How to Start Investing Step by Step: 7 Steps, Explained

Intro

Example: quarter percent fees, not 1%, leave nearly $30,000 more. How to start investing step by step, seven steps explained: what each is, how it works, a first action, what it takes, its limit. That example comes from a markets regulator: annual fees on $100,000 over twenty years. Fees are step five.

Every step comes from official pages linked in the description. Henry only points at what those pages show. Number one: set a goal and a time horizon.

1. Set a goal and a time horizon

What it is: deciding what each investment is for, and when you will need that money. A markets regulator's investor roadmap starts here: an option has to fit your time frame. The regulator calls that time frame your time horizon: the months, years, or decades you plan to invest. How it works: investors with a longer horizon may feel comfortable with more ups and downs.

Those with a shorter horizon may prefer investments that move less. The regulator notes that large company stocks, as a group, have lost money on average about one year in three. Selling on a day below the price you paid, the page says, means a loss on that sale. For a short-term goal, five years or less, the page says you don't want risky investments.

For a goal decades away, it says money kept only in savings products may grow too slowly. The first action, from the roadmap: list your most important goals, and decide how many years each one has. An example: money for a home in a few years is short-term, and retirement decades away is long-term. What it takes, the page says: knowing a few basics, forming a plan, and sticking to it.

The regulator adds that the best mix of investments for you changes over your life. Its limit: a date alone does not pick an investment. The page also weighs comfort with risk, which is step four. Account types and tax rules for long-term goals differ from place to place.

Quick check for number one: every goal written down, each with its number of years. Subscribe, because the next six steps each come with a first action from an official page. Number two comes before buying anything: a cash reserve, and no high-cost debt.

2. Build a reserve and clear costly debt

Number two: build a base first, with a cash reserve and no high-cost debt. What it is: money set aside for emergencies, and expensive debt cleared before investing. The regulator's roadmap puts both before explaining what it means to invest. How it works: the roadmap says no investment strategy pays off as well as, or with less risk than, eliminating high-interest debt.

So the page puts clearing credit card debt before investing. The reserve sits in safe places you can reach any time, like savings accounts or certificates of deposit. The trade-off, the page says: security and availability, in exchange for a low interest rate. How much?

It says some smart investors keep up to six months of their income in savings. The point, it says, is having money you can reach when an emergency comes up. The first action, from the roadmap: pay off the card with the highest rate first. It says to pay as much as you can on that card, and the minimum on the others.

The same goes, it adds, for other high-interest debt without tax advantages. Then, it says, you can budget your money and begin to save and invest. What it takes: a monthly record of what you earn and spend, with a line for savings and investing. If no money is left over, the roadmap's answer is to start by cutting back on expenses.

Its limit: savings interest may not keep up with inflation. That is why, the page says, many people also look to investing. Deposit insurance, interest rules, and debt help differ from place to place. Quick check for number two: the costliest debt cleared first, and a reserve you can reach any time.

Number three covers the basics of investing: knowing what you are actually buying.

3. Learn stocks, bonds, and funds

Number three: learn what stocks, bonds, and funds are before buying any of them. What it is: the regulator's page calls these the most common asset categories investors choose from. How it works, starting with stocks: a stock gives you a share of ownership in a company. A stock's price can rise, and a company may pay out some of its earnings as dividends.

The page says stock prices move down as well as up, so you can lose money. A bond is a loan: you lend to a government or a company for a set time. In return, the page says, the issuer promises interest, and repayment of the amount lent at maturity. Bonds carry risks: the issuer may miss payments, and one sold early may be worth more or less.

A fund pools money from many investors and invests it in stocks, bonds, or other assets. Each share of the fund is part ownership of everything it holds, with its gains and losses. The first action, from the regulator's pages: read an investment's prospectus or disclosure statement before you buy. A rule of thumb many successful investors follow, it says: never invest in something you don't understand.

What it takes: reading time. A fund's prospectus and latest shareholder report are both free, the page notes. Its limit, the page says: funds carry some risk, and you may lose some or all of your money. And past performance, it adds, does not predict future returns.

Product names, investor protections, and taxes on investment income differ from place to place. Quick check for number three: you can explain what you would own, and how it could lose value. Number four turns that into a plan: how much risk you take, and how you spread it.

4. Understand risk and spread it

Number four: understand risk, and spread it across different investments. What it is: the regulator defines risk as uncertainty, or possible loss, in an investment decision. Generally, it says, the higher the potential return, the higher the risk of loss. Spreading money among different investments to reduce risk is called diversification.

The page sums it up: don't put all your eggs in one basket. In an international survey across dozens of countries and economies, 59% of adults, on average, knew diversification reduces risk. How it works: mixing asset types means a weak stretch in one may be offset by another. The regulator calls that mix your asset allocation: dividing investments among stocks, bonds, and cash.

Spreading within each type helps too: different stocks, and different industries, like health care and technology. The first action, from the roadmap: gauge your risk tolerance, your ability and willingness to risk losing money. It asks when you need the money, what it is for, and whether you could sleep at night. Free online questionnaires can help, it notes, but their results may lean toward the sponsor's products.

