Beginning Investor: How to Start

by Charles Rotblut, CFA

Beginning Investor: How To Start Splash image



So, how do you start?

In this new column, I plan to answer that question. I will explain primary investment concepts and give you basic steps that you can take to manage your portfolio. More importantly, I will give you the knowledge to become a successful investor.

It does not matter if you are a brand new investor starting with a very small portfolio or someone who is taking over their investments for the very first time, the steps are essentially the same. So, let’s start taking that first step.

Create a Plan

Investing is a long-term project that constantly evolves. As is the case with any project, success starts with a well-thought-out plan. A map of what you want to accomplish and the steps you are going to take to get there are required. You never know all of the details when you begin a project, but you should have an idea of what you will need to find out as you move forward.

Of course, any big project encounters unexpected twists and turns. Investing is certainly no different; if anything, it encounters even more twists and turns. However, if you have a good plan mapped out, you will have a framework to fall back on when the unexpected inevitably happens.

What Should Be in Your Plan?

When creating your plan, you need to stay focused on the bigger picture and not the details. Investing can get complicated in a hurry, so it is important to keep things at this level simple.

Here are the three primary areas you want to cover in your plan:

Financial Goals

Are you looking to build wealth over time, preserve capital, pay for a certain expense (e.g., college for a child), or is there some other goal? Alternatively, is there more than one goal that you hope to accomplish? Many people have more than one goal. If that describes you, write down all of your goals and the number of years until you need to reach each goal.

Risk Tolerance

What is your ability to withstand losses? Can you handle the losses caused by a bear market? Alternatively, how well would you be able to sleep at night if one or more of your investments experienced a big swing in value? Though it may seem like you should answer these questions based on your emotions, your financial situation and goals are important factors. I’ll explain why in a moment.

Personal Involvement

How involved do you want to be? Some people really enjoy the process of selecting, analyzing and tracking individual securities. Others prefer a more passive strategy, such as investing in a mutual fund or letting a financial planner make many of the decisions. Many incorporate a combination of the two. The answer to this question comes down to how interested you are in being personally involved and whether you have the time to actively monitor your investments.



Other Considerations Are Secondary

Notice what is not in this plan. There is no discussion of whether you should buy Intel (INTC) or Cisco Systems (CSCO). No thought is given at this point as to whether you should own mutual funds, bonds or commodities. In fact, there is nothing about whether you should open an account with E*Trade, Edward Jones or Vanguard. It is not that these decisions aren’t important, but rather that they are secondary to the three primary areas. Once you know what your goals, risk tolerance and involvement level are, it will be easier to make other decisions such as where to open your account and what types of investments to buy.

Guidelines for Answering the Questions

Two of the questions are very specific to you: financial goals and personal involvement. You simply need to make an honest assessment of your unique situation to answer both questions.

Risk tolerance is more difficult to assess. It is partially dependent on your emotional ability to withstand swings in your portfolio value, but even more dependant on time and wealth. Many people have lofty financial goals and low tolerances for risk. Unfortunately, this is a paradox. Conversely, others do not realize that accomplishing their goals may mean taking on less risk than they believe they can handle.

Figure 1 provides a grid to help you assess your risk tolerance. You will notice four quadrants that are based on time and wealth. The longer the period of time before you need to depend on your portfolio for cash withdrawals and the greater your current wealth (or ability to add to your savings), the higher your risk tolerance should be. Conversely, the shorter the period of time and the lower your wealth is, the lower your risk tolerance should be.

Pay attention to what quadrant you find yourself in. This will help lay the groundwork for the next step, asset allocation. This is the process of deciding what types of investments (e.g., stocks, bonds, etc.) to invest in. I will discuss asset allocation starting in next month’s Beginning Investor column.



Edmund from FL posted over 3 years ago:

Good advice for anyone, especially someone who is just starting. I have been retired 20 years with someone else, broker or financial adviser, controlling my buys and sells. I am trying to learn enough to make my own decisions.

Richard from NY posted over 3 years ago:

i would like to control at least 50% of my wealth.

Bob from MN posted over 3 years ago:

I have a fairly substantial stock and mutual
fund portfolio. However, a portion of this is
a faulty group of stocks recommended by a
number of internet experts? I would hope to learn AAII system foe evaluating primarily
avaailable stocks. Thank you.

Elmo from TX posted over 3 years ago:


Much prefer my incoming
e-mail to be shown in order it is received
rather than alphabetically.

Elmo Curry

RAY from ARIZONA posted over 3 years ago:


Nathan from NC posted over 3 years ago:

I have a modest portfolia of stocks and mutual funds with a broker/finanical advisor dating back 15 years. I would like to become more involved in my investment selections and evaluations.

John from MD posted over 3 years ago:

I am a 30+ year passive investor and wish to remain one. I am interested in expanding my portfolio to include ETFs and micro-caps. Your ETF portfolio is well suited to my investment style. Do you have anything similiar for your Shadow Stock Portfolio?

Thank you

Larry from GA posted over 3 years ago:

Although I have a Investment Advisor, my penchant for stock investmenting has always rested with me. Years ago I read various periodicals and books, most recently Prof. Jeremy Segals's "Stocks for the Long Haul."

If there in one piece of advice I would give to someone it would be to read as much as you can about investing from as many sources as you possibly can. Happy Investing!

William from CA posted over 3 years ago:

I am a relatively beginning investor with about 1/3 of a million to invest. I have about a 20 year time line to work with. I am not yet certain as to if a 20 year time line is really considered "long term" as I am in my early fifties, good health, and plan to work full time until my early to mid seventies, and beyond if my health holds up. I am wondering if my time line would truly be considered "long term" considering my age?

AR from MI posted over 3 years ago:

I am retired. Looking to invest 10-25K with a view to generate 10-12% income and hopefully protect & improve priciple. Can handle moderate risk.
Use my initials.


Gerrie from IL posted over 3 years ago:

I would like to invest to save for a retirement home. I think I have a relatively high risk tolerance with a moderate to low amount to invest.

Gregory from GA posted over 2 years ago:

Does investing have to be passive? I'm retirement age and have been investing in income producing property for years and I beat the S&P 500 or all the Vanguard funds in return every year. The returns on passive investments are pathetic right now...look at the Mutual Fund Portfolio.

Diane from RI posted over 2 years ago:

I need to invest in a mutual fund which can earn income such as a dividend fund. At this time in my life I've lowered my risk tolerance . I need to rebalance my portfolio .

Faye from IN posted over 2 years ago:

I like the comment to read as much as you can from as many sources. this was my first time on this web site,I like the tone,consise and straight foward.

Chris from IL posted about 1 year ago:

I'm tired of my advisor saying next year will be different. Since 1997 the stock portion of my portfolio (supposedly moderate growth) has averaged little more than 1%/annum. Advisor does fine with bond portion but as a retiree I hope to at least average the inflation rate with stock portion.

John Odonnell from CT posted about 1 year ago:

I have been investing "by the seat of my pants" and need to learn fundamental and some technical analysis in order to better achieve my goals.

Dennis Lynch from CA posted 9 months ago:

I just want to understand investing better
so when I visit my broker and can understand
why he is doing this .

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