Investing for Beginners: It's Easier Than You Think

Beginners needn't be fearful of investing.

Jun 20, 2014 at 7:32PM

Frozenfortunes
Credit: Nagesh Jayaram.

For beginners, investing can seem a daunting endeavor. But investing for beginners -- and even seasoned investors -- can be surprisingly simple. Sure, you can jump into foreign currencies, options, and commodities, but they can be complex and extra-risky. And you should be wary of them. But you have other alternatives that will let you sleep better at night.

Super simple
Investing for beginners can be as simple as investing in a handful of low-fee, broad-market index funds. Each tracks a particular index, giving you the approximate return of the index, less fees (which can be kept extremely low with certain funds). The Vanguard 500 Index Fund (VFINX), for example, tracks the S&P 500 index, which is made up of 500 of America's biggest companies that together represent about 80% of the entire U.S. stock market's value. You can go even broader with the Vanguard Total Stock Market Fund (VTSMX), which encompasses all of the U.S. stock market, including small companies, or the Vanguard Total World Stock Index Fund (VTWSX), representing the world market. These are examples from Vanguard, but there are more than a few other brokerages or fund families offering low-cost index funds -- possibly including some available to you via your brokerage or workplace. You can also opt for exchange-traded funds, or ETFs, that focus on the same indexes -- such as the SPDR S&P 500 ETF (NYSEMKT:SPY), Vanguard Total Stock Market ETF (NYSEMKT:VTI), and Vanguard Total World Stock ETF (NYSEMKT:VT). You can balance out your portfolio with bonds via index mutual funds and ETFs, too. The Vanguard Total Bond Market ETF (NYSEMKT:BND) is an option that can fit that bill.

The beauty of index fund investing is that it's easy, it's cheap, and it delivers returns that beat many more expensive alternatives. Plunk your money regularly into index funds, and voila -- you're done. It's a perfect kind of investing for beginners (and others).

Fairly simple
Investing for beginners is a little more complicated -- but still relatively safe -- when you invest in blue-chip companies and dividend payers. After all, big blue-chip companies such as IBM and Verizon Communications have done a lot of things right in order to grow to their current size. They may not grow as rapidly in the future as they did in the past, but they offer some competitive advantages, such as economies of scale and brand power, that make them unlikely to go under anytime soon -- and therefore less risky than a fast-growing upstart.

Many such companies offer dividends, too, which can make up for slower growth. And remember that dividend payouts tend to grow over time, too. Semiconductor giant Intel, for example, offers a 3% dividend yield and has upped its payout by 61% over the past five years. These days, this kind of investing for beginners offers significantly bigger income streams than interest rates from banks or CDs (though stocks do carry more risk). A dividend-focused ETF, such as the iShares Dow Jones Dividend Select ETF (NYSEMKT:DVY), can spread that risk across many stocks. It recently yielded about 3%.

Still not rocket science
While index funds can have you roughly matching the market's return, you can aim still higher by adding some carefully selected individual stocks to your mix. They can boost your portfolio if they do well -- but they can also sink it. This is where investing for beginners gets more complicated. For best results, you'll want to keep reading up and learning about investing in general and about the companies and industries that interest you.

Just get started
One of the most important pieces of advice about investing for beginners is this: Just get started. It's easy to think about investing and to read up on it, but unless you're independently wealthy or are counting on a generous pension, you probably need to actually start doing it -- and soon. Don't let fear hold you back. You can ease into it by investing small chunks of money at a time into simple investments such as index funds. They can help you sleep well at night while making your retirement more comfy -- and you needn't do anything more complicated than that.

Tax savings for beginners, too
While successful investing will grow your nest egg, being tax-smart can keep it from shrinking. In our brand-new special report "The IRS Is Daring You to Make This Investment Now!," you'll learn about a simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, owns shares of Intel and Verizon Communications. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel and International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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