suggest you take the $25 you'd spend on the hardcover EZ Secrets to Untold Billions book and the
$500 you would shell out for the EZ Seminar, and invest it yourself -- after you've learned the basics
here.
First, douse your debt
After learning why investing is a smart thing to do, you're probably itching to take the next step. You
want to drop everything and start investing right now. But hold on! Would you start running a marathon
without first stretching? Would you pour syrup on the plate before the pancakes are done? Having
dazzled you with the power of compounded returns, we want to make sure that same principle's not
working against you. Before you start investing, you've got to get rid of your high-interest debt.

The very same principle of compounding that helps your investments grow can quickly transform a
dollar of debt into a few hundred dollars. Does it make sense to try to save money even as your debts
are multiplying like bunnies? No way. Although some kinds of debt may be low-interest or tax-
advantageous (such as your mortgage), you'll want to free yourself from the high-interest stuff before
you begin to invest.

Every dollar you can put toward investing will work for you. And every dollar of yours kept out of the
pockets of financial professionals or full-service brokers is also creating value for you. (We'll get back to
this point later.)

Pay yourself first

To become a successful investor, make investing a part of your daily life. That's not as great a stretch as
it may sound. After all, you make decisions that affect your finances every day, whether you're ordering
a $7 glass of wine with dinner or getting a home equity loan to pay down credit card debt.

We're not suggesting that you obsess over every penny you throw into a wishing well. (Please don't
embarrass your mother by diving in after it.) If you pay yourself first, you won't have to.

You already pay the companies behind your credit card, gas, water, electric, cable, and phone bills every
month, right? Why not add yourself to the list? Heck, put yourself right at the top. Set aside a chunk of
money to save or invest when you first get your paycheck, and you can happily forget about it for the
rest of the month.

The Motley Fool recommends that you save as much as possible; 10% of your annual income (total, not
take-home) is a good goal. Depending on your obligations, you may be able to save more or less. The
more you save, the more wealth you create -- but anything is better than nothing. Even a few dollars
saved now will be worth more than lots of dollars saved later.

With online banking and brokerage services, it's easier than ever to set up automatic monthly transfers
between your checking account and a savings account or investing vehicle of your choice. You'll be
surprised how easy it is to live on a little less money each month -- in fact, you probably won't even
notice the difference.

Don't hesitate to be flexible about your savings. If you find yourself truly pinched for pennies once all
the bills are paid, perhaps you're paying yourself too much. Perhaps you're not yet in a position to start
paying yourself at all. That's perfectly OK -- but as soon as you can feasibly start saving, jump right in!
The earlier you start, the better.
Active and passive strategies
The two main methods of investing in stocks are called active and passive management, and the
difference between them has nothing to do with how much time you spend on the couch (or the
exercise bike). Active investors (or their brokers or fund managers) pick their own stocks, bonds, and
other investments. Passive investors let their holdings follow an index created by some third party.

When most people talk about stock investing, they mean active investing. It may sound like the superior
strategy, but active investing isn't always all it's cracked up to be. Over the long haul, most actively
managed stock mutual funds have underperformed the S&P 500 Index, the most popular and prominent
benchmark for index funds.

In that light, you can understand why some people want an alternative to "active" management. Many
people who just want a return roughly equal to that of a major stock index prefer passive investing.
Beyond the S&P 500, you can find passive investments in many indexes, including the Russell 2000 for
small-cap stocks, the Wilshire 5000 for the broad market as a whole, and various international indexes
as well.

Investing versus speculating

Right about now, you may be thinking about that brother-in-law who "made a killing" in options. Or
maybe you're reminiscing about the Nevada vacation when your one lucky quarter magically drew out
700 more with the pull of a slot-machine lever. Why put your money in slow-and-steady investment
vehicles that merely promise double-digit returns, when you could have near-instant riches? With
compounding, you have to wait patiently for years for your riches to accumulate. What if you want it all
now?

Granted, there's nothing exhilarating about predictability. Matching the performance of the S&P 500
won't make you the life of the party. But neither will the far more common tales about how you lost
your savings on some speculative gamble -- nor a recounting of your subsequent adventures in
bankruptcy court.

You don't need a card dealer, dour strangers, or Wayne Newton background muzak to gamble. Plenty of
stock market gamblers do an admirable job of losing their money on seemingly legitimate pursuits. At
The Motley Fool, we believe investors "gamble" every time they commit money to something they don't
understand.

