Starting to invest
As soon as you have been able to save a bit of money, which can be as little as a few hundred dollars, it will likely be beneficial to your future financial well-being to make conscious decisions about investing. Learning early and understanding some general principle can make a difference of 10,000 USD or much more towards the time of your retirement. This guide will help you with general considerations and gives you step-by-step instructions on how to build a simple diversified investment portfolio.
Important note: While investing into the stock market will be likely beneficial to most people, we also understand that it is not for everybody. We therefore explain what to consider before making an investment.
Introduction
Why should you start investing into the stock market?
Simply put, money is a tool to keep track of mutual obligations across space and time.
Under what conditions should you not invest into the stock market?
While we believe that investing into the stock market is a good idea for almost everybody who intends to save a part of their wealth for retirement or longer term financial goals that are 10-15 years away, we advice against stock investments in the following situations:
You are in debt with interest. If you have high debt with high interest, it is typically best to pay off as much as possible as soon as possible. This applies particularly to credit card debt and other consumer debt (including car loans). The situation is a bit different for mortgages with reasonable interest rates and a clear long term strategy. If you have student loans or similar educational debt with a clear payment schedule, it may also ok to invest in parallel. Generally, you should compare the interest rate of your debt with the average (but highly fluctuating) return of ca. 5-7% p. a. of the international stock markets. If your interest rate is significantly below with low risk of you defaulting in the future, you could invest a little bit - otherwise, it is almost always better to use your money to get rid of your debt and thereby effectively gaining a certain return equal to the interest rate that you are saving.
You need the money soon. If you are planning a large purchase (typically: down deposit on a house), you should make sure that you have sufficient funds available that are not tied into the stock market. The reason is that the value of stocks can easily fluctuate around 15-25% within a given year and significantly more if there is a crash or some market surge. As it is impossible to predict such fluctuations with certainty, it is imperative that you ensure sufficient available funds as soon as you know that you will require a certain amount. If you have the certain plan that you would like to purchase a house within the next 5-10 years, you should calculate carefully how much funds you require for your down deposit and
Step 1: Open brokerage account
Step 2: Start initial investment
Once you have opened your brokerage account, there is no good reason to wait with your initial investment. Rather than thinking and debating what to purchase, you can just start with a reasonable amount.
This should typically be at least 1,000 USD, but not more than 10,000 USD. If you have less, we assume that you will be able to save more in the future, so it is ok if you invest it all for now. If you saved up significantly more, such as a few 10,000 USD or more, you can consider to make an initial investment of 5-10% of this amount. Note that we
Step 3: Refine a long term strategy
Further resources
Finanztip. One of the most down to earth guides on what to consider if you want to invest money (in German).