How To Start Investing For Beginners (step-by-step)

Hey, everyone. Welcome back to my channel. I am Rose. Now, I'm sure you've heard about how important it is to invest your money, put your money to work, but I also know how intimidating it can be when you're just getting started, which is why today I want to walk you through how to get started investing your very first $1,000. So in this video, we're going to talk about what investing is, and I'll also walk you through the actual steps of investing your first $1,000. We're actually going to jump on my laptop together, and I'll walk you through it and share my screen and show you step-by-step. Investing is basically putting your money into something, whether that's stocks, real estate, crypto, whatever, with the hope of getting more money back in the future. And the whole point of investing is essentially to keep your money safe from inflation because on average, the dollar loses about 2% of purchasing power every single year due to inflation. And I'm sure you've seen this in your own life. Your money doesn't take you as far as it used to. I'm sure you've noticed this at the grocery store, for example. Another place where I've noticed this is actually the other day. I was at a really nice steak restaurant with my boyfriend. It's called Monty's in LA. This restaurant has been around for decades and was passed on through the family, and we had a delicious prime rib steak. It cost $80. Now, when I was walking out after dinner through the lobby, I saw Monty's original menu from like 80 years ago, and the prime rib steak that I just ordered used to cost $3.85 back then. And this menu was framed. It was sort of like in a museum. And so it was really cool to see the actual effect of what inflation does to your money, which is why you have to invest it so that your dollars keep up with inflation. And of course, if you do it right, it will also outpace inflation as well. That's why when people say like, wow, isn't investing risky? The real answer is not investing is riskier because then you are guaranteed to be a lot poorer decades from now. Not only this, but investing allows you to break out of that trading time for money sort of cycle that we're all in. It enables you to work smarter, not harder because you've got dollars working for you. So for example, let's say you invested $500 every single month into what's called the S&P 500, which is the 500 largest stocks in the United States. If you had done this every single month over 30 years at a 10% average annual return, you would have just under a million dollars at the end of those 30 years. And that's pretty incredible because over those 30 years, putting $500 of your money in every month, you would have only put in $180,000 of your own money and then investing did the rest for you to get you to a million. Put it another way, if you put $500 a month under your mattress every month for 30 years, you'd end up with $180,000 versus if you'd invested it, you'd have a million dollars. That's basically about $800,000 of free money. So that's what investing can do for you. So if you're completely new to investing and feeling even a little bit intimidated, don't be. I want you to get excited about it because who doesn't want to earn more while also working less? All right, so the first place to start is to check your 401k. So for those of you who don't know, a 401k is a retirement plan that you get through your work. Some of you may not have this. So in this case, you can just skip ahead. This doesn't apply to you. But for most of us, investing really starts with our 401k. So at your job, your employer may have given you a 401k and out of your paycheck every single pay cycle, they'll take out a little percentage and put it into your 401k and that will get invested for your retirement. So before you go off and do any other investing on your own, check your 401k. Make sure that a percentage of your paycheck is in fact going into this 401k because that's like the easiest no-brainer way to get started investing. And the other thing I want you to check is see if you have something called employer match. This is basically where your employer will put in money for every dollar that you put into your 401k. It's just another job benefit that you may have. And if you have it, you should definitely take advantage of it to the max because it's basically free money that your employer is going to give you and there's no reason not to take advantage of it. So see up to what percentage your employer will match for you and make sure you max that out. Now the good thing about a 401k is whoever the provider of your 401k is, they'll be managing the investments for you. So it should already be invested in hopefully some good index funds, which we'll get into later. And then the next step would be to look into other investment accounts that you can open on your own. So that brings us to step two, which is to open an account. So think of this as like a shopping cart. When you enter the grocery store, before you can grab a bunch of things off the aisles, you need to have a shopping cart to put the stuff into. So an account is going to basically hold whatever investments you buy later on, whether that's stocks, funds, or index funds. We'll be getting into that. Now there are different types of investment accounts. There are Roth IRAs. There's traditional IRAs. There's HSAs. There's SEP IRAs. There are regular taxable brokerage accounts. There's a lot of different types of accounts. But essentially what differentiates these accounts from each other are how the investment gains in those accounts are taxed. So there's one family of investment accounts called retirement accounts, and these are all tax advantaged because any investment gains that you make that are held in these accounts won't get taxed versus there's taxable accounts, which are non-retirement accounts. And any gains and profits that you make on investments held in these types of accounts will get taxed—capital gains tax, income tax, etc. And so when you're just getting started, it definitely