Investing Advice

How to Start Investing on Your Own

Written by Zina Kumok
Published Jan 24, 2020 - [Updated Apr 26, 2022]
6 min read
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Unlike most people, I’ve always wanted to invest. That’s why I was so excited at the end of the summer before my sophomore year in college. After working a couple of jobs, I’d managed to save up about $1,000 to invest in my own portfolio.

Instead of talking to one of the personal finance counselors on campus or doing some research of my own, I listened to my dad. He advised me to invest everything in one particular company, which he was absolutely certain would be successful.

Ten years later, I withdrew the funds from my account. I hadn’t made any money.

I still regret my decision to this day. If I had done a little research, that $1,000 could have been the foundation on which I built my retirement account. Instead, it’s just served as a reminder to look outside the family for investment advice.

The sad part is, starting a portfolio isn’t rocket science. I was just in such a rush to feel like an investor, I didn’t give enough weight to what I was actually investing in. If I could do it all again, here’s what I would want to know.

Understanding Investing

You don’t need a finance or business degree to invest successfully. All you need is patience, a little extra money and a basic understanding of where to put that money.

Many people avoid investing because it seems overwhelming and complicated, especially if they’re scared of losing money -and it’s true that investing comes with an inherent risk. But that risk is essential to building a strong portfolio.

When you put money in a bank’s savings account, it is insured by the federal government. You can’t lose anything because the funds are guaranteed, but you also won’t be able to earn more than 1-2% interest a year. When you invest money in the stock market, you can expect to earn 5-8% average per year depending on your risk tolerance and asset allocation mix of the portfolio. By having the potential to earn more rate of return over time, that discrepancy can mean the difference between a modest sum and a million dollar nest egg.

Obviously there are no guarantees, but more risk gives you have the potential to earn more return. When you leverage investing principles such as diversification and rebalancing it minimizes the overall risk of any portfolio.

How to Invest on Your Own

First, decide on your overall investing goal and use this future value investment calculator to get an idea of how long it will take to achieve your goals.. Do you want to save for retirement, or maybe a down payment on a house? Maybe your goals are more immediate, like a trip after graduation.

You can either invest for the short-term or the long-term, and that choice will affect what kind of investment account to open and what securities to buy. Usually it is wise to only invest your money for long term goals, i.e. anything 5 years or longer.

There are three main security types: stocks, Exchange Traded Funds (ETF) and mutual funds. A stock is a share of one company, like Nike or Apple, while ETFs and mutual funds can represent thousands of companies with just one share.

There are two basic account types, brokerage accounts and retirement accounts. A brokerage account lets you access the money at any time while retirement accounts only allow you to withdrawal after age 59 1/2 without any penalties.

Trading individual company stocks might seem fun, but it’s often hard to build consistent positive returns. Even the experts are bad at picking stocks that can beat the average. If you still want to trade stocks, understand that you’re more likely to lose money and not see the returns you’d need to retire.

A brokerage account has no rules on when you can withdraw funds. If you invest $100 in a brokerage account and you need to withdraw it next month, you can do that. You may have to pay taxes on any earnings, but there will be no extra withdrawal fee.

Long term Investing

A retirement account like an Individual Retirement Account (IRA) may be a good option if you want to save money for the long haul. These accounts have special tax benefits to reward saving for a long period of time.

Once you put money in an IRA, you can’t take it out until you reach age 59 1/2. There are a few exceptions, but in general you’ll pay a 10% fee and income tax on any withdrawals prior to age 59 1/2.

You can open an IRA or brokerage account with a firm like Vanguard, Charles Schwab or Fidelity. Charles Schwab and Fidelity. Keep in mind that while these financial institutions may have no minimums to get started, there may be a minimum to actually get started with an investment within the account such as $1,000.

If you’re investing for the long term, an ETF or mutual fund following the S&P 500 index is a good place to start. This is what many experts recommend, including famed investor Warren Buffett. Vanguard, Charles Schwab and Fidelity have their own S&P 500 index funds available when you open a brokerage or retirement account with them.

According to historical records, the average annual return since its inception in 1926 through 2018 is approximately 10%. The average annual return since adopting 500 stocks into the index in 1957 through 2018 is roughly 8% (7.96%). However, this growth isn’t completely linear. In some years, it may be down double digits. In other years, it may grow 30%. If you stick with this fund and don’t withdraw when the market dips, you’ll likely see good results over time.

Use a Robo Advisor

A robo advisor is an online platform that provides financial and investing suggestions based on a tried-and-tested algorithm. It’s a hands-off approach, popular with investors who don’t want to spend a lot of time managing their portfolio.

When you sign up for a robo advisor, you’ll be asked a series of questions to help determine the best investment course for your particular situation. This usually includes your age, when you hope to retire and your current income level. The robo advisor will then select investments for your portfolio and suggest a monthly contribution amount.

As the years pass, the robo advisor will automatically rebalance your portfolio. This means choosing more conservative investments as you get closer to retirement age, so your nest egg is at its most secure when you need it.

Robo advisors can keep fees down because they choose well-respected, low-cost funds. The only thing that changes for each person is the exact allocation of each fund. They offer both retirement and brokerage accounts.

Reputable robo advisors include Betterment, Wealthfront and Personal Capital. Some robo advisors have no minimum requirements so you can start investing right away.

You can set up automatic transfers to a robo advisor on a monthly basis or transfer funds sporadically. If have a steady gig, figure out what you can afford to contribute and set up automatic payments. If you work sporadic hours or are unemployed, you can transfer extra money at the end of the month.

Do you have any investing tips for beginners? Let us know in the comments!

Zina Kumok is a freelance writer specializing in personal finance. A former reporter, she has covered murder trials, the Final Four and everything in between. She has been featured in Lifehacker, DailyWorth and Time. Read about how she paid off $28,000 worth of student loans in three years at Conscious Coins. More from Zina Kumok