How to Start Investing in under 30 Minutes - Ultimate Guide to Start Investing for Beginners
0 to Investing in Under 30 Minutes. This guide is designed to take you from not knowing what investing is, to clearly understanding how to start.
Table of Contents.
Why Invest
Guiding Concepts
Opening a Brokerage Account
Process to Start Investing
That’s it - Sustain the process
This post distills over 16 years and 30,000+ hours of investment research into a simple yet comprehensive guide on how to start investing. The goal is to break down the process as clearly as possible, so let’s dive in. While the post is long, it's detailed. By reading this, you can go from having zero knowledge of investing to gaining a basic understanding—enough to get the compounding clock started. Optional sections will add context, but aren't required to begin.
About Erik. Investing changed my life. I came from a single mom who was poor. We grew up in an area with 2.5x the national rate for violent crime. I walked through metal detectors daily and sat on a radiator because there weren’t enough seats in my high school ranked #15,877 (tie) out of 17,680. I’m nothing special and that’s the beauty, we don’t need to be. We just need the information, work ethic, and discipline.
I’d like to reiterate that I’m not an investment advisor, nothing I say should be taken as investment advice - I’m a random dude on the internet writing a post.
Why invest?
Investing differs slightly from trading (see below) and is relevant to anyone looking to grow their money. It involves committing capital with the expectation of future returns. In the stock market, this is commonly known as 'buy and hold,' which is exactly what it sounds like—we buy assets and hold them, gradually accumulating over time. The goal of investing is to benefit from compound interest.
Compound interest, simply put, is when we have a principal value that earns interest, increasing our principal that then earns interest on that higher amount.
Example. If we have $100 (this is our beginning principal) and earn 10% interest, we make $10 and now have $110 (this is our new principal). If we earn that same 10%, now we make $11 (without adding more money) and our new principal is $121.
So we originally put in $100 and after (2) compounding cycles, without adding more money, we earned $10 on the first and $11 on the second. This is the power of compounding interest.
That example may not excite you since it’s a lower dollar amount, but don’t overlook how this becomes powerful. Take for example the stock market that averages between 8 and 12% return per year (depending on what timeframe you look at). If you have $10,000 to invest and save an additional $100 each month, at 10% return you have $372,000. Your total input to this is the initial principal + monthly contribution, which is $46,000 over the 30 years - yet that turns into $372K. That’s the power of compounding interest.
Source: Free Compound Interest Calculator: https://www.esinvests.com/compound-interest-calculators We can accelerate this return by saving more or increasing our returns (cii and ciii below).
The broad stock market (aka the market) exhibits positive drift. This is where it tends to gain value over time and has since inception. The US Stock market has many different products (or securities) but we’ll be keeping it super simple, and focusing on broad index Exchange Traded Funds (ETFs) - more on these in Section 2.
Optional Read.
Trading is when we take a more active role in the process and incorporate active management like timing strategies like trend following or volatility trading (for those that trade options).
Saving is our first lever and is accessible to everyone. The punchline is the more you can save the better, however we can only cut so many expenses. So part of the idea of saving is actually increasing our income (think side hustles, etc.) and saving as much of that in addition as possible.
The idea of increasing our return potential is why most of us start trading. The math is very clear however, there is an incredibly small subset of those that attempt it that are able to consistently outperform the market over the long run. So it’s doable, but for those not fully committed to that path, which is time intensive, investing via buy and hold over the long run tends to work most effectively.
Guiding Concepts.
Overview. I would invest with savings that I don’t immediately need into index ETFs via Dollar Cost Averaging.
ETFs are Exchange Traded Funds. There are products that hold a basket of securities with a clearly outlined holding structure. Most ETFs are inactively managed (rebalanced on a set cadence, typically quarterly) and seek to maintain a certain construction outlined by a a Prospectus (governing document that describes how the fund operates).
ETFs differ from Mutual Funds in that they are much lower cost (in terms of fees paid) since they are inactively managed.
For a summary, I’d simply buy SPY on a set date each month - regardless of how much you can buy. SPY is the Index ETF that tracks the S&P 500 Index. It’s low cost, diversified (with weighting towards technology).
If you cannot afford a full share, simply move the money into the brokerage account until you can. This is ESSENTIAL. Waiting until you “have enough” typically leads to that money being spent and never making it in at all. For those interested in the details of how this all looks, see below:
What can we invest with? We need to have a decent budget with decent savings to continually increase our principal. The more you can save the better. Ideally, we’d have at least 6-months of emergency expenses saved up (if we have a stable job) or more (if we have a less stable job). I would only invest money that I don’t anticipate needing for at least 3-years.
