10 Tips to Get Started Investing

If there's ever a time to get started investing, it's right now. And that's not because of where the market is headed or because cash savings rates are near zero. You should kick off your investment plan today because time heavily influences your wealth-building potential. Simply put, the sooner you start investing, the more money you can make.

With that in mind, here are 10 tips to help you get in the market now, with the right level of risk and appropriate expectations for what you can accomplish.

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A normal investment goal might be to achieve a certain portfolio balance by a certain date. Unfortunately, that type of goal can be counterproductive for a beginning investor. Here's why. It takes time to build momentum in your investment account. If your monetary goal is a big one, you can easily get discouraged with what feels like no progress.

Instead, challenge yourself to goals involving consistency and returns relative to the market. On the consistency front, you want to invest a set dollar amount each and every month. As for returns, shoot for performance that's within 1% of the S&P 500.

The S&P 500 is a basket of 500 large, publicly held U.S. companies. It's considered a benchmark for the market as a whole. If your account growth is well below the S&P 500, you are probably invested too conservatively. And the opposite is also true; if your account growth is way above the S&P 500, you may be taking on too much risk.

ALSO READ: Beginner's Guide to Investing in Stocks

Investors do get rich in the stock market overnight, but that's the exception and not the rule. More commonly, investors get rich in the stock market over decades.

Some easy math demonstrates this. You can quickly estimate how long it takes (in years) to double your money by dividing the growth rate into 72. The long-term average annual growth of the S&P 500 after inflation is about 7%. Dividing 72 by the number 7 tells us that at market-level returns, you'll double your money about every 10 years.

The point is, investment growth takes time. Be prepared to wait it out.

Stock market investing is not a fix for out-of-balance finances. If you spend more than you make or you have no emergency cash savings, investing in the stock market can easily backfire.

Say you put your last $500 into shares of a mutual fund. And then a month later, you need to cash out those shares to cover your rent. Over a few weeks or months, the value of those shares could easily be less than what you'd paid for them. Plus, you may also lose money on trading fees or sales charges.

Avoid those quick losses by getting your finances in order before you invest. Your income must cover your bills, and you should have enough cash on hand to fund at least three months of living expenses.

You can set yourself up for success on the consistency front by budgeting. Decide what you can afford to invest each month, with the expectation that you won't have access to those funds for five years or more.

Since that can feel like you’re throwing money into a black hole, start small. Your monthly buy might be $20 or $200, depending on your financial situation. Any amount above zero is enough to get you in the habit of investing regularly.

Plan on revisiting your monthly investment amount every six months or so. You'll want to increase it as you gain confidence and feel more comfortable.

ALSO READ: How to Invest for the First Time in 2021

Learn how to use a compound interest calculator like this one. This will tell you what's possible based on your investing budget.

When projecting your investment performance, the wildcard variable is always the interest rate. If you are mostly invested in large-company stocks, you can use the market's historic average annual growth rate of 7% after inflation as a starting point.

The caveat is that this growth rate won't be reliable for time frames shorter than 10 years. That is a function of how the market behaves. In the short term, stock prices can be quite volatile. But as you look at longer time periods, the trend is more likely to be up in that 7% to 10% range.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Asset classes are types of securities that behave similarly. The main asset classes are stocks and bonds. Stocks have growth potential, but they can be volatile. Bonds produce income but stay stable in value.

A portfolio that diversified across stocks and bonds has elements of growth and stability combined. That’s what you want. Also, the relative weights of stocks and bonds in your portfolio should largely depend on how much volatility you can handle.

Generally, you can invest more aggressively in stocks when you don't need the money for several decades. Say you are saving for retirement, which is 30 years from now. In that case, you might hold 75% stocks and 25% bonds. But if you plan on using your invested funds in five years, you should prioritize stability by taking a more conservative approach. That would mean something closer to a 50-50 split.

To diversify within your asset classes, you’d own multiple individual stocks, as well as bonds with varying maturities. The purpose is to limit the influence any one position has over your entire portfolio.

As a beginning investor, the simplest way to achieve this type of diversification is to invest in mutual funds or exchange-traded funds (ETFs). Otherwise, you'd need to have at least 20 individual stocks, which can be a lot to manage when you're first starting out.

Two ETFs to consider are iShares Core S&P 500 ETF (NYSE: IVV) and iShares Barclays U.S. Treasury Bond ETF (NYSE: GOVT). The S&P 500 fund gives you exposure to 500 companies, including many names you'll recognize. Apple, Microsoft, Amazon, Facebook, and Alphabet are the fund's top five holdings.

The iShares Treasury bond ETF holds U.S. Treasury debt in maturities ranging from one year to 30 years.

ALSO READ: 3 Investing Lessons I Wish I'd Learned Sooner

Whether you invest in individual stocks or funds, always lean toward companies you know and understand. Apple is a great example. If you use Apple products, you have a sense of why the company is so successful. iPhones, MacBooks, Apple Watches, and iPads all share an intuitive user experience, and they work seamlessly together. Those factors encourage you to keep buying technology that's within the iOS ecosystem.

You might feel less of a connection, though, to a biotech company. If you have no interest in biotech, you probably also have little knowledge of what success looks like in that industry or what factors can be barriers to success. Without any connection to the company or industry, it’s challenging to form opinions and make timely decisions.

Investing comes with the risk of loss. You know this in theory, but it can be jarring when it happens in real life. One way to prepare is to learn more about corrections and crashes that have already happened.

The coronavirus-related crash in March 2020, for example, was a mere blip, even though it coincided with fairly extreme unemployment and an economic recession. Investors were, and still are, optimistic that the economy will return to normal as soon as the pandemic is under control.

Recovery timelines are longer when investors lose confidence in the longer-term economic outlook. The dot-com crash of 2000 is an example. Pre-crash, technology stocks blew up as investors acted on the belief that almost anything internet-related would ultimately be successful. When the dot-coms began to fail, it undermined that optimism and forced investors to rethink their outlook.

At some point in your investing career, the market will go sideways on you. It’s easier to keep your cool when that happens if you’ve already decided how to respond.

For most investors, the simplest way to minimize losses in a crash is to do nothing and wait. By resisting the urge to sell, you keep yourself positioned to benefit from the recovery that will eventually follow.

The hardiest of investors may take advantage of lower share prices by increasing their investing activities. There is a lot of upside to this approach, but it could be a long-term play -- since you can’t predict precisely how long the recovery will take.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Get started investing today with a clear set of goals, a long timeline, and an investing budget you can afford. Add in diversification across and between asset classes, plus a plan for managing through a market correction, and you've got the fundamentals for building wealth in the stock market.

The final component is time. Be patient and stay the course.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Catherine Brock owns shares of Microsoft. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Facebook, and Microsoft and recommends the following options: short March 2023 $130 calls on Apple, long January 2022 $1920 calls on Amazon, short January 2022 $1940 calls on Amazon, and long March 2023 $120 calls on Apple. The Motley Fool has a disclosure policy.