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How to Start Investing – A Guide for New Investors

How to start investing

Investing is an incredible way to grow your wealth. But how do you even start? Read the steps below, and learn how to start investing your money properly.

Table of contents

  1. Why invest?
  2. Why start investing now?
  3. How to invest?
  4. What should you do if the market drops?
  5. How much do you need to start investing?
  6. How to start investing?

Why invest?

Result of compound interest

If you invest your money, you do it to get some kind of return in the future.

Let’s say that you invested 1.000 dollars, and got a 7% return on investment per year – which is the stock market average. After one year your 1.000 dollars would have turned into 1.070 dollars.

You might think that this isn’t significant. But actually, it is.

Investing money is like a snowball effect. In the beginning, it takes a lot of time to see a meaningful return. But after some time – and if you reinvest your returns – the power of compound interest really shows itself.

You just have to get the snowball rolling.

Let’s look at an example of the power of compound interest, to really understand the significance it provides.

Imagine that you invested 1.000 dollars

Let’s say you initially invested 1000 dollars, and every month contributed to your investment account with an additional 100 dollars.

In the following 30 years, your investment account would look something like this:

Total savings after 30 years investing

On the picture, you see two graphs. The red line is representing how your money would develop if invested. And the blue line is your total contributions. Basically, the power of compound interest is the difference between the red and the blue line.

This is what makes investing so lucrative.

You can use a compound interest calculator to see it for yourself – with your time horizon and contributions.

Why start investing now?

As you already learned, investing takes time, and you have to get the snowball rolling.

Therefore, the best time to invest is now.

Imagine that you don’t start investing now. And you in 10 years actually think about investing again. At that time, you’d wish that you started investing now.

Below you can see the difference of starting investing now vs. starting investing in 10 years.

Cost of waiting to invest

If you wait just 10 years to invest, you will miss out on 72,392 dollars! This is significant. Therefore, now is the best time to start investing.

You can play around with the calculator here.

How to invest?

You can’t beat the market.

Investing may seem like a complex topic, but in fact, it is best to keep it as simple as possible when investing.

Numerous studies show that the average investor can’t beat the market – nor can they choose a fund to do so for them – as the fund charges fees, which will eat your profit.

So you can’t beat the market or choose a fund to do so for you.

In fact, the average investor loses money by overcomplicating investing, rather than keeping it simple. Therefore, we recommend that you keep things as simple as possible – especially in the beginning.

Accepting that you can’t beat the market, will be a key moment in your investment life. And perhaps without knowing it, you will be much better of, compared to people who try to beat the market.

What should you do then?

When you make your first portfolio, it should consist of only two things; equity investments and fixed income investments. These are the two fundamental things in every portfolio.

Whether you are going to invest yourself or if you are going to outsource your investments – we will go over this part later in the post – you should both have some equity and some fixed-income investments.

If you want, later on, you can add more asset types to your investment portfolio, but the foundation of your investment portfolio should be based on a diversified mix of stocks – which is easiest achieved with a world equity index tracker – and low-risk assets like bonds.

How to start investing successfully?

Your overall success in investing will depend on your ability to:

  • Choose a proper asset allocation – the combination of stocks, bonds etc. you have in your investment portfolio.
  • Create and stick to an investment plan – this will allow keeping your emotions at bay, so even if a crash occurs, you won’t panic sell.

What should you do if the market drops?

Don’t panic. Market crashes happen from time to time, but when they happen, it is important that you don’t act out of emotions.

Market drops is an opportunity to get your favorite investments on sale. Imagine if an item you wanted went on sale. Wouldn’t you be more likely to buy it then? The same should be the case with investments.

A lot of people panic sell during market drops, and this is partly caused by media having a lot of negative focus on the market during those times. But stay calm, and just wait it out.

If you have excess cash, it might also be an opportunity of a lifetime, to get some investments on a discount.

Sell early and buy back cheaper?

No one really knows how long a market drop will be. And trying to time the market can make you end up chasing the market when it is even higher than when you sold.

If you really think you can time the market, try taking this market timing test a few times. You’ll probably figure out that you can’t.

How much do you need to start investing?

You don’t need a fortune to start investing. In today’s world, it is possible to start investing with as little as a few cents.

However, you will need a little more than that to actually see some serious growth in your wealth. But as a novice, you can easily start investing with a few 100 dollars.

How to start investing?

There are many ways to approach investing. So how you should start investing depends on you. Choose the statement below that best represents your situation:

  • “I know that investing can benefit me, but I would prefer someone to manage it for me.”
    A robo-advisor might be something for you. Robo-advisors is one of the best things since sliced bread. There are a lot of them out there, but fortunately for you, we have made a comprehensible guide on picking the right robo-advisor.
  • “I’m interested in financials, and want to learn to choose investments myself.”
    If you want to learn more in-depth how to start investing, we HIGHLY recommend reading at least a few books about investing. For more information, you can also check out all the free content on this website, which will help you getting investment ideas for getting your investment portfolio started.