Suppose you overhear your best friend's dentist's nanny talking about a company called Huge Fruit at a
cocktail party. "This thing is gonna go through the roof in the next few months," she says in a stage
whisper. If you call your broker the first thing the next morning to place an order for 100 shares, you've
just gambled.

Do you know what Huge Fruit does? Are you familiar with its competition (Heavy Melon)? What were its
earnings last quarter? There are a lot of questions you should ask about a "hot" company before you
throw your hard-earned cash at it. A little knowledge could help keep you from losing a lot of money.
Remember, every dollar that you speculate with and lose is a dollar that's not working to create long-
term wealth for you. Speculation promises to give you everything you want right now, but rarely
delivers. In contrast, patience all but guarantees those goals down the road.

Planning and setting goals

Investing is like a long car trip: A lot of planning goes into it. Before you start, you've got to ask yourself:

 Where are you going? (What are your financial goals?)

 How long is the trip? (What is your investing "time horizon"?)

 What should you pack? (What type of investments will you make?)

 How much gas will you need? (How much money will you need to reach your goals? How much
can you devote to a regular investing plan?)

 Will you need to stop along the way? (Do you have short-term financial needs?)

 How long do you plan on staying? (Will you need to live off the investment in later years?)

Running out of gas, stopping frequently to visit restrooms, and driving without sleep (this is the last of
the travel analogy, we promise) can ruin your trip. So can saving too little money, investing erratically, or
doing nothing at all.

Don't let yourself get away with fuzzy answers, either. Investing demands hard numbers -- get used to
them. You'll need to pin down exactly how much it'll cost to send a child to college, or how much you'll
need to live on in retirement. It can be liberating to see exactly what you need to reach your destination,
and that precision helps you stay accountable to yourself along the way.

Don't worry -- you don't have to do all the math yourself. Online interactive calculators can help you
figure your future money needs. The more specific you can be, the more likely you are to set and
achieve reasonable goals.

How stock trading works

You've whipped your finances into shape. You've set concrete financial goals. Now you're ready to learn
how to start making your investments. If you use a mutual fund, the process is pretty easy: Contact the
fund company and ask to open an account. But with stocks, things get a little trickier.

Stocks trade on exchanges. In the U.S., the major exchanges are the New York Stock Exchange (NYSE),
the American Stock Exchange (AMEX), and the Nasdaq Stock Market. While there are differences in the
way the various exchanges handle trades, buying and selling shares on any of them involves a similar
process.

Exchanges bring together buyers and sellers. The price that buyers are willing to pay for shares is called
the "bid," while the price sellers are willing to accept to sell their shares is the "ask" price. The difference
between these two prices is called the "spread." Usually, the spread goes into the pockets of the
exchange professionals who handle trades.

The amount of spread will vary, depending on the volume of shares traded. For heavily traded stocks,
competition will make spreads quite small. Thinly traded stocks may carry a large spread, in order to
compensate exchange professionals for the risk they take.

Investors can set their own bid or ask prices, too, by placing orders to sell or buy only at a specific price.
(These are called "limit" orders.) Exchange professionals keep a close eye on these "open" orders,
executing them when conditions are met, and using them to gauge demand for the stock.

Brokerage accounts are the most common way to buy stocks. You can either use one of the many way-
too-expensive full-service (or full-price) brokers, or execute your trades through a discount broker. Learn
more about how to pick one in our Broker Center, where you can compare brokers and open an
account.

The perils of margin

When you use a brokerage account, you can have a cash account or a margin account. The former lets
you trade only with money you actually have. The latter -- and right about now, you should be hearing
alarm bells and warning sirens -- lets you purchase stocks with borrowed money. Margin accounts can
increase your returns -- but they'll also increase your risk.

Brokers, who have a vested interest in enticing customers to use margin, like to say that such accounts
increase your "buying power." But in reality, buying on margin only enhances your "borrowing power."
You'll have to pay all that margin money back at some point -- forget that at your peril.

Brokers make a good part of their money by collecting interest on margin loans. And since margin gives
investors more (borrowed) money with which to buy stocks, it generates greater commission fees for
those same brokers. The broker has total control over the collateral for the loan, including the ability to
step in and force you to sell stock if it thinks you're in danger of defaulting on its loan. For brokers,
margin is a cash cow; for investors, it's a double-edged sword.