makes sense to stick with these tax-advantaged retirement accounts because you don't have to deal with taxes and you'll obviously keep a lot more of what you make. However, the catch with these tax-advantaged accounts is that they are earmarked for retirement. So in exchange for all these tax benefits, you have to keep the money in the account until retirement age, which is 59 and a half. And if you withdraw before then, you might be subject to some penalties and fees. So all that being said, it's really smart to start with these retirement accounts because number one, we all have to save for retirement and two, the tax advantages make it so, so worth it. Now for you, likely the best account option for you is going to be the Roth IRA. A Roth IRA is an account that allows you to put money into it after tax and then whatever you buy in the Roth IRA, even if those investments go up like 100x, you don't owe any taxes on those capital gains and then later on when you retire, you can withdraw the money also tax-free. So it's really, really amazing. The Roth IRA is a must for everyone. As of 2023, you can contribute up to $6,500 a year into your Roth IRA. If you want to learn a little more about different types of investment accounts, then check out these videos here to learn more about them. But for now, we'll just keep moving on. Assuming that you're going to open a Roth IRA, then step three would be to transfer money into it. And once you've transferred money into the Roth IRA, the next step is really important. A lot of people actually forget this. They don't invest. So I'm going to reiterate a Roth IRA or an account is just an account. It's not an investment. So just because you have a Roth IRA doesn't mean that you are investing. It just means that you have an investment account with money in it. At that point, it's basically like a fancy savings account, but until you actually buy stocks and bonds and investments with the money that is in the Roth IRA, you really aren't invested at all yet. So that brings us to step four, which is to buy investments. This is the fun part. Basically, when you're deciding where to invest your money, it comes down to basically two options. You can either invest in stocks or you can invest in bonds. And I'm going to explain each one one by one. Stocks are basically little pieces of ownership in companies. When you own a stock, you actually own a tiny slice or a little percentage of a very, very large company, which is pretty cool because that also means that when that company makes money, when it makes profits, if you are a shareholder in that company, you get a little slice of those profits and dividends as well. A really easy example is if you love Apple, you can buy Apple stock. That means you become a little tiny percentage owner in Apple. Now, there's different ways to buy stocks. One is that you can actually just buy the individual stock directly. So you could just go and buy Apple stock. Another way to invest in stocks is you can buy them as part of a fund. So think of a fund as just a bundle of lots and lots of different stocks and the benefit of a fund is that it gives you instant ownership into hundreds, sometimes even thousands of different companies all in one easy purchase. Think of it like this. If you're buying the individual stock, you're like buying one flower versus if you're buying a fund, you're buying the whole bouquet with lots of different flowers in it. And the benefit of buying a fund is that it gives you what's called diversification. Diversification is just safety in numbers, essentially by investing a little bit into lots of different companies. Your financial future is not so dependent on whether one company does well. It depends more on a whole subset of companies, which is a lot safer than owning a little slice of one company because if this one company goes down, you're basically screwed, right? Because all your money is in it versus if you own a little slice of the economy, the economy goes through a lot of ups and downs. It does have some rough times, but it's essentially impossible for the entire economy to go down and for you to lose all your money. So investing in funds is a lot safer because it's diversified. It's also very convenient because you get all that diversification with just one easy purchase. So now that you know that if you want to invest in stocks, funds are the safer, best way to go. Now, let's talk about how to actually choose a fund. There are a lot of different funds out there, but when you are choosing one to invest in, you want to look for one that has low fees because the thing is every fund charges what's called a management fee. It's a tiny little percentage that they take off the top of your investment in exchange for giving you that convenience of owning all those stocks in one easy purchase. This is also called an expense ratio. They can be anywhere from like 0.0 something percent up to like 1 or even 2% and maybe even higher. So there's a lot of really bad funds out there that charge high expense ratios. We're talking like 1, 2, 3% and they really don't give you any benefit in return compared to lower expense ratio fund. So the first thing to look at when choosing a fund to invest in is what is the fee? I know that 1 or 2% doesn't sound like much, but the thing is a small difference in the expense ratio just compounded over many many years can actually make a difference of hundreds of thousands of dollars in what you actually end up with at the end. A good rule of thumb is to look for funds that have expense ratios of 0.5% maximum. There are plenty of great funds with expense ratios well below that. And now this brings us to my next point, which is the only type of funds that really fit this criteria of low expense ratios are what you call index funds. So an index fund is basically a fund whose holdings mirror the components of a particular index. So in case you didn't know, an index is basically a benchmark that has a lot of different stocks in it and it just gives you a really quick picture of how a group of stocks is doing