Simply put, investing can help you get ahead in life. It can be key to helping you grow your worth over time and provide the kind of future for yourself and your family that you dream about. It has the potential to let you literally earn money in your sleep. So there's no doubt that it's worth your time to figure out how it all works.
However, when you're new, it's a lot. A lot of choices, a lot of new words and concepts, and a lot of complicated, often-competing advice to sift through. And because it has to do with risking your money, it can be stressful too.
But just because it can be complicated doesn't mean it has to be. There are actually only a few main choices you have to make to start investing. Let's break it all down—no nonsense.
Step 1: Figure out what you're investing for
You might be thinking, "But wait, shouldn't my first step be to find some hot, secret stock picks that I can ride to the moon?" But in truth, successful investing generally starts with what you're investing for, not what you're investing in.
Lots of people start off by investing for retirement. In fact, we believe that for many people, investing something toward retirement should be pretty high up on your financial to-do list (falling after making minimum debt payments and building up a cash buffer; learn more about where investing should fall within your other financial priorities).
Although answering this question may not be as exciting as hunting down stock tips, it can help all the other pieces of your investing puzzle fall into place.
Step 2: Choose an account type
What you're investing for can also help you pick an account to open. Chances are, you'll want to start investing with one of these 3 main account types:
Brokerage account: When people talk about trading stocks, they're typically talking about doing so in a brokerage account. You can think of a brokerage account as your standard-issue investment account. Here are the basics:
- Pros—Flexibility. Anyone age 18 or older can open one.1 You can add as much money as you want to the account, whenever you want, and have access to a wide range of investment options. You can also generally withdraw any cash in the account whenever you want.
- Cons—Taxes. While a brokerage account may be the simplest to open and start using, it's typically the most expensive come tax time. That's because you generally have to pay taxes on any investment profits every year (like if you've sold investments for a gain, or received dividends or interest).
- When to consider. Most commonly used for investing and trading the full range of investment options for either specific goals or just building wealth as you’re accumulating assets. If you're investing for retirement, it generally makes more sense to first start with one of the next 2 account types. That said, as long as you choose an account with no fees or minimums, there's no harm in going ahead and opening a brokerage account so you have it at the ready. (Fidelity charges $0 account fees and has no minimums for opening or maintaining a brokerage account.)2
401(k): This is an employer-sponsored plan account for investing for retirement. You can generally only invest in one through work. If you're not sure if you have access to one, check with your employer's HR department. Some people may instead have access to a 403(b) or 457(b) account, which are similar. Here are the tradeoffs:
- Pros—Tax benefits, plus potentially free money. 401(k) plans offer tax-deferred investment growth. This means that you can contribute to the account pre-tax, and you generally don't pay any taxes while your money is sitting in the account potentially growing. Instead, you only pay income taxes when you take withdrawals (learn more about the benefits). Many employers will also match your contributions, up to a certain amount—it's like free money to encourage you to contribute. Your 401(K) may offer a Roth option as well. Here, you contribute after-tax but withdrawals are generally income tax-free.
- Cons—Rules and restrictions. There are rules to follow on when and how you can contribute, and strict rules on when and how you can take money out. You may also be limited in what investments you can buy, and you can't necessarily buy specific stocks.
- When to consider. For most people, the benefits easily outweigh the drawbacks. Many people start investing for the first time in these accounts. Chances are that if your employer offers a 401(k) or similar account, it's worth your while to invest in yours.
Individual retirement account (IRA): This is an account for retirement that you can open and invest in on your own (i.e., not through work). Although there are different types of IRAs, here we're focusing on traditional IRAs, which you can think of as the plain-vanilla kind. Here's what you need to know:
- Pros—Tax benefits. Traditional IRAs come with similar tax benefits as 401(k)s. You also often get a bit more flexibility and control than you do with a 401(k). For example, you can pretty much contribute whenever you feel like it, and you may have more investment choices. You can typically even trade individual stocks.
- Cons—Rules and restrictions. There are rules and restrictions on who's eligible to contribute to an IRA, how much you can contribute each year, and how and when you can take money out. Also, if you do decide to open an IRA, you may have to spend some time deciding which type of IRA to open.
- When to consider. An IRA may be a good choice if you don't have a 401(k) or similar option at work. A traditional IRA, in particular, may be a good option if you expect to be in a lower tax bracket when you retire.
- Roth IRAs may be a good choice for new investors and we can help you choose between the two in the account selector.
Still with us? You're doing great. And the next step is simpler—promise.
Step 3: Open the account and put money in it
The nuts and bolts of this step aren't too complicated, but you do still have some decisions to make.
