Beginning Investor: How to Start

by Charles Rotblut, CFA

If you are brand new to investing, the question you are probably asking yourself is: “What should I do first?”

It is not an easy question to answer for someone who is just starting to manage their portfolio. There are many options available, with just subtle differences between some choices. More importantly, you do not want your first investment to be a losing one.

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.

Charles Rotblut, CFA is a vice president at AAII and editor of the AAII Journal. Follow him on Twitter at