15 Things to Know Before You Start DIY Investing

You can be the happy owner of a fat stock portfolio, with wealth you amassed on your own. But it's not likely to happen unless you learn more about investing and you start taking certain steps. Here are 15 important things to know that can help you get started.

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.

For starters, pay off any credit card debt or other high-interest-rate debt before investing, because you don't want to be growing your investments by 10% or even 20% while paying 20% or 25% (or more!) in interest. That's a recipe for trouble, not wealth.

ALSO READ: Starting Investing in 2021? Here Are 3 Great Starter Stocks

Next, be sure that you have an emergency fund loaded with enough (accessible) money to keep you afloat for at least six months. You may not expect to experience a sudden job loss or face a costly car repair in the near future, but such things happen to millions of people who didn't expect them. Be sure you have funds available to cover your housing, food, utilities, taxes, insurance, transportation, and other nonnegotiable expenses.

If you want to be successful investing in stocks on your own, you're going to have to be good at living below your means -- which is what all of us should be doing, anyway, regardless of investing status. This means you'll be spending less than you bring in, in order to be able to save money. Having a budget can help a lot, and you might create an "investing money" category in your budget, so that you can plan to sock away certain sums regularly for investing.

If you're going to invest in stocks, you need to know this number: 10%. It's the approximate average annual growth rate for the stock market. You're never guaranteed 10% returns, of course, and any period of, say, 10 or 20 years might average 7% or 13% or something else. But it can help a lot to understand what's reasonable to expect, and what above- or below-average returns look like. Understand that smaller stocks can often grow faster (though sometimes with more volatility), and that bonds and other kinds of investments can grow more slowly.

ALSO READ: Is 2021 the Year You Start Investing?

Not every stock investor appreciates this, but to get really good at investing, you should plan on reading and learning -- regularly -- and, ideally, for the rest of your investing life. You'll want to be able to evaluate candidates for your portfolio, so you should aim to become very familiar with industries and companies that interest you. You should learn how to make sense of the financial statements that companies issue every quarter. (They will look very confusing and intimidating at first, but take baby steps and stick with it -- it's not rocket science, and you can come to understand them.) You will also benefit from reading about great investors and great companies and different investing styles.

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.

Speaking of investing styles, there are two that are particularly worth getting to know -- value investing and growth investing. They're often presented as opposed, but combining them could give you the best of both worlds. Value investors seek stocks that are trading at a discount to their intrinsic value (a value that is not precise and that can be hard to pin down). So if they buy into Scruffy's Chicken Shack (ticker: BUKBUK), for example, at $40 per share when it seems to be worth $50, they're building in a margin of safety. Growth stocks are those that are, well, growing -- at a solid clip. They can often end up overvalued, due to investor enthusiasm leading many to buy no matter what the price, but sometimes rapidly growing companies can trade at a discount, too.

Another kind of stock well worth considering for your long-term portfolio is dividend-paying stocks. Invest in some healthy and growing companies that pay dividends, and you'll receive regular income from them no matter what the economy is doing. (Some companies do occasionally reduce, suspend, or eliminate their payouts when they're really struggling, but that's not the norm.) Better still, those payouts tend to be increased over time, sometimes substantially, so that income will often keep up with and outstrip inflation. Best of all, that money will accumulate in your account, and you can spend it on more shares of stock!

ALSO READ: How to Find the Best Dividend Stocks

Mutual funds are also worth considering. When you invest in a mutual fund, you buy some shares of it and your money, pooled with the money of other shareholders, is used to buy investments. Each fund has a certain focus, which can be broad (like large-cap stocks) or more specific (like Taiwanese stocks or artificial intelligence stocks). With managed mutual funds, there will be professional managers who make all the buy and sell decisions. They're paid to do so, from the fees the fund charges. There are also passively managed mutual funds, or index funds, and we'll get to them soon.

One thing you're probably going to need if you want to do your own investing in stocks is an account at a good brokerage. You can have a regular, taxable account there, or you might open an IRA account -- or both! You may also be able to invest through a tax-advantaged 401(k) account at work, but that will likely limit you to a smallish range of mutual funds. To open a brokerage account, just visit the brokerage's website, where you can likely set it up online. Then send in some money with which you'll invest.

It's important to understand that investing in stocks --and being good at it -- involves more than just parking money in some stocks you heard about or jumping in and out of stocks. For best results, you'll want to dig into any company of interest before you invest in it, learning about its strengths, weaknesses, risks, opportunities, and so on. You'll have to keep up with your holdings, too, to make sure nothing seems to be changing for the worse. And you'll want to keep honing your skills.

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.

It's critical to be patient when investing. Most stocks that have soared -- such as Netflix, Apple, and Amazon.com -- have done so over years, if not decades. Sell too soon for, say, a 30% or 100% gain, and you might lose out on a 600% gain. Understand, too, that these great stocks won't go up in a straight line. You'll have to be able to stomach some sharp falls and hang on -- after some research -- as long the companies seem healthy with great growth prospects intact.

ALSO READ: 3 Stocks to Build Your Portfolio Around

Determination is key -- really. It's easy to have big dreams of wealth, open an account, and buy some stocks. But for great success, you'll want to be adding money to your account regularly over years, if not decades, and investing it effectively. There will be market downturns ("corrections" and crashes) that could turn you off of investing, but those can be the worst times to sell (and great times to buy more). However you do it, you will need to keep your eyes on the prize -- which will be well worth it.

One reason DYI investors need to keep reading and learning throughout their investing years is so that they can learn about all kinds of investing mistakes to avoid making -- such as buying into penny stocks, engaging in day trading, trying to time the market, investing with margin, and so on.

If all this sounds like too much work, fear not -- there's a simple alternative. You can invest in stocks by just parking your money in one or more low-cost index funds, such as ones that track the S&P 500. Index funds are passively managed funds, because their managers don't have to make many decisions -- they just have to own all or most of what's in the index that the fund tracks. Index funds tend to cost far less than actively managed funds, and they tend to outperform them, too, over long periods. There's no shame in just investing via index funds, and you can do quite well with them over time. Just keep adding to your holdings over the years.

ALSO READ: How S&P 500 Index Funds Can Make You a Millionaire

Keep in mind that you can invest both in index funds and in individual stocks, according to your risk tolerance and interest in being a hands-on investor. You might split your holdings 50-50 between index funds and carefully chosen individual stocks, or you could have any other mix. Find the style that works for you.

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.

Congratulate yourself for deciding to invest in stocks -- because it's a terrific way to build wealth over time, secure a comfortable retirement for yourself, and reach lots of other financial goals. You don't have to be a genius or a math whiz to do well at it, either. The ability to stick with your plan is what you need most of all.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Selena Maranjian owns shares of Amazon, Apple, and Netflix. The Motley Fool owns shares of and recommends Amazon, Apple, and Netflix 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.