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Investing strategies

How to start investing: A guide for beginners

Discover the essential steps to start investing with our comprehensive guide. Learn investment strategies and secure your financial future today.
18 minute read
  •  
August 02, 2024
Investing strategies
How to invest
Article
Page
Understanding investment types
Asset mix
Advisors
Robo-advisors
Rebalancing

A quick investing guide for beginners

With the right tools and resources, investing can be much easier than you'd expect. Best of all, you don't need a lot of money to get started. Simply start out small, and gradually increase your contributions over time as your income and savings grow. The important thing is to start saving for your goals as early as you can, so your money has more time to potentially grow.

6 steps to help you begin your investing journey

These simple investing steps consider your personal needs and preferences and include supporting resources to help you make decisions that are right for your unique financial situation.

Identify your financial goals

Retirement should always be the first investing goal on your list. But it's also important to plan and save for other goals like a house or a child's education. Once you've defined your investing goals, it's time to consider your:

  • Financial situation. Figure out how much you're spending every month and how much is left over to save toward your goals.
  • Time horizon. Determine how much time you'll need to achieve your goals. For example, if you have many years until retirement, it's a long-term goal. If you're planning to buy a home in 5 years, that's a short-term goal. The longer your time frame, the more time to potentially benefit from the power of compounding, where your earnings generate their own earnings over time.
  • Risk tolerance. Think about the amount of market volatility and potential loss you're willing to accept. Your risk tolerance will likely vary depending on the time horizon for each of your goals. For example, the longer you have to reach your goal, the more time you have to weather market ups and downs, which means you may be comfortable taking on more risk.    

Pick the type of investment account that suits your goals

There are several different types of investment accounts to support your goals. Here are a few:

  • A 401(k) plan is a retirement plan offered through an employer. It allows you to save a portion of your paycheck before taxes are taken out. Your employer may even match part of your contributions, which can help you save faster.
  • An individual retirement account (IRA) is a powerful tax-advantaged account designed to help you save for retirement. Depending on whether you choose a traditional or Roth IRA, your earnings will grow tax-deferred or tax-free. IRAs often offer flexible investment options, making them a great way to further diversify your investments and boost your retirement savings. 
  • A 529 plan is a tax-advantaged account specifically for education savings. It offers a variety of surprising benefits and flexibility. For example, 529 plans aren't just for 4-year colleges, pay for more than just tuition, and can be transferred to another qualified family member. Contributions could be state tax-deductible, and you could benefit from tax-deferred growth and tax-free withdrawals for qualified education expenses.1
  • A brokerage account allows you to buy and sell a variety of investments, including individual stocks, bonds, and funds. Brokerage accounts are a good option for investors who want more control over their investments. Since it's a taxable account, you might owe taxes when selling investments that have increased in value.

Use our Quick-start tool to narrow down your investing goals and find investment options that best fit your selections.

Select your asset allocation

Now that you've identified your financial goals, and picked the right investment account for you, it's time to determine your asset allocation—how to divide your portfolio among stocks, bonds, and cash based on your goals, time horizon, and risk tolerance. Different asset classes tend to act in specific ways. Choosing how to allocate your assets helps to give you a certain amount of control over your investing experience.

Check out this investor questionnaire for help. It suggests an asset allocation based on your investment objectives and experience, time horizon, risk tolerance, and financial situation.

Select your investments

There are many types of investments to choose from to suit your needs, including mutual funds, exchange-traded funds (ETFs), and individual stocks and bonds. Be sure to diversify your portfolio by choosing a variety of investment types to help lower your risk and improve your chances of achieving your investment goals. Here's how:

  • Invest in different asset classes. A portfolio that includes stock, bonds, and cash can help reduce your risk of potential losses if one class underperforms. Mutual funds and ETFs offer an easy way to accomplish this because they invest in a diversified mix of individual investments.
  • Invest in different sectors. Within each asset class, there are different sectors. For example, the stock market is divided into sectors such as technology, health care, and finance. By investing in different sectors, you can further reduce your risk.
  • Invest in different geographical regions. This can help reduce risk if one country's economy underperforms. Total market funds offer an easy way to get broad exposure to both domestic and international stocks and bonds.  

Open a new account

Ready to invest? See how to open an account. If you're not sure whether you want to create and manage your portfolio on your own or take advantage of advice for guidance, we've got you covered in the section below. It covers important considerations to keep in mind when choosing your investment management strategy.

