10 steps for getting started in investing

Experience can be a great teacher, but when it comes to learning how to invest, the cost of negative experiences can be extraordinarily high. If you want to start investing, you should commit to learning from your mistakes while also seeking to limit them.

The best way to do this is to wade gradually into investing. After all, you don't want to risk your life savings without knowing what you are doing, but if you stay on the sidelines till you have learned enough to be an expert, you may never get in the game. Most experienced investors will tell you that they never stop learning, and the truth is that most people don't really start learning until they participate.


Here are 10 steps that can help make the massive job of learning to invest more manageable.

1. Set objectives

Don't even think about starting to pick investments until you have set down some investment objectives. Investing without clear objectives in mind is like hiring someone without knowing the job description -- you might end up bringing on a brilliant history professor when what you need is a plumber.

A thorough set of objectives should include both the goals you want to achieve and your risk tolerance in pursuing those goals. You might also include some asset allocation guidelines so you can look for investments to fill designated roles in your portfolio. Set these objectives down in writing, because that will help you clarify your thinking and maintain consistency over time.

2. Become an avid spectator

Given the popularity of fantasy sports, many people might enjoy making some initial picks purely on paper and then tracking how they do. Students might even be able to find an investment club in school that does this kind of thing as a competition.

Doing this can help you practice the necessary analysis and observe market behavior even if you don't yet have the money to invest, and it will allow you to learn from experience without paying for it.

3. Take advantage of employer-sponsored plans

If your employer has a 401(k) or other plan that allows participants to make investment choices, this is a great place to start. You can get tax advantages and often matching benefits from directing money into these plans, so your investments will be ahead of the game right from the start.

Also, by presenting you with a menu of available funds, these plans can narrow your initial decisions down to some manageable choices.

4. Start with broad diversification

You may want to get to the point of picking individual stocks, but start out by trying to acquire a representative range of holdings. This can be done with broad-based investment funds, and possibly multi-asset class funds.

It can take time to build up a diversified portfolio of individual investment picks, so if you start with a broadly based fund and then add more specific securities, you can get general market participation while you add individual opportunities one-by-one.

5. Keep your individual picks in proportion

Once you have a broad base to work from, you can start thinking about adding individual stock picks to your portfolio. While these should be promising prospects that you are willing to put more money into than the more generic securities in your broad-based funds, letting individual picks represent too large a share of your portfolio is risky.

To put this in perspective, the largest holding in the S&P 500 stock index represents about 4 percent of that index, and the rest of the 10 largest each represent less than half of that. It is fine to hold more than that in securities you really believe in, but you should set some limits, such as restricting new purchases to no more than 5 percent of your portfolio.

6. Know the history

Next to experience, history is the best teacher and it is a lot cheaper. Knowing how various asset classes, industries and companies have performed under a full range of conditions, good and bad, will help give you a feel for what range of outcomes your portfolio might produce.

7. Invest in what you know

If you have expertise in a given field, use that expertise to make investment decisions based on which companies have a competitive advantage, or when the industry as a whole might be poised for an upswing or a downturn.

Just be aware that simply being familiar with one of a company's products is usually a far cry from knowing the financial and competitive dynamics of the industry as a whole.

8. Don't bet your job and your portfolio on the same thing

The exception to investing in what you know is putting too much money into the stock of your employer. Too many people have been burned by doubling down on their investment risk this way. If something goes wrong, you could see your career and your portfolio wiped out all at once.

9. Unless you're buying or selling, focus on earnings

You should be very particular about price when buying and selling a stock, but in between don't let daily fluctuations concern you too much. Instead, make sure fundamentals like sales and earnings are progressing as well as you expected. If the fundamentals behave, the price should come around eventually.

10. Fit every new development into a context

Investors get whipsawed -- thrown from one extreme to another -- when they react to each new piece of information in isolation. Every investment, and your economic outlook as a whole, should be viewed as an ongoing narrative, and each new development should be viewed in terms as how it affects that established narrative.

This advice is primarily for people who want to build a portfolio that can be readily valued and traded, so it is based on the assumption that acquisitions will consist of publicly traded stocks, bonds and mutual funds. There are of course many other types of investments, such as real estate, businesses, collectibles and so on. However, be advised that besides being less liquid, these require two types of specialized knowledge: an understanding of the field the investment is in, and a legal understanding of how to protect yourself when dealing with nonpublic investments.

For most people, understanding publicly traded securities entails a learning curve that is challenging enough.

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