at any given time. So for example, one of the most well-known indexes in the world is the S&P 500 and this is an index of the 500 largest companies in the United States. It's just a really convenient, you know, one number metric that you can look at to see how the economy is going up and down at any given time. So an S&P 500 index fund would invest in all the 500 stocks that are in the S&P 500 index. Pretty simple, right? Same with the NASDAQ, the Dow Jones, that's another index. There's many, many indexes that represent different segments of the economy around the world, but essentially an index fund will just hold whatever is in the benchmark index. Now, compare this to what you call an actively managed fund. An actively managed fund is where instead of the fund's holdings mirroring that of a particular index, it's just going to be some really smart person, a fund manager, who using his intellect and financial knowledge picks what companies go in that fund. And of course, in theory, this sounds great to have someone really smart picking the stocks that would presumably outperform. However, the data shows that these actively managed funds hardly ever outperform index funds. Your investment will perform better in an index fund that just blindly mirrors the components of a diversified index rather than leaving it up to some smart person to try and outperform the index. So now you know why you want to go with index funds. One, they always have lower fees and that adds up to hundreds of thousands of dollars of difference in your NASDAQ over time. And two, the alternative, which are actively managed funds, don't even perform better. So you'll make more money with index funds and also pay a lot less in fees. So that's how stock funds work. Now let's talk about bonds. Instead of owning a piece of a company, when you invest in a bond, you're actually lending some money to a company. So that's how you make money with bonds, by earning the interest that you get from having lent your money. They're a lot safer, but if the company makes a ton of money, you don't really get to benefit from that because you just get that interest. Compared to stocks, bonds are less riskier because in a bankruptcy situation, the bondholders always get their money back first. And if there's any money left, it's the stockholders that get paid last. So investing in stocks give you way more upside, but you also have more downside. Whereas with bonds, you have less upside, but you also have less downside. So all that to say, stocks and bonds are a really good complement in your investment portfolio because stocks, even though they're riskier, they also have a higher potential reward. Whereas bonds, they are less riskier, but they also have lower potential reward. And combined together, they give you a really nice balance of the ideal ratio of risk versus reward. Now as for how to invest in bonds, it's just like stocks. You can either invest in bonds individually, like you can invest in individual stocks, or you can invest in bond funds that hold many, many different bonds in one easy fund purchase. And for all the same reasons as stock funds, it's much better to invest in bond funds because you get that diversification. So given that you have a choice between stocks and bonds, now we get to the topic of asset allocation. What percentage of your money do you invest into stocks and what percentage into bonds? This really depends on your age and your tolerance for risk. So presumably, if you're a lot older, you're close to retirement age, and you really can't afford a lot of kind of ups and downs in your investment portfolio, then you're going to want to go with something more stable like bonds. On the other hand, if you're really young, you've got 20, 30, 40, maybe even 50 years until retirement, you have a lot of time to take a lot of risk and weather any ups and downs in the market, and you should be taking more risk than someone who's a lot older. So in your case, you'd want to invest most of your portfolio into stocks and maybe have a small percentage like 5 to 10 to 20% in bonds just to sort of balance out the risk of stocks and smooth out your portfolio when the market is having a rough time. One good rule of thumb invented by Jack Bogle, who is the founder of Vanguard. He's also the pioneer of index funds. He's sort of like the grandfather of investing. He says you should own your age in bonds. So if you're 20 years old, you would own 20% in bonds and 80% in stocks and that would be a nice asset allocation for your overall portfolio. Whereas if you're 60 years old, you could own 60% in bonds and have 40% in stocks. So owning your age in bonds is a good rule of thumb, but there's no wrong answer here. If you're young and you want to take more risk, it's okay to own no bonds at all and just put all your money in stocks. Personally, that's what I prefer because I want to go for the maximum amount of reward and gain and I'm okay with the risk that that entails because overall in the long term, I know my investment is going to go up and I don't mind so much of the roller coaster ride that comes along with it. So now that I've given you a nice little overview, let's actually get into my laptop and actually do this together. I'm going to log into my brokerage. I use Fidelity and there I have opened a Roth IRA. I've already transferred money into it and I'm going to walk you through on my screen step-by-step how to buy $1,000 worth of your first few index funds. If you're wondering where to open your accounts, Fidelity is the brokerage that I use but you really can't go wrong with either Fidelity or Vanguard. They're the two biggest brokerages that have been around forever and they're both really great options. I've just been with Fidelity for a really long time. So that's what I prefer and I'm in my Roth IRA. I've already transferred money into it. So there's some money in there and because I haven't invested it yet, it is sitting in my core position which Fidelity puts in money market fund called SPAXX. That's basically a fund that pays a little bit