Dividend reinvestment plans (DRPs) and direct investment plans (DIPs)

Not yet ready to open a brokerage account? These plans offer another, steadier way to buy stock.
Lovingly known by many investors as Drips, they allow shareholders to purchase stock directly from a
company, with only minimal costs or commissions. Not every company offers such plans, but they're
great for people who can only invest small amounts of money at regular intervals.

Summing up
All right, Fool -- you've got a rough idea of what you want to do with your finances, how much money
you'll need, and how much time you have to reach that goal. And you now know how to start investing
your money in the market. For your next step, it's time to start thinking about exactly what you should
invest in, and the kind of returns you can reasonably expect.
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How To Invest

If you want a shot at becoming wealthy, you need to do more than simply earn money. Most
importantly, you need to hold onto the money you earn. And then, you need to grow your money. In
order to grow your money, you need to learn how to invest.

When you become an investor, you’ll be using your money to acquire things that offer the potential for
profitable returns through one or more of the following:

Interest and dividends from savings or dividend-paying stocks and bonds

Cash flow from businesses or real estate

Appreciation of value from a stock portfolio, real estate, or other assets

As you learn to become an investor, you will begin to devote your limited resources to the things with
the largest potential for returns. That may be paying down debt, going back to school, or fixing up a two-
family house.

Of course, it may also mean buying stocks and bonds, or at least mutual funds or exchange-traded
funds.
Thanks to advances in technology, you can start to invest with as little as $5 a month and a smartphone.
It’s our job to help you filter out the noise, learn the basics, and make good investment decisions from
the start.

So here are the basics of how to invest—wisely.

Table of contents

Why invest?

When should you invest?

Investing for the first time

Risk vs reward

What do you invest in?

Our philosophy is to keep investing as simple as possible

Mutual funds

Retirement accounts

Advanced investing strategies

Bottom-line advice

Should you DIY or get help with your investments?

Online stock brokers

Robo-advisors

Next steps

Need a financial advisor?

Why invest?
Investing allows you to significantly grow your money over time thanks to the power of compound
returns.

Compounding can be called the Eight Wonder of the World. Thanks to the power of compounding, a
single penny could grow into millions of dollars, given enough time. You may not live that long, but
consider the following examples.

Say you start investing when you’re 16…

As unrealistic as it may sound to start investing that young, say you got a small inheritance and you
decided to invest it—if you put $5,000 in an account with an interest rate of seven percent and
contribute an extra $200 a month, after 30 years you’ll have a little over $264,000.

Using a more realistic example, say you start investing when you’re 22, right after graduation…

You start out just putting $50 a month into your 401k, with a 50 percent company match.

If you raise contributions by the same amount as any pay raises, you’ll have more than $1 million by age
65. That assumes annual raises of 3.5 percent and an 8.5 percent return on 401(k) investments.

While there are many factors to consider—a simple example like this demonstrates the power of
compound interest if everything goes right.

So if you want to start saving now, you could even have a whole year’s salary saved by the time you’re
30…Take a look at the chart below to see how.

How To Save A Year’s Worth Of Salary In Your 401(k) By Age 30

Age Salary Your 6% Contribution 3% Employer Match Total Contributions Year-End 401(k)
Balance
22 $30,000 $1,800 $900 $2,700 $2,889.00

23 $30,900 $1,854 $927 $2,781 $6,123.60

24 $31,827 $1,910 $955 $2,864 $9,707.07

25 $32,781 $1,967 $983 $2,950 $13,670.03

26 $33,765 $2,026 $1,013 $3,039 $18,045.62

27 $34,778 $2,087 $1,043 $3,130 $22,869.71

28 $35,822 $2,149 $1,075 $3,224 $28,181.14

29 $36,896 $2,214 $1,107 $3,321 $34,021.95

30 $38,003 $2,280 $1,140 $3,420 $40,437.60

When should you invest?

Now that you know why you should invest, how about when to invest?

The answer to that is pretty simple. The right time is now.

Investing sounds more intimidating that it is. Yes, there’s always a potential risk for loss, but there’s an
even bigger potential for serious gain.

Doing anything for the first time can be terrifying, especially when it involves your hard earned cash. But
here’s some advice for first time investors.