What’s a good strategy? The broad strategy I’d employ is called Dollar Cost Averaging (DCAing). This is just where we consistently buy something on a regular cadence, regardless of it’s price. The idea being, sometimes we’ll buy when it’s high. Sometimes when it’s low. But continuing to add results in a good aggregate basis.
What happens when the market is down (or up)? This is the make or break of the DCA strategy. I would stay the course here. The worst thing traders do is buy when things are high (they’re scared of missing out) but then they sell at lows when things look bleak. Trading individual stocks is a separate approach than what I’m discussing here that requires a different rule set. DCAing into index ETFs is far more forgiving - I’ve never seen a US based ETF not make new highs at some point.
What can we invest in? I’d primarily start with an index ETF. You might’ve heard of the S&P500 (commonly referred to as, “the Market”). I would use a mix securities broken into two broad buckets: Equities & Bonds.
Equities represent individual or baskets of stocks. Equities traditionally will have higher volatility (change in values) but higher returns. The primary profit mechanism for equities typically is capital gains (price advancing) with yields as a secondary contributor.
For this example, I’d stick to index ETFs such as:
SPY (S&P500 index ETF)
IWM (Russell 2000 index ETF)
QQQ (Nasdaq 100 index ETF)
Bonds represent debt securities, typically different types of loans that earn a yield. Bonds typically have lower volatility (lower change in values) with a lower but more consistent return. The primary profit mechanism for bonds is typically the yield (interest paid on a regular interval based on the security, typically Quarterly or Monthly) with capital gains (price advancing) as a secondary return source.
For this example, I’d stick with a few bond ETFs such as:
HYG (High Yield Corporate Bonds)
TLT (20-Year US Bonds)
BND (Total Bond Market ETF)
SPY, IWM, TLT are called Tickers, that’s essentially a nickname for a security used to locate it on your platform)
For those not interested in the details, I would simply buy the SPY each month on a regular cadence.
The SP500 (SPY) holds 500+ US based large cap (big company) stocks. It has a lot of exposure to Technology (over 28% of the index). SPY also pays a quarterly dividend. See below for an overview. the left hand side below shows the various sector SPY has exposure to and the right hand side lists it’s largest 20 holdings:
The Russell 2000 (IWM) holds over 2,000 US based small cap stocks. These are commonly referred to as “growth” stocks, meaning they’re smaller and tend to move more. Below is an alternative view from that above called a “Heatmap”. You can see the various sectors: Financials, Industrials, IT, Real Estate, Consumer Discretionary, Healthcare, Energy, Communication Services, Utilities, Consumer Staples, Materials. IWM also pays a quarterly dividend.
20-Year Bonds (TLT) is seen as one of the safest investments available to offset risk in a portfolio. These tend to move far less and pay a monthly dividend.
So, how do I decide between the three securities? Simple, the longer the runway, the more I’d put into Equities (SPY, IWM, QQQ). Longer holding duration allows me to ride out the volatility (price movement) and take advantage of long-term positive drift.
You can tinker with different portfolio returns here at Portfolio Visualizer:
https://www.portfoliovisualizer.com/ (I’m not sponsored by them, it’s a cool tool):
We want to go to “Backtest Portfolio” in the box on the left-hand side.
Here, you can input different % combinations of the tickers above to see how the returns look.
If I didn’t need the money for >5 years, I’d simply take a primary position in SPY and see if I want to add QQQ and IWM (SPY by itself again is completely fine to keep things simple). As I got closer to needing it, I’d pare down my equity allocation, and allocate more to bonds like HYG, TLT, or BND.
Optional Read.
Mutual funds are “actively managed” by a professional thus incur additional expenses. Interestingly enough, the vast majority underperform the market itself. This is for a litany of reasons outside the scope of this writing, but suffice it to say - they’re not incentivized to beat the market. ETFs are automatically managed by a ruleset and automatically balanced. There are no specific investment decisions or expertise being applied - simply rebalancing. Thus, they are much cheaper.
You can explore tons of ETFs to gain exposure to precious metals, specific sectors, currencies, entire countries, volatility, etc. What I listed above was purposefully culled for simplicity.
There are TONS of ways to optimize what tickers you buy and when, you can also explore adding simple timing tools like Moving Averages to inform your purchasing and selling. However, what you see above, as simple as it is, works extremely well.
Open a Brokerage Account.
Next, we need to find a brokerage account. A broker is a middleman that connects investors (and traders) to the stock market. Unfortunately, you need this middleman, there’s no system to cut them out.
I encourage you to shop around simply by Googling “best brokerage account”. However, I use TD Ameritrade (not sponsored by them) and have for years, they’re fine. So is Schwab, Interactive Broker, etc. The main thing here is to look for tenured brokers - they’ve withstood shaky markets. I would avoid dealing with the Robinhoods and Webulls, they’re not aimed towards investors anyways but nonetheless, I personally do not trust their platforms.
