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How To Invest For The Very First Time

She’s just 18 years old. She’s a freshman in college studying industrial design. And before she left for school, she made her very first investment in stocks and bonds. It took her all of five minutes. I was so proud of her.

Over the past few months I have had the opportunity to talk with three first-time investors. In addition to my friend’s daughter mentioned above, I’ve also spoken with two friends in their twenties. One had never invested. The other had a 403(b), but really no idea how to create an investment plan or how to evaluate the mutual funds in his retirement account.

These conversations were eye-opening. At first I tried to reduce a lifetime of investing experience into a 20 minute conversation. I learned that many people really don’t care about emerging markets, REITs, or standard deviation. They also aren’t that interested in the debate between actively managed investments versus index funds.

What they do care about is risk. They want to understand the chances of losing money. Here it’s helpful to distinguish between volatility, which the industry defines as risk, and loss of purchasing power, which intelligent investors define as risk. But here again, I’ve gone too far into the weeds for most investors just starting out.

So in the end we talked about 4 things:

Time: Investing in stocks is for the long term. If you will need the money in a couple of years, keep it in a high yield savings account. Investing in stocks should be for a minimum of five years, and ten years is preferable.Diversification: Most investors should diversify across a wide spectrum of investments. The most important decision will be how much to invest in stocks versus bonds. For long term investors, more should be in stocks than bonds.Cost: Even small costs, multiplied over a lifetime of investing, will have a big impact on an investor’s results. It’s wrong to thing that a 1% fee is small. It can easily erode hundreds of thousands of dollars in value over a lifetime.

Ease: I enjoy studying investments. I use a free tool to track my investments as well as a custom spreadsheet I created and that you can find here. Many people, however, don’t want to spend a lot of time managing their investments. They want what I call the Ronco Rotisserie method of investing–”set it and forget it.”

Here are three investing strategies that meet these four criteria for first time investors.

3 Simple Ways to Start Investing

1. Target Date Retirement Fund: A target date retirement fund enables investors to get instant diversification with just one mutual fund. These funds take your contributions and split them among multiple stock and bond mutual funds. In addition, there is no need to rebalance your investments as you age. Target date retirement funds adjust the allocation between stocks and bonds as the investor nears retirement.

These types of funds are readily available in most 401(k) and other workplace retirement accounts. They are not all created equal. Some cost more than others, and the investment strategies vary from one fund family to the next. But they are an ideal way to begin investing.

2. Robo Advisor: Outside of a 401(k) there are other options. One of the easiest and least expensive options is an automated investing service, which has become known as a robo advisor.  These services typically cost around 25 basis points plus the cost of the underlying ETFs. The only decision an investor must make is how much to invest in stocks and how much in bonds. Once that decision is made, the robo advisor takes care of the rest, including rebalancing and dividend reinvestment.

These services have done an excellent job of creating very usable websites. Through charts, graphs, and content, they are a great source of information and knowledge for any investor, including those just starting out. You can find a list of the some of the more popular robo advisors here. My friend’s daughter chose WealthFront.

3. 3-Fund Portfolio: A final option is ideal for those who know they will eventually take a more active role in their investments. A simple asset allocation plan consists of just three asset classes, U.S. stocks, foreign stocks, and U.S. bonds. This portfolio can easily be implemented with just three mutual funds.

As an example, one could implement this investment plan at Vanguard with the following funds:

Vanguard Total Stock Market Index Fund (VTSMX)Vanguard Total International Stock Index Fund (VGTSX)Vanguard Total Bond Market Fund (VBMFX)

You can find an excellent description of this simple investment plan at

As one gains more experience investing, he or she may choose to move away from the above options. Some like to take a more active role, particularly as they study and learn more.

The above options, however, are an excellent way to get started as an investor. And these strategies will also serve well those that chose to stick to them over a lifetime of investing.