Investing for the first time

Investing is like religion—people have some strong opinions and may even belong to one of many sects
or schools of thought. Here are a few that come to mind: (add a graphic depicting these three different
groups)

The Doomsday Preppers – these people are convinced our financial system will collapse, so they stick all
their money in gold and real estate.
The Gambling Day-Traders – these are most often the people you see in movies, with their desks or
walls covered in monitors and TVs, watching every second of the day and seeing how the stock market
changes.

The Indexers – these are people who simply invest in everything in order to take advantage of the slow
and steady increase in the overall value of the markets.

If you already belong strongly to one of the above camps, you may not find the investing resources on
Money Under 30 useful. If, however, you have an open mind and are interested in learning simple
strategies for successful lifelong investing—without any gimmicks—then read on.

Risk vs reward

It’s true: Investing involves risk. We’ve all heard stories about investors who lost half of their fortunes in
the Great Depression or even more recently in the Great Recession. We’ve heard about the Bernie
Madoff’s of the world and investors who lost everything to a scam. Although you can never eliminate
risk entirely, you can significantly reduce risk if you invest wisely.

The great thing about investing young, is you’re likely investing in longer-term investments—like your
retirement account. These investments are less risky than quick-fix stock trading by people who really
don’t understand what they’re doing.

While investing can be risky, it’s best to just deal with that risk, because not investing can cost you a lot
more money than losing a little of money on a bad investment.

We talked about compound interest above, and the key rule to that is—the sooner you start to save the
more your money will earn over time. Take a look here to see the big difference between someone who
started investing at 25 versus 35. You could be missing out on hundreds of thousands of dollars if you
start saving later.

What do you invest in?

Our philosophy is to keep investing as simple as possible

Create broad diversification through a mix of low-cost mutual funds and ETFs, while keeping it fun by
holding individual stocks with up to 10 percent of your assets.
The most important factor in being a successful investor is not the stocks and funds you pick. Successful
investing depends on:

Choosing proper asset allocation – the overall mix of bonds, stocks, and cash you hold in your portfolio.

Making and sticking with an automatic investment plan – this way you avoid making terrible,
emotionally-charged decisions—like selling at the bottom of a market crash.

The investing information on Money Under 30 barely scratches the surface of all the knowledge out
there about investing, but that’s OK. We’re not trying to train the next class of hedge fund generations
so much as give the average person enough knowledge and confidence to begin investing on your own.

Mutual funds

A mutual fund is a type of professionally managed investment that pools your money with other
investors. The fund’s managers then use the pooled money to buy securities for the group.

It’s best to start out investing in mutual funds or exchange-trade funds rather than individual stocks and
bonds until you get your feet wet. These types of funds enable you to invest in a broad portfolio of
stocks and bonds in one transaction rather than trading them all yourself.

They’re not only safer investments (because they’re diversified), but it’s often far less expensive to
invest this way. You’ll either pay just one trading commission or nothing at all (in the event you buy a
mutual fund directly from the fund company), as opposed to paying trading commissions to buy a dozen
or more different stocks.

Although mutual funds can be purchased through any brokerage account, you’ll save money on trade
commissions by buying funds direct through a mutual fund company like Fidelity or Charles Schwab.

Retirement accounts

An IRA provides certain tax advantages as an incentive to save for retirement. The downside is there are
limits on how much you can contribute to the account each year and when you can withdraw the
money.
Traditional IRA

With this type of account, your contributions may qualify for a deduction on your tax return. In addition,
there’s the potential that your earnings can grow tax-deferred until the time you need to withdraw
them at retirement age. The primary argument with a Traditional IRA (vs. a Roth IRA) is that most feel
they’ll be in a lower tax bracket when they retire, so paying taxes on this money at stage will be cheaper
than paying them when they’re earned (considering the up-front deduction).

Roth IRA

With a Roth IRA, your contributions are after-tax and the money can potentially grow tax-free while you
save. The big benefit here is that withdrawals at retirement time are tax-free, assuming you meet the
required conditions. This is my number-one recommended retirement account for most people.

Rollover IRA

This is an account that’s created by rolling over another account, such as a company-sponsored 401(k).
For example, if you have a 401(k) with an employer who you leave, you can roll that money over into a
Rollover IRA.

If you’re new to investing and want to begin putting money to work for the long-term, an IRA is where
to start. Read more about the best places to open an IRA here.