of interest, but it's not an investment. It's still cash. So now our job is to choose some index funds to put this money into and then buy those index funds. So let's say if we're going to buy $1,000 worth today, we need to actually choose what investments we're going to buy. Now, my thought process is you really can't go wrong with the S&P 500, for example, right? That's the 500 largest companies in the United States. These companies do extremely well. If you've invested only in the S&P 500 for the last few decades, your money would have grown a lot. So I'm going to choose the Fidelity S&P 500 index fund. Its ticker symbol is FXAIX. So knowing the ticker symbol, you would go over here, type that in to pull up the page and then once you see it right here, Fidelity 500 index funds, you can go ahead and click buy and then you would go over to accounts. If you have different accounts at Fidelity, then you have to choose the right one. We're doing the Roth IRA today. Check that it's the correct symbol, the Fidelity 500 index fund and the action today is to buy. Now going back to that asset allocation, let's say I am a young person. I want to take a lot of risk, but I still want a little bit of bonds in my portfolio just to smooth out the ride and lower the risk a little bit. Then let's say I want to do 90% in stocks and 10% in bonds. So 90% of $1,000 is $900. So I'm going to buy $900 worth of this stock index fund today and then in a second, we'll buy 10% or $100 worth of the bond index fund also and that'll give me a nice, complete, well-balanced portfolio. So let's go with $900 of the stock fund. I'm going to preview order, place order and that's it. Now this will take a day for the order to execute and if it's over the weekend, it'll be on Monday. Now something I skipped over and that you're probably wondering is where do you find a list of these good index funds to buy? So I've actually come up with a really handy cheat sheet for you to save you all the headache of doing this research on your own. It's called my Fidelity index fund cheat sheet. It's very useful and this is a list of all of the major index funds that you have to choose from. It also kind of talks you through which ones to choose and how much to buy of each. A little more detail of everything we talked about here. So definitely grab that if you'd like. I'll leave the link below in the description. It's completely free. So anyway, that will help you choose which funds to buy. But now that we've entered in the stock fund order, now it's time to buy a bond fund together. If we're going to stick with a 10% allocation, we need to buy $100 worth of that bond. I happen to know that there is a really good bond index fund called FUAMX and that invests in US Treasuries. Those are bonds to the US government. They're very safe. So let's actually pull up that page, FUAMX. Then I'm going to click buy and then in my Roth IRA, the action is to buy dollar amount 100, preview the order, and then I will place the order. And like I said, the trade is going to execute after the next market close. So it'll be the next business day and you'll know that it went through when you see that your core position or your cash position has gone down and then you'll actually see the investments in your portfolio. So if we fast forward two days, this is what it would look like. Okay, so that's pretty much it. As you can see, it's really nothing too complicated. It's just a matter of knowing what you want to buy and then going onto the website and clicking buy. Now before I let you go, I want to leave you with a few important tips. Before you start investing all your money into these S&P 500 index funds and getting excited about all the money you're going to make, I first want you to think about having your financial kind of basics covered first. The first thing to do is make sure you have an emergency fund. You need to have a little bit of savings set aside in a different savings account from your checking account for emergencies, for job layoffs, and things like that. Ideally, you have at least three months worth of bare minimum living expenses so that if something happens, you can live off of that money instead of having to sell your investments early just to like make rent next month. And the whole rationale behind this is so that you don't have to ever sell your investments at a loss just because you need the cash. You want to be able to hold your investments for the long term because the market has literally never lost money over the long term. Over any like 16-year period, over the last hundred years, the stock market has never lost money. But if you sell after one or two or three years of holding the investment, there's no guarantee that you won't be selling at a loss. So your biggest advantage as an investor is having a long time horizon. And so for that, it's important to have an emergency fund. The other thing I want you to think about is if you have credit card debt, then I would hold off on investing and just focus on paying off that credit card debt first because with credit card rates at 15% up to 20, even 30%, it really doesn't make sense because the stock market returns about 10% a year. So whatever you're making in the stock market is going to be canceled out completely by the interest that you're paying on these credit card balances. So it makes more sense to pay off the cards first and then start investing. So that's it for this little investing tutorial. I hope it was really helpful. Now, I want you to think about after you've invested your first $1,000, don't forget to keep investing more. Invest as much as you can, as often as you can, and you'll be really, really happy with the results 10, 20, 30 years from now. Your future self will definitely thank you. So anyway, that is it for today. I really hope that this video has eliminated your fear of investing a little bit and shown you step-by-step how to actually do it. Don't forget to grab my little index fund cheat sheet over here. And that's it. Thank you so much for watching. I'll catch you in the next video. Bye.