5 Steps to Start Investing For Beginners

To streamline the investing process and achieve consistently positive outcomes, it is essential to have an asset allocation framework and make prudent decisions regarding the construction and composition of a portfolio.

Here are the steps necessary to succeed as an investor.

1. Understand Your Goals

Legendary management consultant Peter Drucker outlines the importance of starting with the end in mind in his highly acclaimed book, ‘Managing Oneself’.

This advice translates well to investing as it will allow the investor to focus on their goals and objectives, which in turn will lay the foundation to make tactical portfolio allocation decisions and define risk limits.

Investors with long-term goals will be able to invest in riskier strategies and can afford to be patient in periods of decline while investors having goals for a different time horizon may not invest in a similar manner.

Overall, it is imperative to identify the big picture outcomes for the portfolio, the time horizon of investment and how much risk the investor is comfortable taking in the marketplace.

2. Determine an Investment Strategy

Based on how much of their disposable income an investor is willing to allocate towards building their portfolio and the amount of time they’d like to stay invested, an appropriate investing strategy can be formed.

Here are the few tried and tested strategies that have performed well over the course of time:

Diversified, Low-cost Index Fund Investing

Active investment and making decisions on individual sectors and companies might yield outperformance for experienced portfolio managers.

However, on average, investors are better served by focusing on low-cost index ETFs that minimize churn and participate in the long-term growth of the economy.

Robo investing can be a good method to automate such investing strategies without incurring additional fees and can provide a similar outcome to managing a self-directed passive portfolio.

Risk Parity

Ray Dalio of Bridgewater Associates famously utilized risk parity investing using the flagship All-Weather fund to become one of the largest asset managers, managing in excess of $160 bn.

This method focuses on utilizing equities and fixed income products together to weather downturns by using bonds as a hedge against risk assets as they gain value in periods of turmoil and distress.

While this strategy works well in disinflationary periods, risk parity portfolios will struggle in an inflationary environment as equities and bonds sell-off at the same time because inflation will be deemed to cause demand destruction and elevate forward inflation expectations.

However, over the long term, such portfolios are often structured as a 60:40 split between risk assets and fixed income to produce steady appreciation and track benchmark returns.

Discretionary, Event-Driven Portfolios

While most investors are not active market participants as they are not full-time investors, individuals having a shorter time period to achieve their goals can utilize more aggressive risk-taking to produce returns but may experience larger drawdowns and will have to undertake an active role in tracking the markets and staying on top of the investment news cycle.

Further, such portfolios will have greater correlated positions and may pose concentration risks associated with those positions.

Activist Investing

Activist investing focuses on acquiring significant positions in publicly listed entities to secure management positions on the board to influence strategic decisions and unlock shareholder value.

While an average investor may not lead an activist investing campaign, it is not uncommon for retail investors to bandwagon prominent activists such as Carl Icahn, Bill Ackman and other well-known fund managers to follow their trail into profitable investments.

Like any other strategy, investors can achieve decent returns and should conduct their own due diligence before making any investment.

Did You Know?

Elon Musk’s acquisition of Twitter is a good example of activist investing where an investor acquires the entire company to capture long term value that current management is struggling to unlock.

Other popular methods may yield suboptimal results as they might have higher fees and not meet benchmark returns.

Successful investing requires a systematic process with diligence and discipline to perform year after year.

3. Choose Which Assets You Want to Invest In

Financial markets are extremely broad and represent several, distinct asset classes, each having its own drivers, risks and function in a diversified portfolio.

Once the investor has honed in on their goals and objectives, it lays the foundation to pick the mix of asset classes that can be utilized to achieve the target.

As mentioned before, certain asset classes perform well in particular market regimes and suffer when the global macro environment changes.

The asset classes that are most commonly allocated towards are the following:

  • Equities (Large Cap, Mid Cap, Small/Micro Cap, Convertibles)
  • Fixed Income (Rates, Credit, Mortgage-Backed Securities)
  • Currencies (G10 and Emerging Markets)
  • Commodities (Oil, Gas, Agricultural, Metals)
  • Real Estate (Residential and Commercial Real Estate, REITs)
  • Digital Assets (Cryptocurrencies, NFTs, etc.)