Once you get started, there are many ways to keep the momentum going, such as setting aside all or a portion of your annual work raises or bonuses to help fund your investing needs. Another convenient way to build your savings is by establishing regular automatic contributions that pull money from a specified account on a set schedule.

Rebalance your portfolio

Your asset allocation can change over time as the markets fluctuate. It's important to update and rebalance your portfolio at least once a year to ensure it remains aligned with your target asset mix. If something has changed with your overall goals or your life circumstances, be sure to revisit your asset mix to see if it still works for you.

Decide on your investment management strategy

If you're knowledgeable about investing, you might want to consider a self-directed approach, where you invest on your own. However, if you'd prefer to have help creating and monitoring your plans, a robo-advisor or financial advisor are 2 great options. Here are general pros and cons of these three investment management strategies.

Investing on your own

Pros:

  • Control: You have full control over investment choices and the flexibility to adjust your portfolio whenever you see fit.
  • Lower costs: You'll typically incur fewer fees with this approach since you're not paying for professional management services.
  • Personalized learning: You can significantly enhance your financial literacy and understanding of the market through managing your own investments.
  • Speed: You may be able to execute trades faster without having to go through a third party.

 

Cons:

  • Time commitment: You may need to spend a significant amount of time researching and managing investments effectively.
  • Risk of mistakes: You may be susceptible to common investing mistakes, such as emotional trading, without professional guidance.
  • Lack of expertise: You might miss out on expert financial strategies and market opportunities that advice services typically offer.
  • Stress: You may find it stressful to manage your own investments, especially during volatile market conditions.

 

Using a robo-advisor

Pros:

  • Lower costs: Typically charge lower fees than human advisors, making them an affordable option.
  • Efficiency: Can save you time by automatically managing and adjusting your portfolio and giving you access to tools to help you make informed investment decisions.
  • Low investment minimum: Often have low or no minimum investment requirements, making them accessible to a wider range of investors.
  • Consistency: Operate based on algorithms, which can be helpful for maintaining a consistent investment strategy without emotional interference.

 

Cons:

  • Limited personalization: May not be suitable for more complex financial situations.
  • Less or no human interaction: Don't offer a personal relationship with an advisor, which can be a downside for those who prefer face-to-face communication.
  • Dependence on technology: Rely heavily on digital platforms, which can be a drawback for those uncomfortable with technology.

 

Using a financial advisor

Pros:

  • Expert guidance: Offer professional advice tailored to your specific financial situation and goals.
  • Complexity: Can handle complex financial planning needs, including taxes, retirement, and estate planning.
  • Emotional discipline: Can help you stay on track, maintain discipline during market volatility, and potentially prevent costly emotional decisions.
  • Personalized service: Build a personalized relationship with you based on a solid understanding of your unique needs.

 

Cons:

  • Higher costs: Typically more expensive than managing investments on your own or using a robo-advisor.
  • Time commitment: Require a time commitment for regular meetings.
  • Variability in quality: Differ widely in quality and effectiveness, requiring careful selection.

Compare our low-cost advice options to see how we can unlock more power for your plans. Our custom tools and strategies are backed by nearly 50 years of investment experience to help you make the most of your hard-earned money.

Find more information to simplify your investing journey.

Start investing today

Commonly asked questions

The amount of money you need to start investing can vary widely depending on where you choose to invest. In fact, it can range from $1 to several thousand depending on the investment product and company you choose. But remember, the more money you invest, the greater the effects of compounding and your return potential.

Compound interest refers to the returns that are earned on both the principal amount of your investment and the accumulated earnings. It can help your investment grow at an exponential rate when the returns you earn on your investments remain invested to generate their own earnings.

The key is to align your investment durations with your financial goals and to remain invested long enough to allow your assets to compound and grow. For example, if you're saving for retirement, you'll probably need to invest for a longer period of time, even as long as 30–40 years. If you're saving for a shorter-term goal, such as a down payment on a house, you may only need to invest for a few years. Here are some general time frames for common goals that are designed to balance the growth potential of investments with the need to minimize risk as your goal approaches:

  • Retirement: 30–40 years. Start as early as you can to help maximize the power of compounding. As you get closer to retirement, be sure to adjust your investment strategy by gradually shifting from more aggressive investments to more conservative ones to preserve your balance.
  • Down payment on a house: 3–5 years. This shorter-term goal typically requires more conservative investments to reduce the risk of significant losses close to the purchase date.
  • Education: 10–15 years. With this longer-term goal, your investment approach can initially be more aggressive and gradually become more conservative as the time you'll need the funds approaches.

