Simple. Honest. Personal finance.

How to Invest Well: Simple Advice for Beginner and Intermediate Investors

As I’ve interviewed hundreds of people about money over the years – both people with money and those with not so much – there is always an obvious difference: The people with money are investors.

What makes them different? Rather than simply spending every penny, investors use their money to acquire things that offer the potential for profitable returns, either through interest, income, or the appreciation of value.

As you approach managing money, you’ll learn to devote your limited resources to the things with the largest potential for returns. That may be paying down debt, going back to school, or fixing up a two-family house. Of course, it may also mean buying stocks and bonds — either individually or as mutual funds or exchange-traded funds.

Thanks to modern technology, the investing world offers enormous possibilities to anybody with a few bucks and an Internet connection. It’s our job to help you filter out the noise, learn the basics, and make good investment decisions from the start.

Investing vs. gambling

All investing involves risk. But there’s a big difference between smart investing and gambling. Trading a few stocks without knowing what you’re doing is gambling. Diligently setting aside money, putting it the best stocks or funds for your goals, and leaving it put for the long run. That’s investing.

If you love researching stocks and making fast trades in search of short-term profits, fine. It’s fun. I just don’t recommend doing it with more than 10 percent of your money.

How to start investing (my advice)

Investing is like religion – people have some strong opinions and may even belong to one of many “sects”.

There are the doomsday preppers who are convinced our financial system will collapse, so they stick all their money in gold and real estate. There are the optimistic and opportunistic day-traders with their Batcaves covered in wall-to-wall monitors. And there are the indexers, those that simply invest in everything in order to take advantage of the slow and steady increase in the overall value of the markets.

If you already belong strongly to one of the above camps, you may not find the investing resources on Money Under 30 useful. If, however, you have an open mind and are interested in learning simple strategies for successful lifelong investing – without any gimmicks – then read on.

My personal investing philosophy is quite simple: Create broad diversification through a mix of low-cost mutual funds and ETFs, while keeping it fun by holding individual stocks with up to 10 percent of my assets.

To start investing, you’ll need to make a few choices:

Your platform

First, you’ll need to choose a platform with which to invest. Available platforms include:

Until you become a comfortable investor, we recommend buying mutual funds or ETFs, either through an online broker or direct mutual fund account. For anybody who’s not interest in choosing individual investments, Betterment offers a very simple way to gain exposure to the total stock and bond market (you just deposit money like a savings account, choose your risk tolerance on a scale of 1-10, and it invests in the overall market for you).

Your account type

Next, you’ll need to choose whether you’re investing in an individual retirement account (IRA) or a general, taxable account. An IRA or Roth IRA provides certain tax advantages as an incentive to save for retirement. The downside is there are limits on how much you can contribute to the account each year and when you can withdraw the money. If you’re new to investing and can afford to begin putting money away for retirement, I recommend everybody begin investing with a Roth IRA.

If you already have a retirement account or need to invest money for another goal (like buying a home or starting a business), a regular brokerage account will do. Keep in mind that your capital gains – the money you earn when you sell a security for more than you paid for it – are taxable, as will certain dividends you receive.

Your investments

Finally, you’ll need to select your investments.

This is where it gets overwhelming. My advice is to stick with mutual funds or exchange-trade funds rather than individual stocks and bonds until you get your feet wet. Funds enable you to invest in a broad portfolio of stocks and bonds in one transaction rather than trading them all yourself. Funds are not only safer investments (because they’re diversified), it’s often far less expensive to invest this way because instead of paying trading commissions to buy a dozen or more different stocks you will either pay just one trading commission or nothing at all (in the event you buy a mutual fund directly from the fund company).

Here are some posts to get you started choosing investments:

Some final advice

The most important factor in being a successful investor is not the stocks and funds you pick. Successful investing depends on:

The investing information on MoneyUnder30 barely scratches the surface of the world of knowledge out there about investing, but that’s OK. We’re not trying to train the next class of hedge fund generations so much as give the average person enough knowledge and confidence to begin investing on your own. I hope the investment strategies here are helpful.

Recent Investing Posts

End Your Fear of Investing

Investing is the key to building wealth, yet many let fear hold them back from buying a single stock. Three no-nonsense reasons to get over your fear and why you should start investing today.

Be a Smarter Investor: The Best Investments to Make When Markets Waver Between Up and Down

It’s easy enough to buy low and sell high when the stock market rallies and dips. But how do you profit as an investor when the market is sideways? Learn the pro tactics to find investment opportunities even in the most boring of markets.

Want a Quick Win? Here’s an Easy Way to be Smarter With Your Money than the Average American

Warning: You may be embarrassed to be associated with the “average American” after seeing the results of this recent study. Find out if you’re guilty, too.

Got Side Income? Pay Fewer Taxes and Juice Your Savings at the Same Time

If you have freelance or self-employment income, you must know about this specialized investment account that lets you save a ton more for retirement than an IRA or even a 401(k). And, since you can deduct contributions, you’ll save on taxes this year, too.

How Does the Federal Reserve Affect Your Portfolio? The New Investor’s Guide to Monetary Policy

When the Federal Reserve (“the Fed”) speaks, Wall Street scrambles. Here’s a high-level guide to how the Fed influences monetary policy and what it means for your investments.

5 Penalty-Free Early IRA Withdrawal Options

Tapping an IRA for cash typically carries a 10 percent penalty tax. Although it’s always a last resort to cash out retirement funds, there are at least five circumstances in which you can make penalty-free early IRA withdrawals.

This Simple Nugget of Investing Advice is Timeless; Do You Follow It?

Peter Lynch, Warren Buffet and Jim Cramer all dispense variations of this same simple investing advice. Learn what it is and how to apply it to your portfolio.

Stop! Don’t Do Your Taxes Until You Read This: The Best Tax Software Compared

Is free tax software really free? Can I file my taxes with my phone? And what’s the difference between a tax program that costs $15 and software that costs $80? The answers here.

Avoid These Investments at All Costs!

You never — never — want to avoid in the two investments we discuss here. If somebody tries to sell you on these investments, they’re the only one profiting. And if your friends are investing, they’re rolling the dice no differently than if they were at a craps table.

myRA: What You Need to Know About the New myRA Savings Account

In President Obama’s 2013 State of the Union Address, he unveiled plans for myRA: A new retirement savings account that is supposed to make it simple and affordable for young workers to set aside a few dollars for retirement. How does myRA work? What’s different? And can myRA be used as a safe place for short-term savings, too?