Advanced investing strategies

Individual stocks

If you decide you want to venture out and buy individual stocks, we recommend you take a slow and
steady approach. Don’t put more than 10 percent of your portfolio in individual stocks until you get very
comfortable with what you’re doing.
A great place to start is by reading about value investing, where we focus on heavy amounts of research
and a “buy-and-hold” mentality.

It’s important not to be afraid of the stock market, it really is one of the best places to grow your money.

Real estate

Real estate investing makes millionaires (just look at Donald Trump), but you don’t have to be a
millionaire to start investing in real estate.

Investing in real estate is a long-term investment that investors invest in for cash flow (the money you
make from rental properties every month after all expenses are paid). Cash flow will also increase over
time because rents will go up with inflation while your mortgage payments stay the same.

Like any investment, though, it’s important to know the risks. And consider if you have what it takes to
be a landlord.

Crowdfunding

With online investment sites like EquityMultiple and Fundrise that run on crowdfunding, you can invest
with as little as $1,000.

Crowdfunding allows you to invest in real estate, and other peer-to-peer ventures. Sites like Lending
Club allow everyday investors give personal loans to others. These loans go towards anything from debt
consolidation to funding a wedding.

Bottom-line advice

If you’re new to investing and can afford to begin putting money away for retirement, I recommend
everybody begin investing with a Roth IRA.
If you already have a retirement account or need to invest money for another goal (like buying a home
or starting a business), a regular brokerage account will do. Keep in mind that your capital gains—the
money you earn when you sell a security for more than you paid for it—is taxable, as will certain
dividends you receive.

Should you DIY or get help with your investments?

It’s important to know when it’s best to have a financial advisor and when it’s best to opt for a different
investing platform. If you’re looking for real financial advice and you have quite a bit of money to
handle, a face-to-face advisor will be much better at explaining things to you than any electronic form of
advisor.

Some people may choose to invest with a financial advisor because they want face-to-face interaction,
professional advice, and don’t mind paying a premium for someone handling their money. Oftentimes,
people with large sums of money to invest will hand it over to a financial advisor so they don’t have to
do the work.

We’ll talk more in depth about choosing a financial advisor in a minute.

So how do you find a financial advisor? It’s relatively easy to do as long as you know the right questions
to ask. If you’re a Millennial and are looking for a financial advisor (although, make sure you really need
one), here’s a roadmap of the best advisors for you.

Online stock brokers

These are brokers that are available online. You can typically do everything without ever having to speak
to a person, which is nice for some people. Online brokers are also often much cheaper than a
traditional brick and mortar broker where you’d meet face-to-face with a person.

Ally Invest is an example of an one of the best online brokers for new investors. Ally offers $4.95 stock
trades – about the cheapest around – and there’s a low $500 minimum funding requirement to open an
account. Other options include Fidelity, TD Ameritrade, E*Trade, and Merrill Edge. If you’re interested in
opening a brokerage account, you can research them with the excellent comparison tools at
StockBrokers.com.
Robo-advisors

So-called robo-advisors like Betterment and Wealthfront offer the benefits of a financial advisor with
the ease of using an online broker. Robo-advisors are growing in popularity and take the stress out of
knowing how (and when) to invest, as well as having to meet with someone in-person. With robo-
advisors, you’re instantly diversified in a plethora of stocks and bonds, and your allocations will
automatically adjust for you based on your goals.

You may want complete ease and automation, as well as the ability to to a) not have to talk to anyone in
person, and b) not have to sit down at a compute to do any research. Using an investment app like
Stash, you can invest as little as $5 right from your phone (and get $5 just for signing up!).

Next steps

These are the basics of investing—there’s plenty of directions you can take now that you know what
you’re doing.

Setting up an automatic investing system

Here’s a guide to investing in a socially responsible way

Here’s how to know when it’s time to sell your investments

Want others to experience the excitement of investing—here’s how to give investments as gifts

Maxed out your 401k? Here’s what to do next

Need a financial advisor?

The above investment accounts are all great for do-it-yourself investors. However, if you find yourself
wondering if it’s time to get professional help making a financial plan, it may be time to work one-on-
one with a financial advisor. You can learn more about how to find a qualified financial advisor to help
with your investment goals here.

Get Matched with 5-Star Rated Financial Advisors in Your Area

The Paladin Registry pre-screens financial planners and investment advisors. It’s free to use and there’s
no obligation. Start now:
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