Investment risk is the possibility that an investment will lose value or fail to generate the expected return. It's an important concept to understand before investing in any asset, as it can have a significant impact on your financial goals. To manage risk, begin by understanding your risk tolerance and risk capacity:

  • Risk tolerance is your willingness to take on investment risk and your comfort level with the ups and downs in the value of your investment portfolio. It's influenced by your personal preferences and your financial situation. Some investors are willing to take on more risk in order to achieve higher potential returns, while others are more comfortable with accepting lower returns in exchange for less risk.
  • Risk capacity is the amount of investment risk that you can afford to take on. It's determined by your financial situation and your future financial needs. Investors with a higher risk capacity have the financial means to recover from potential losses that could result from taking on more investment risk, while investors with a lower risk capacity need to be more cautious.

As inflation increases, the value of money decreases. This means you'll need more money in the future to purchase the same goods and services that you can buy today. For investors, a key concern is ensuring investment returns outpace inflation. When volatility or inflation have you questioning your investment strategy, it's important to maintain a long-term perspective. Making abrupt changes to your portfolio can undermine your long-term objectives. We recommend focusing on things you can control, such as building and sticking to a well-diversified portfolio that is tailored to your goals, risk tolerance, and time frame. You can also hedge against inflation through your spending habits. Reducing your spending can free up more funds to invest, which can help enhance your future purchasing power.

Fees and expense ratios are some costs you might encounter when investing. Costs can chip away at your investment returns over time and have a significant effect on the value of your portfolio. The most common costs are:

  • Annual fees. These are flat fees charged yearly, regardless of your account activity or balance.
  • Transaction fees. These fees are charged when you buy or sell an investment. Very few Vanguard funds charge fees when you buy and sell shares as a Vanguard client. 
  • Expense ratios. These are the annual management fees for mutual funds and ETFs. They're expressed as a percentage of the fund's average assets under management and deducted directly from the fund before returns. For example, an expense ratio of 0.10% means you'd pay $10 for every $10,000 you invested in the fund each year. The average Vanguard fund expense ratio is 83% less than the industry average.2

By choosing Vanguard, we can help you keep more of your money where it belongs—in your account. Our fees and expense ratios are among the lowest in the industry.

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1Earnings on nonqualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes. The availability of tax or other benefits may be contingent on meeting other requirements. State tax treatment of withdrawals used for i) expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school, ii) expenses related to apprenticeship programs, or iii) student loan repayments is determined by the state(s) where the taxpayer files state income tax. If you are not a Nevada taxpayer, please consult with a tax advisor.

2As of December 31, 2023, Vanguard's average mutual fund and ETF expense ratio is 0.08%. Industry average mutual fund and ETF expense ratio: 0.44%. All averages are asset-weighted. Industry averages exclude Vanguard. Sources: Vanguard and Morningstar, Inc., as of December 31, 2023. This is a hypothetical calculation that does not represent any particular investment and does not account for inflation. Results shown are not guaranteed. There may be other material differences between investment products that must be considered prior to investing.

 

All investing is subject to risk, including the possible loss of the money you invest.

Diversification does not ensure a profit or protect against a loss. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer's ability to make payments. Investments in bonds are subject to interest rate, credit, and inflation risk. Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. Funds that concentrate on a relatively narrow market sector face the risk of higher share-price volatility.

For more information about Vanguard funds or Vanguard ETFs, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.

You must buy and sell Vanguard ETF Shares through Vanguard Brokerage Services (we offer them commission-free online) or through another broker (who may charge commissions). See the Vanguard Brokerage Services Commission and Fee Schedules for limits. Vanguard ETF Shares are not redeemable directly with the issuing Fund other than in very large aggregations worth millions of dollars. ETFs are subject to market volatility. When buying or selling an ETF, you will pay or receive the current market price, which may be more or less than net asset value.

Vanguard's advice services are provided by Vanguard Advisers, Inc. ("VAI"), a registered investment advisor, or by Vanguard National Trust Company ("VNTC"), a federally chartered, limited-purpose trust company.

The services provided to clients will vary based upon the service selected, including management, fees, eligibility, and access to an advisor. Find VAI's Form CRS and each program's advisory brochure here for an overview.

VAI and VNTC are subsidiaries of The Vanguard Group, Inc., and affiliates of Vanguard Marketing Corporation. Neither VAI, VNTC, nor its affiliates guarantee profits or protection from losses.