Getting started with investing is a daunting task. There are a lot of things that can go wrong, and it's very easy to lose a lot of money quickly. This series will focus on things I've learned over the past 10+ years of investing as a long-term investor.

Markets fluctuate continuously, and there are many different strategies. While there are no guarantees, longer-term strategies average out those fluctuations and therefore have a much higher likelihood of success, so that's what I'll be focusing on for this series. By "investment," I'm referring specifically to long-term strategies.

Long-term strategies are focused on steady growth over the course of your career, not making high-risk bets to get a quick payoff. While short-term strategies can work, the risks are much higher, so it's not a good first step.

Note: This article is written for a US audience and uses US terms, accounts, and tax considerations. This reflects my knowledge and experience, but I am not a licensed financial advisor. Please consult a professional advisor for personalized advice.

When to start investing

Before you start investing, there are a few things you should do first.

1. Have an emergency fund of at least 3-6 months. Investments will fluctuate in value, which means they can and will decrease in value during some periods. Investing money that you might need in the near future means you may need to sell your investments at a loss. Having an emergency fund helps cover short-term unexpected expenses that might otherwise require selling during a loss.
2. Consider upcoming expenses. As with the previous point, if you have a known expense coming up in the near future (1-6 months), you should avoid investing the money needed for that expense because the market could fluctuate downward when you need to sell. You should only invest money that you can choose when to sell. If the expense is more than 1 year out or doesn't have a specific date (e.g., "I'll need a new car soon"), then investing that amount is still a good idea so you don't miss out on potential growth.
3. Pay off high-interest loans. Credit cards and other high-interest loans will bleed money far faster than you can hope to earn from your investments. It's better to focus on paying those off first.

For lower interest debt, it makes more financial sense to start investing before paying off your debt (sorry, Dave Ramsey). While it is "nice" to be free from debt, an investment portfolio can grow more quickly than lower interest debt which will put you in a better financial situation. Money in an account is more useful than an account balance of zero.

1. Prioritize personal growth. Education or other growth opportunities will have major impacts on your earning potential, which can vastly outweigh profit from investments. Prioritize these over investments. Finish college first!
2. Have some money to invest. This goes without saying but if you have no money to invest, then you'll need to focus on cutting expenses, refinancing or consolidating debt, or finding ways to increase your income first. I don't mean to diminish the difficulty of this, but if that's your situation, this article isn't going to be helpful right now. Ideally you would have a lump sum and/or at least $100 per paycheck. You can get started with less, but you'll need to either use a broker like Robinhood that allows fractional shares, or save up between purchases and invest less often.

Why invest

Increasing wealth opens up possibilities and naturally creates some "breathing room." If you invest a percentage of your income, you can always lower that percentage if you need to. You'll increase your future access to better housing, a better retirement, the ability to support your kids or family, or the option to start a business.

Financial discipline can help you avoid wasting your money by investing first before you spend it on other things, which slows down spending on "wants" just a little bit.

Investing is putting your money to work for you, amplifying your income while you focus on other things.

It's better at tax time, too. Long-term capital gains (holding an investment for more than 1 year) are normally taxed at a lower rate than ordinary income for middle-class investors, so you'll pay a lower fraction of your money.

Why invest as opposed to saving

The economy is inflationary, with a target inflation rate of 2% but sometimes is significantly higher. Assuming that it is 2%, this means that prices increase by 2% year-over-year, so your money loses 2% of its "purchasing power" over that time.

If your savings account pays a lower interest rate than the inflation rate, it's actually losing its ability to purchase goods. You can think of this as the savings account losing value over time, even if the number is increasing.

Check out the Current inflation rate.

How to get started

Start simple and start small. This allows you to acclimate to the investment experience and gives you a chance to learn how you'll react to market changes on a small scale before risking a lot of money.

Always try new strategies at a small scale before investing a lot of money. You can use a tool like Testfolio to check the historical performance of a portfolio before committing a significant amount of money to it.

To start simple, I'd suggest picking a single fund at first, investing a small amount every paycheck until you've kept up the habit for a few months or have reached $5,000 invested.

It's generally recommended to pick an index fund to start, but there are many to choose from. Here are some thoughts on some potentially good starting points:

Where to Invest

Personally, I've used Schwab and Vanguard; both are fine for new investors. Another popular option is Robinhood. Look for a broker that offers no-commission trades for index funds and mutual funds.

How to Invest

The best way to start investing is incrementally, a process typically referred to as "DCA" (Dollar Cost Averaging).

While there are more effective strategies mathematically, it's most important to be comfortable with your investments. Investing incrementally allows time for those investments to fluctuate while they're small and gives you time to acclimate to that fluctuation and develop the habit before the account reaches a larger value.

Losing $2 on an investment of $100 will feel a lot better than losing $2,000 of $100,000.

Learning to weather those fluctuations is much easier when your account is small. By the time your account reaches $100,000, you'll most likely already have experienced significant gains on your investments, so that temporary loss won't matter as much if you remember that you've also gained $30,000 in value.

Remember, we're all about long-term investment.

What to avoid

Don't try to "buy the dip"

When I started seriously investing around 2012, it had been about 4 years from the end of the previous recession. A colleague and I discussed investing at the time. I jumped in, but he was hesitant since recessions have historically occurred every 5-10 years on average.

Time went by and the recession didn't come. He was convinced it was just around the corner, but I kept investing.

A $10,000 investment in 2012 would be worth over $48,000 inflation adjusted as of posting this article, while $10,000 uninvested would be worth less than the starting amount, due to inflation.

So don't try to time your investments.

Avoid reactionary investment

Panicking or fear of missing out (FOMO) on an incredibly successful investment are ways to destroy your gains in the market.

In both scenarios, you're almost certainly exposing yourself only to the downside in the market and cutting off your profit potential.

Make a plan with a clear head and stick with the plan.

A stock can go down for months before starting a recovery. With perfect knowledge, you could theoretically end up with higher profit, but unless you have a time machine or have actual knowledge of exactly why things changed direction and might change direction again, you'll almost certainly lose instead of sticking with the plan.

Don't try to pick individual stocks

Picking individual stocks is much more effort. You're at the mercy of decisions by a small group of people who have imperfect knowledge and motives.

This isn't necessarily "bad," but it requires a lot more research to look into those companies, learn their business plan and why they might turn a profit or not, and they don't necessarily react in the way you expect. For example, stock values can decrease even when a company announces a profitable quarter.

It's best to hold off on individual stocks until you have some experience and then start small. I've gotten out of this entirely, as I have other priorities and don't want to spend a ton of time reading investment documents.

Avoid short-term investing

Just as with individual stocks, this can work, but you're competing against the career traders who have a ton of experience and proven strategies.

Meanwhile, 5-10 year timeframes in large indexes almost always turn a profit.

Avoid front-loaded or high-fee funds

Front-loaded funds mean you're throwing away a percentage of your money up front. This means you're starting at a loss, which will be a discouraging start to your investment experience.

In theory, the idea is that they have "experienced" investors who return a higher profit over time than other funds, but this is exceedingly rare, especially with the prevalence of so many low-fee funds.

Also, pay attention to management fees; some funds charge significantly more than others. Large funds are often small fractions of 1%.

Conclusion

Investing doesn't have to be a frustrating or confusing experience. Starting small and building your portfolio over time is a great way to begin your investment experience and start today to improve you and your family's financial future.

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