Key Take Aways
- Set a proper foundation by paying off debt and building a savings
- Open a beginer friendly account that offers fractional share investing, and deposit funds
- Select diversified set of holdings and select target allocation
- Automate your investing by setting reoccuring deposits and automatic investing
So you want to start investing in the stock market, but you are unsure how and you’re light on cash. Fear not, this overview is made just for you, let’s begin!
First and foremost, congratulations on taking the initiative and taking the first steps in controlling your financial future! In a day in age where far too many are obsessed with the next big shiny new thing or spending simply to post on IG; few have the discipline to delay gratification and invest for their future.
Setting the Proper Foundation
Before risking your precious capital on the next big stock, it is important to assess your current situation to make sure you can maximize your odds of success in the market.
First and foremost, you want to make sure you have a steady income and for most (myself included) that means a job. It doesn’t have to be your dream job, it just has to provide a steady source of cash that you can use to fund an investment account.
The next two items are often overlooked, but critically important to your long-term success in the markets. You want to make sure that you have paid off your high-interest debt (to me that means anything with an APR over 6%) and you want to make sure you build a small cash savings of at least $500 to $1,000.
Wait, I thought this post was about investing and 10xing your money, so why are we talking about paying off debt and building a savings? Here’s why; completing the above two items not only builds good habits but also affords you some financial stability to take advantage of market volatility instead of it taking advantage of you. Imagine you have to make a large credit card payment or you got a flat and need to buy a new tire, where will you get the money from? Chances are you would end up having to sell stocks to meet your obligations. And what if this happened in March of 2020 when the market was down 36%? Chances are you would have to sell at a loss AND, because you are low on cash, you would be missing one of the best buying opportunities in 10-years—a double whammy. Hopefully, this alone illustrates the importance of checking off the above two items before jumping into the markets.
Setting Expectations
Awesome, so we’ve paid off high-interest debt and built a small savings, now it’s all rocket emojis and printing tendies!!!
Well, not quite. The last thing to check off before moving on is to set proper investment expectations. For starters, the S&P 500 delivers on average returns of 9% a year with an annual standard deviation, or volatility, of 15%. For those light on statistics, this means annual returns will typically fall anywhere between -6% and +24%, with an average of around 9% a year (this assumes stock returns are normally distributed, plot twist…they are not, but that’s for a different post). Especially for starters, it’s important to truly set realistic expectations so that you don’t feel like you’re not making progress or worse load up on risk in an attempt to go to the moon.
Let’s Start Investing
By now all the real hard work is mostly done, what’s left is selecting a broker, funding your account, and selecting what to invest in.
On selecting a broker, there are dozens of quality online brokers. There is no ‘best’ broker, only the best broker for you. For myself, I have enjoyed using M1 Finance, Robinhood, and Ally Invest. For absolute beginners, I recommend M1 Finance as their platform makes it easy to create a diversified portfolio and encourages long-term investing over trading—both are valid, but beginners will experience higher levels of success with investing versus day trading. The bare minimum is that the broker should be FINRA registered and participate in SIPC (it’s like FDIC insurance but for brokers).
Note, when starting to invest with little money, you’ll need a broker that offers fractional shares (i.e. the ability to buy pieces of a stock or ETF). For example, M1 Finance and Robinhood both allow you to buy fractional shares, which means you can buy $10 worth of VTI instead of buying an entire share for $230 (as of 12/1/2021).
With a broker account set up and funded, now it’s time to buy. For an absolute beginner with little to no investment experience, low-cost diversified ETFs are the best place to start your research. Below are are few of my favorite Vanguard ETFs:
| Symbol | # of Holdings | Annual Expense Ratio | Description |
| VTI | +4,000 | 0.03% | Small, mid, and large-cap U.S. stocks |
| VXUS | +7,000 | 0.08% | Large-cap international stocks |
| VB | +1,500 | 0.05% | Small-cap U.S. stocks |
| VT | +9,000 | 0.08% | Invest in both U.S. and international stocks |
| BND | +10,000 | 0.035% | U.S. bond market |
For those looking to include commodities in their portfolio, GLD and SLV are bullion-backed ETFs that provide cost-effective exposure to gold and silver, respectively.
A portfolio built on the above-listed ETFs provides instant diversification across sectors, and potentially across countries. If, however, you want to take on building your portfolio with individual stocks the process is a bit more involved and stocks must be carefully selected to provide a well-rounded and diversified portfolio (check out my article here on diversification).
For new investors, I recommend sticking to low-cost ETFs, at least initially, such as the ones shared above as you’re guaranteed to get market returns, you get instant diversification and a lower rate of volatility which will help you get used to seeing your net worth move up and down.
The final piece of the puzzle, after selecting your ETFs or stocks, is to select your desired target allocation, which means how much of each holding you’ll be buying. Your target allocation is unique to your circumstances, such as your age, risk tolerance, and other factors. A classic baseline is the old ‘60/40 portfolio’, which typically means 60% equities (stocks or stockholding ETFs like VTI) and 40% bonds (or bond holding ETFs like BND). As a rule of thumb, the younger you are the more towards stocks you should allocate while the older you are the more bonds you should hold. As an example, an 18-year old fresh out of high school with no large financial obligations can realistically be 100% stocks and 0% bonds while a 65-year-old might be 40% stocks and 60% bonds.
Automate the Process
Now that you have selected your desired holdings and selected your target allocation, the last major step is to automate your investment process. This is done to help ingrain investing into your finances as well as make it easier for you to stick with it and reduce the risk of panic selling.
I have scheduled automatic weekly deposits from my checking account directly into my brokerage accounts, and, with M1 Finance, the funds are automatically invested into my pre-selected holdings according to my target allocation. I strongly recommend setting up something similar for yourself to help create an investing habit. It doesn’t matter if you are doing $10 a week or $1,000 a week, the important thing is to get started and build the habit.
Conclusion
If you’ve made it this far, it means you are serious about taking control of your financial future and becoming an investor. I know it may seem daunting, and there are some prerequisites, but I know you can do it and it will be well worth it. Paying off debt, building a savings, and starting with low-cost index ETFs will get you started on the right path towards building a better financial future!
Final words of advice. Do not get discouraged, and understand it’s a long-term process. If you are starting with $10 or $20 a week, it may seem like you are not making progress and you might doubt that it’s even worth it. But it is worth it, and your future is worth it! Last but not least, be wary of scammers and fake gurus. The markets are unpredictable and no one can tame them. There is no such thing as a fail-safe way, or getting any amount consistently (ie 1% a day). There is only time in the markets, and bearing market risk, those are the only two ways to build returns.
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