What it takes: an occasional check-up, called rebalancing, because some investments grow faster than others. Rebalancing returns the mix to plan. The page says it tends to work best when done relatively infrequently. Its limit: when the market drops, the page says, diversified investments can still suffer.

Diversification, it adds, can improve the chances of avoiding a loss, or of a smaller one. A narrowly focused fund, the page notes, won't necessarily provide diversification. Fund rules and taxes on gains differ from place to place. Quick check for number four: your risk tolerance known, a spread-out mix, and a periodic check-up.

Number five shows the opening example in full: how much fees can matter over time.

5. Compare costs and fees

Number five: compare costs and fees before you invest. What it is: the fees and costs that come with investment products and services, like anything you buy. The regulator says these fees may seem small, but over time they can have a major impact. Its example: $100,000 invested for twenty years, same growth, different annual fees.

With a quarter percent annual fee, it ends near $208,000. With a 1% annual fee, it ends near 179,000. That gap, nearly $30,000, is the opening example. The only difference is the fee.

How it works: a fund deducts its costs from the fund's value, so you pay them indirectly. A fund with high costs, the page adds, must perform better than a low-cost fund to give the same returns. Brokers who buy and sell for you charge a commission, which is another cost to compare. In the international survey, 26% of adults, on average, compare financial products across providers.

The first action, from the page: ask what the total fees are to buy and to sell. It also lists ongoing fees to keep the account, and how they compare with similar products. For an investment professional, the page asks directly: how do you get paid? What it takes: reading the costs, and knowing what any percentage fee means in dollars.

Its limit: cost is one test. The regulator also asks whether a fund fits your overall financial situation. Fee disclosure rules and taxes on investment accounts differ from place to place. Quick check for number five: total costs known, in dollars, and compared before you buy.

Number six checks the one selling it, before any money moves.

6. Check that the seller is registered

Number six: check that the seller is licensed and registered. What it is: confirming, in a regulator's own records, that a person or firm may sell investments. A markets regulator's questions before investing start here: is the seller licensed? It says smart investors check the background of anyone promoting an investment, even before hearing the offer.

Its second question checks the investment: registration gives investors key information about the company's management and finances. How it works: regulators keep public records of who is licensed, and some offer a free search tool. The markets regulator's tool also shows any disciplinary history or customer complaints. Another financial regulator says almost all financial firms in its country must be authorized or registered.

The first action: look the seller up in a regulator's free search tool, which one page calls a great first step. The other regulator adds: some firms pretend to be authorized, so use the contact details in the register. What it takes, the markets regulator says: the habit of using the information and tools on regulators' websites. The markets regulator also notes that initials after a name do not necessarily mean better service.

Its limit: a licensed seller answers only the first question. The page still asks how risks compare with rewards. It also flags offers pitched as high returns with little or no risk. The other regulator lists more signs to pause on: unexpected contact, and pressure to act quickly.

Registers and rules differ from place to place. The other regulator suggests checking overseas regulators for overseas firms. Quick check for number six: the seller found in the official register, and contact made through it. Number seven is the moment it all starts: a first amount, then the same again, regularly.

7. Start small and invest regularly

Number seven: start small, and invest the same amount at regular intervals. What it is: the regulator's glossary calls it dollar-cost averaging. It means investing equal portions at regular intervals, regardless of the market's ups and downs. How it works: the same amount buys more when the investment price is low, and less when its price is high.

The page says this can help manage risk, through a steady pattern of new money over a long period. Small amounts matter too: the roadmap says even a small amount saved can add up over time. With compound interest, it explains, interest is earned on the money saved and on earlier interest. The first action, from the roadmap: pay yourself first, a habit many people use to save and invest.

It describes the bank moving money from each paycheck into a savings or investment account, automatically. What it takes: often a modest start, since many funds set a relatively low minimum for first and later purchases. An example: the same small amount on the first of every month, whatever the market did. It also takes patience, because the page describes a consistent pattern kept over a long period of time.

Its limit: the roadmap says investing carries a greater chance of losing money than saving does. The roadmap adds that you could lose your principal, the amount you invested. Account types, minimums, and tax rules for regular investing differ from place to place. Quick check for number seven: one automatic amount, on a fixed schedule, for the long run.

That completes all seven steps, so here is each one again with its first action. Number one, goal and horizon: list your goals and the years each one has.

Recap

Number two, the base: clear the costliest debt and keep a reserve you can reach. Number three, the building blocks: read the prospectus before you buy. Number four, risk: gauge your risk tolerance, then spread your money. Number five, fees: ask for the total costs, in dollars.

Number six, the seller: search the official register first. Number seven, regular investing: an automatic amount from each paycheck. Which step are you on right now? Tell us in the comments.

Results vary, rules differ where you live, and this is information only, not financial advice. Next on Wealth Filings, watch four ways people save money, linked on screen. Subscribe so you see the next list first.