Next, we need to open an account. Below is an example using TD Ameritrade (now Schwab - the process remains the same), in the top right we can see a button to “Open New Account”
Next we need to select what kind of account we want. You can read through the options, I started with an “Individual” account first then also opened a ROTH and Traditional IRA. To keep it simple, an Individual account will be pertinent to everyone.
Optional Read.
The primary difference is a traditional account offers no tax advantages. You put in post tax dollars and as you close trades incur capital gains tax. IRAs offer different tax treatments:
ROTH (invest post tax dollars, money grows tax free).
Traditional (invest pre-tax (or post) dollars and money grows tax deferred. You then are taxed as current income when withdrawn after 59 1/2.
Both have maximum annual contribution limits (that can be circumnavigated):
To circumnavigate Traditional IRA contribution, you can contribute post tax dollars and accept the tax hit.
To circumnavigate a ROTH contribution limit a Back-door contribution can be made. You can learn more about those here: https://www.investopedia.com/terms/b/backdoor-roth-ira.asp
After we select “Individual” on the left hand side, we then select “Open an individual account”
From here, you’ll follow their flow which requires similar information to opening a standard bank account.
Account is open, you should have linked a bank account during this process. We now fund the account (transfer money from bank to brokerage) and start the process.
Start Investing.
For TD Ameritrade, when I login, there is a search bar in the top right:
In that bar, we’d type: SPY which returns the following, where we can learn more about the product and buy or sell it.
I would select “Buy” then a order window pops up on the bottom that lists the following:
Really, we just need to change the “Quantity” from the default “100” to whatever we want to buy. In this case, each share costs $442.87. So if we wanted to invest $1,000 we need to do some basic math:
Investment Amount Divided by Current Price = # Shares we want to buy
1,000 / $442.87 = 2.2 shares. There are no partial shares here, so we always round down to the nearest whole number.
So 2 shares. We adjust “Quantity” to: 2, change “Order Type” to “Market”, Review the Order and launch it.
Optional Read.
Order Type matters far more for traders where each transaction it’s important to get as good of a price as possible. For DCAing long-term into an index ETF, it's inconsequential.
For those wondering, a Limit order is where we explicitly state a specific price (or better) that we want to transact at. As such, if there are no offers at that price, you may not get a “fill” which simply means the transaction won’t go through.
A Market order simply executes the trade at the next best available price.
“Time-in-force” is an excessively fancy way of saying “Expiration”. Since we’re using Market orders here, we’re filled immediately. If we had a limit order where there wasn’t a counterparty readily available, then this matters more.
GTC stands for good till canceled - meaning the order will remain until it’s filled or until you cancel it.
Day stands for today. At the end of the day, if the order isn’t filled, it will automatically be canceled.
Ext means extended trading hours. This is important because extended hours tend to have less liquidity, meaning worse fills. This can be added to either GTC or Day orders.
Done.
That’s it. You now understand what investing is, what buy and hold is, how Dollar Cost Averaging works, what index ETFs are, how to open a brokerage account, and how to place a trade. Congrats Mr. or Mrs. Buffett.
Stay the course. This approach only works if you consistently deploy it.
What about taxes? In this case, you only pay taxes when you sell a position at a profit.
Optional Read.
So until you do that, there are no taxes. DCAing incurs no taxes until we unwind or flatten (both fancy ways of saying exit a position) at a profit. Once you do that, you’ll incur capital gains tax.
If you hold the position for > 1 year, you are taxed at the long-term capital gains tax rate which changes year over year, but tends to be lower than the tax for short-term holdings.
If you hold for < 1 year, your profits are added to whatever your income was for the year and you are taxed at that rate.
There are some nuances to the outline above (Sect. 1256 of the tax code, wash sales, Carried Losses, etc.) so it’s important to either read the tax code yourself or find a competent accountant you trust.
This is the tip of the iceberg and as most know, the majority of an iceberg is below the surface. Nonetheless, the approach listed above is time tested and works incredibly well despite how simple the process is. As always, if you have any questions - drop me a line and if this post helped you, please help me by sharing it to spread the information!
Are you interested in learning more about the process of investing or trading? Checkout these videos below:
Be an Outlier!
-Erik
Click here for more resources: https://linktr.ee/outliertrading
DISCLAIMER:
The content presented is for informational purposes only and should not be considered as financial advice. esInvests, its affiliates, and employees are not responsible for any investment decisions made based on the information presented. Any opinions, news, research, analyses, or other information contained in this content provided as market commentary and do not constitute investment advice. esInvests does not guarantee the accuracy, completeness, or reliability of any information presented in these videos and is not liable for any losses or damages arising from the use of or reliance on this information.