In this part of the blog series, I’ll explain an effective, but simple, way to begin investing. Here are the steps we’ll take:
- Open an online brokerage account
- Link your checking account to the brokerage account
- Set up an automatic monthly transfer of a fixed amount to your brokerage account
- Set up automated recurring investment into just one or two mutual funds
Open a Brokerage Account
First, you’re going to need an online brokerage account. I’ve been a long-time, satisfied customer of Charles Schwab, but there are a number of quality brokerages you could use. Pick one of the large, reputable firms (e.g. Schwab, Vanguard, Fidelity, etc.) and open an account that allows you to place trades online at little cost. For Schwab, go to www.schwab.com, and click Open an Account.
You will need to know if you want to set up a regular brokerage account, or an IRA account. (Basically, and IRA is for retirement. You receive current tax deductions on your investments, but can’t withdraw the money until you are 55 or older.)
Link Your Checking Account
Next, you’ll want to be able to easily move money from your checking account into your brokerage account, and vice versa. At Schwab, after logging in to your account, you do this by:
... choosing the Accounts tab,
... selecting Transfers & Payments,
... then choosing Manage External Account,
... and finally hitting the Add External Account button.
The process should be similar at other brokerages; if you can’t find the right page, call their help desk (or do a search on the brokerage site).
Set Up a Monthly Transfer
After the link to the checking account is established, set up a recurring monthly transfer from your checking account to the brokerage account. At Schwab, choose the Accounts tab, and select Transfers & Payments.
This is the easiest way to get cash into your brokerage account on a routine basis (for eventual investment). For example, you might decide to monthly transfer $100 into the brokerage account.
Set Up Automated Monthly Investment
Finally, you’ll need to invest that monthly sum of cash into specific mutual funds. You will need to decide what fraction of your portfolio you want to invest in stocks, and what fraction in bonds or other investments (e.g. 80% stocks, 20% bonds). This decision depends on your risk tolerance, and when you will need to use the money you’ve invested. (Refer to my previous investing blog titled Know Thyself.)
For simplicity, you might initially invest in just one broad stock fund reflecting the entire U.S. stock market, and one broad bond fund reflecting the U.S. bond market. At Schwab, the ticker symbols for these mutual funds would be SWTSX for stocks, and SWLBX for bonds.
To make your initial purchase of shares in each mutual fund, you’ll need to make manual trades. Select Trade and then Mutual Funds if you’re using the Schwab site. Once that initial purchase goes through, you can set up automated future purchases of a fixed amount. To do this, select Trade, Mutual Funds, and Automatic Investing.
That should get you started. You’ll want to check your online account monthly for at least the first few months, just to make sure the automated transfers and purchases are working properly. If you have any questions or problems, contact the help desk at your brokerage.
As your investment base grows, and as your income increases, you may want to consider:
- Increasing your monthly investment
- Diversifying your stock investment by adding specific exposure to i) foreign stocks, and / or ii) U.S. small stocks.
- Rebalancing your portfolio annually (refer to the book recommended below).
With this system of consistent investment (called Dollar Cost Averaging), when stock prices drop you’ll be buying more shares with your monthly investment, and as stock prices increase the value of your total investment will grow. The key is to continue investing regularly and methodically.
For more on this simple investment strategy, and the rationale behind it, I highly recommend the short book titled The Elements of Investing, byBurton Malkiel and Charles Ellis.