Decision: Where to open your account? If you're opening a 401(k) then this part's easy: You'll open it through work, with whatever company is handling your employer's 401(k). With an IRA or brokerage account, you'll need to choose a financial institution to open your account with. (Here's how to open an account if you choose to go with Fidelity.)
Decision: How much money to invest? With a 401(k), you contribute through payroll deductions, meaning the money is taken out of your paycheck automatically. You decide how much of your pay to contribute. If your employer offers matching contributions, consider investing at least enough to capture the full amount of the match. If you're opening an IRA or brokerage account, you can start by depositing a chunk of money, and then add to that when you're ready. There are no minimums to open an IRA or brokerage account with Fidelity.2
There's no one magic number for how much you need to start investing, or how much you should add each month, because the right number varies depending on your income, budget, and what other financial priorities you're juggling. But if you're getting stuck on this step, remember that starting small is better than not starting at all.
Investing a little bit every month and gradually increasing that amount over time, as you get more comfortable, is a fine way to go. Eventually, consider aiming to save an amount equal to 15% of your income toward retirement each year (including any employer match). If you decide to invest in a brokerage account or IRA, consider setting up automatic contributions so you keep investing every month.
Step 4: Pick investments
This is the step that tends to trip people up. It can feel like other people know some secret to picking investments—like there's a trick that can help you choose only the best ones. But here's the truth: There isn't.
Investing is actually a lot like creating a healthy diet. Most people should focus on getting a broad range of common-sense investment types, rather than placing all your bets on a small number of high-promise investments. After all, turmeric and açai may be superfoods, but they still shouldn't be the only things you eat. Many people can be well-served by investing in a broad range of stocks and bonds—with more money in stocks if you're young or investing for a goal that's a long time away (read more about figuring out your big-picture investment mix).
But if you're new to the investing grocery store, how do you figure out what to put in your cart? There are 3 basic methods:
- Buy individual stocks and bonds—This is the most complicated and labor-intensive way, but it's what many people think of when they hear "investing." If you want to go this route, you'll need to learn about researching stocks, building a diversified portfolio, and more. It's doable, but it can take a lot of time and a lot of cash to build your portfolio. Fortunately, there are easier ways for beginners to get started.
- Buy 1 or more funds or ETFs—Mutual funds and ETFs are packages of stocks and bonds, almost like a prefilled grocery basket you can buy. You can use them like building blocks, putting a few together to create a portfolio. Or, you can buy an all-in-one fund, which is an easy-to-manage diversified portfolio in a single fund. If you're investing in a 401(k) or IRA, one option to consider is a target-date fund—an all-in-one professionally managed fund that's specifically designed with a target retirement date in mind.
- Hire a professional manager—If you're getting stuck, consider getting help. While this may sound like it's only an option for the wealthy, there are low-cost options that can meet your needs too. For example, robo advisors can offer low-to-no-cost professional management, because the day-to-day money management is handled by computers rather than live humans.
And of course, plenty of people end up deciding to use some mix of those options—like investing in funds with their retirement money, but perhaps also picking individual stocks with a small portion of their money. There's nothing wrong with mixing and matching. Whatever options you're considering, just be sure also to consider any fees, expenses, or commissions.
Step 5: Buy the investments
Game time, folks. Planning and research are great, but in the end, you also have to pull the trigger. For stocks, mutual funds, and ETFs, you'll generally look up the investment's ticker symbol—a string of 1 to 5 letters that's unique to that investment—then decide on a dollar amount or number of shares to buy (if you're getting stuck on this step, check out a more detailed walk-through of the process or some frequently asked questions).
In a 401(k), it's often easiest to set up your investment choices when you're setting your regular contribution amount, in which case your money will be invested in the choices you've selected automatically, corresponding with your pay cycle.
Step 6: Relax (but also keep tabs on your investments)
You're now an investor! Give yourself a pat on the back, but also try to keep up your momentum by continuing to build your knowledge base.
Now that you have a portfolio, try to remember that it's normal for investments to bounce around over the short term. (In fact, there's evidence that the more often you check your investments the riskier they seem, because you notice more of these short-term blips.3) Try to stay focused on the big picture, like your long-term investing goals and your total portfolio's performance.
Over time, you'll want to periodically (at least annually) check in on your plan, including:
- Whether the account or accounts you're using are still a good fit for your situation.
- Whether you're regularly contributing enough to your investments (chances are you'll be able to increase your contributions over time).
- Whether your big-picture investment mix, and the specific investments you own, are still a good fit for your goals, risk tolerance, and time horizon.
If that still feels like a lot, you don't have to do it all alone. You may be able to work with a financial professional through your retirement plan at work, or with a firm like Fidelity. There are plenty of options to choose from if you feel like you could use some guidance.