How To Become An Investor In 5 Easy Steps

May 3, 2022
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Written By Adam

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Before you drop your life saving on the hottest stock your friend told you about, follow these 5 easy steps to become an investor.

56% of Americans have stock investments, according to a recent Gallup Poll

Step 1) Define Your Investing Objectives

The first step to becoming a successful investor is to define your investment objectives.

Ask yourself what your goals as a soon-to-be investor are?

Common investing goals may include:

  • Saving for retirement
  • Life events (e.g., college, education, home)
  • General Investing
  • Lifestyle goals (buying a luxury watch, car)

Saving for retirement is usually the number one investing goal for most people, followed by investing for their children’s future, and lastly, if you’re wealthy enough, investing for lifestyle purchases.

Maybe you are not sure what your investing goals are.

In that case, it’s worth considering a wealth advisor like the team over at Personal Capital.

Step 2) Pick The Right Type Of Investment Account

The second step to becoming an investor is opening the correct investment account based on your investment objectives. Depending on your goals determines what type of account you should open.

I’m a DIY investor myself, but if you are overwhelmed and don’t know where to start, a wealth advisor can guide you through the investing and asset allocation process.

Investment GoalType of Investment AccountsContribution Limits?
General InvestingTaxable BrokerageNo limit
Retirement Investing401K/403B/IRA$20,500 for 401k & 403B, $6,000 for IRA
Education Accounts529 Savings PlanLifetime cap depending on the state of residence
Accounts for childrenUTMA/UGMAFund up $15,000 per year/ $30,000 per couple

The most common investing accounts are a retirement account opened through an employer and a taxable brokerage.

Depending on your goals, I recommended maxing out your tax-deferred retirement account before opening a taxable brokerage account.

Step 3) Choose Your Asset Allocation

Your asset allocation is dependent on your investment objectives and goals.

Most investors have a well-diversified portfolio of equities, bonds, alternatives, and cash.

Depending on your investing timeline and goals, the rule of thumb is to hold riskier assets like stocks & ETFs when you are younger and reduce your exposure to riskier assets near retirement age.

If your investment objective is income generation, you may want to focus on fixed-income investments.

Fixed income securities fluctuate less in value, but also tend to have higher coupon payments.

Alternatively, if you are looking for capital appreciation, equities are a better option as they increase in value more than fixed-income investments.

Asset allocation is tricky if you don’t want to pay for expert advice.

A lower-cost option is M1 Finance. The M1 platform offers a semi-guided approach to investing, including expertly selected portfolios. M1 also offers taxable brokerage accounts, IRA, and 401k accounts.

The M1 platform makes it easy to become an inveator.

Step 4) Educate Yourself About Investing

Continuous education is the key to becoming an investing guru.

Reading the Wall Street Journal is a great place to start if you want to learn about the stock market and investing. You won’t become an expert overnight, but your investing acumen and understanding of investment jargon will develop over time. If there are any investing concepts you are not familiar with, your investment account will likely offer free training and research.

Excellent sources for learning about investing include:

  • The Wall Street Journal
  • The Intelligent Investor by Benjamin Graham (Warren Buffet’s mentor)
  • The Bogleheads’ Guide to the Three-Fund Portfolio by Taylor Larimore

Step 5) Be Patient!

Becoming a successful investor is a long-term game. There will be periods of prosperity, volatility, market downturns, and the urge to panic sell when the market is down. It’s critical to stick to your investment objectives and remember your goals.

PRO TIP Investing for the long-term has tax benefits. Investments sold after 1 year have a lower tax rate than investments held for less than a year.

Investing Habits To Avoid

It’s easy to get caught up in investing habits that can be detrimental to your portfolio and long-term investing goals in search of quick riches.

Trying to time the market

Timing the market means buying low and selling high. According to a study by Bank of America, if an investor missed the ten best market days since 1930 every decade, their total return would stand at 28%. If, on the other hand, the investor held steady through the ups and downs, the return would have been 17,715%.

Panic Selling

Panic selling, also known as loss aversion, is the tendency to sell during a market downturn to avoid further losses. In 2020, at the onset of COVID, the S&P 500 dropped almost 25% only to reach records highs months later.

Day Trading

Buying and selling securities the same day to generate a small profit is a terrible idea if you are learning to become an investor. Not only is day trading incredibly risky, it usually doesn’t end up well. The most significant number of millionaires are from everyday 401K investors. If you are just starting to invest, day trading is not something you get involved in.

Trading Options As A Beginner

Options trading can get incredibly complex. While they can multiply gains, they can also multiply losses. So as a beginner, you should stay away from options. As you become a more advanced investor, options can play an important role in your portfolio, but you must first understand how they work and their associated risks.

Good Investing Habits To Adopt

Maintain Regular Contributions

When you are just starting to invest, making regular contributions to your investment account is critical, especially when investing in a tax-advantaged account such as an IRA, 401K, or 403B.

PRO TIP: When investing in Exchange Traded Funds and mutual funds, be aware of the expense ratio, which can eat into your investment gains. Index funds tend to have the lowest expense ratio.

Diversify Your Portfolio

A critical part of investing is maintaining a diversified portfolio. A mix of stocks, bonds, alternatives, and cash works well for most people. However, you should be more inclined to invest in riskier assets such as equities the younger you are. A more balanced allocation of stocks and bonds makes sense as you near retirement age.

There is no one size fits all approach. That’s why I like M1 Finance. They offer over 80 professionally picked portfolios comprised of stocks and ETFs that align with all types of investing objectives – from retirement portfolios to ESG portfolios.

Stick To Your Investing objectives

Sure, your friend may tell you about the next high-flying stock that will be the next Apple or Google, but that doesn’t mean you should go all-in. No matter what, stick to your investment objectives even if the market is in a downturn. Market downturns happen quickly and can be painful, leading to panic selling.

Frequently Asked Questions

When Is The Best Time To Invest?

Now! If you think you can time the market, you are sorely mistaken.

Right after the pandemic started in March 2020, the S&P tanked and lost almost a quarter of its value. Two years later, the S&P 500 is up nearly 78%. Many people would have likely told you were crazy if you were going to start investing in March 2020. However, the reality is that if you ignore the market volatility and maintain regular investment contributions, you will end up ahead in the long term, and compounding is your friend when it comes to investing.

Can I Invest Without A lot Of Money?

Yes! M1 Finance is an investing app that allows you to invest in fractional shares of popular stocks like Tesla, and Google, among others.

Can I Invest Outside of The Stock Market?

Absolutely. Asset classes such as real estate, alternatives, and even investing in wine are becoming incredibly popular and more accessible for everyday investors. Having up to 10% of your portfolio in these asset classes can be helpful because of their uncorrelated returns to the stock market.

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