4. Begin Investing Your Capital

Prior to this step, it is important to evaluate all the investing platforms thoroughly to zero in on the best platform that matches the aspirations of the portfolio.

Further, after completing account opening and paperwork procedures, the investor can transfer funds into the account.

Once an investor has decided upon the strategies to deploy capital towards, this is where the rubber hits the road and trades are executed in the marketplace to establish positions.

Investors should have a plan for executing trades along with the price where they will scale back their position in case their thesis is incorrect and their position is offside.

Risk and money management is extremely critical to long-term success as even some of the most successful investors are often “wrong” and how they manage their losses subsequently is what ensures the sustainability of their portfolio. 

5. Rebalancing and Monitoring

Long-term investors can choose to rebalance and check their holdings on a periodic basis and confirm whether their original thesis still holds good.

This is imperative to not be caught in short-term market noise and utilize volatility to enter into longs or book profits if the run-up has been steep and gets overextended.

When investing for the long term, investors need to size their positions appropriately and ensure no one trade is a big part of the portfolio unless there is a significant edge or high conviction trade setup.

Further, to eliminate emotional purchases or sales of investments, investors can benefit by using a systematic rules-based approach that acquires positions for a certain dollar value or number of shares in a certain period, thereby not aiming to time markets to catch the absolute bottom.

Finally, it can be useful to do a periodic review using a top-down analysis of the macroeconomic landscape (monetary policy, fiscal policy, geopolitical risks, economic data) to identify shifts in market conditions to pare positions or lean in on certain sectors to capitalize on those opportunities.

Learning how to invest using tablet on desk

Key Considerations Before You Start Investing

While making trades and investing can seem exciting and fun to do, it is critical to appreciate the hidden risks and the possibility of incurring losses.

Here are a few things to keep in mind while allocating capital and building a portfolio:

Use Disposable Income

Investors should ensure that they’re putting money to work that they don’t intend to use in the short term to make payments for essentials and living expenses.

Further, it is financially prudent to save anywhere from 6 to 12 months of expenses before beginning to invest long-term.

Interest-Bearing Debt

Personal finance principles advocate that individuals pay down high-interest-rate debt (such as credit cards) prior to investing money as it can be counterproductive and burn the candle from both ends.

Having said that, investors can utilize cheaper forms of debt to acquire income-producing assets and magnify their returns on equity by employing borrowed funds.

Defined Entries and Risk

Investors can often self-inflict pain if they rush into trades without conducting adequate due diligence and purchase securities based on random research or headlines.

In bear markets, we can see sharp corrections in price valuations and it may present buying opportunities as a whole, but discretion has to be exercised in order to avoid catching falling knives. 

Dollar-Cost Averaging

Investors can benefit from building positions over a long period of time by consistently buying a predetermined amount, sidestepping the temptation to pick bottoms in markets.

As stocks go up in value over the course of time, accumulating shares will enable investors to add to winners and strengthen their portfolio.

Futures/Options/Securities Lending

Investors may lack the sophistication to employ derivatives or engage in portfolio lending to augment returns.

It has become well-known to use options to acquire positions and sell covered calls against those positions to generate income on long-only portfolios.

Further, custodians or investment dealers can be pre-authorized to lend out the underlying portfolio for securities lending purposes and can be another lever to generate returns on a portfolio.

Finally, investors can use index futures to hedge market risk and reduce the amount of portfolio risk in volatile periods.

Frequently Asked Questions

  • How do you start investing with a small amount of money?
  • How should a beginner start investing?

Sid Mohapatra is an energy trader based out of Toronto working in power and natural gas trading. Prior to working in commodities, Sid worked at a top Canadian bank’s fixed income and derivatives business. He possesses strong fundamentals in asset allocation, global macro thematic investing and physical commodities.

As a graduate of McMaster University, Sid specialized in Finance and has taught numerous sessions on Investing, Financial Securities and Trading courses. He led and managed the Horizon’s Trading Center at McMaster University.

Sid’s unique experience brings a breadth of institutional knowledge to the retail investing universe. He covers equity derivatives, structured credit instruments and tax harvesting techniques to help Canadians make better financial decisions in the ever-changing landscape of financial markets and investing.