The Beginner’s Guide to Investing

Getting started as an investor can seem like a daunting task at first, largely because it’s never taught. There isn’t a personal finance or investing class available unless you specifically study finance. Don’t feel alone if you have no idea where to get started. It’s never too early or too late, whether you have $1000 or $100,000. This is The Beginners Guide to Investing. This guide will outline the basic concepts to understand before becoming an investor.

Stocks and Bonds

What is a stock?

A stock is ownership, or equity in a company. When companies go public they issue stock to raise money for growth. Investors buy stock in the hopes that the company will increase in value, and/or reward them with dividends. The S&P 500 is an index of the 500 largest market capitalization companies in the U.S.

What drives stock performance?

The underlying factors that determine a stock’s price are earnings and interest rates. Earnings are more directly correlated to stock prices. If a company outperforms their earnings expectations, i.e. the company earned more than analysts predicted, their stock price will likely rise. Interest rates, more specifically the federal funds rate, on the other hand, do not directly impact the stock market. Instead, they have more of a ripple-type effect in the sense that as interest rates go up, it becomes more expensive for banks to borrow money from the Federal Reserve. This rate increase then gets passed on to bank customers causing increases in their borrowing rates. As a result of paying more to borrow money, consumers will spend less discretionary income, thereby impacting the revenues and profits of publicly traded companies where this income is otherwise spent. Outside of this, global political commentary, sensational news stories, and other noise can impact stock performance in the short-term but generally have no effect in the long-term. Rather, it’s the quantitative fundamentals (shown in earnings), and other intrinsic value (management, brand recognition) that will lead to a successful company and thus a successful investment.

What is a bond?

A company issues bonds in the form of debt. When an investor buys a corporate, municipal, or government issued bond, they get paid interest on their investment. At the end of the term, the investor receives the principal of their investment back. The face value of the bond  is called “par”, which is the value it matures at. Bonds can be bought above par (at a premium), below par (at a discount), or at par. Whether bought above or below par, if the bond is held until maturity, it would be redeemed back at par value. As an example, we’ll say our friend Joe buys a bond issued by ABC company with a par value of $10,000 and a coupon of 5%, but Joe buys it at a discount because we’ll assume ABC company’s credit rating has declined. As a result, Joe pays only $9,500 for this bond, earns $500 per year in interest payments, and then gets $10,000 back upon maturity. In this case, Joe earned the $500/yr in interest payments plus an extra $500 at maturity for buying it at a discount and holding for the entirety of its duration.

What drives bond performance?

Interest rates are important in determining how bonds perform. As a general rule of thumb, bond prices will increase if interest rates decrease and vice versa. As interest rates increase, investors know that newer issued bonds pay more, thereby making already issued bonds less valuable. Same goes for if interest rates fall – investors know that already issued bonds pay more than newer issued bonds, causing the older ones to be worth more.

Mutual funds, Index Funds, and Exchange Traded Funds

New investors usually don’t have large sums of money to invest, which makes diversification through owning individual stocks or bonds difficult. To achieve diversification, investors buy “baskets” of securities in the form of mutual funds, exchange traded funds (ETFs), and index funds.

Mutual Funds

The fund has a professional portfolio manager who is “actively” trading the securities within the fund according to their investment strategy. It’s more expensive to run the operations of the fund because a portfolio manager and his/her team are running their strategy. Investors pay higher internal expenses within than fund in the hopes that the manager can outperform their benchmark index. If you want to include a form of active management in your portfolio, look for managers who take concentrated positions or manage with “high conviction”. In other words, they don’t “hug” the benchmark. These managers are more likely to provide value and potentially outperform than one who acts like an index fund.

Index Funds

Instead of being selective in what the fund owns, index funds simply buy up a basket of shares within a given index. For example, an S&P 500 index fund will contain shares of all the companies listed in the S&P 500, where a Mutual fund will be selective in what they own. This operational structure results in very low-cost expense ratios for investors. On average, This structure has proven that over extended periods of time it will outperform its active counterpart. Index funds are known as a passive strategy. Both mutual funds and index funds are considered “open-end funds,” meaning as the fund brings in investors, it continues to issue new shares that are then either held or redeemed at the end of each day. We’ll see how this differs from ETF’s below.

Exchange Traded Funds

ETF’s have grown in popularity over the last decade due to their unique structure and low-cost. ETF’s, unlike both mutual funds and index funds, are traded openly on exchanges, hence their name. This means they have daily liquidity so you can buy and sell shares during market hours just like individual stocks. ETF’s are also unique in the way they allow investors to gain exposure to specific sectors, regions, market capitalizations, or themes that they might not otherwise participate in if forced to buy individual securities. Lastly, ETF’s are relatively cheap in comparison to their mutual fund counterpart. They are considered “passively managed” so they don’t have a fund manager buying and selling securities, rather they hold a specific set of securities according to the fund’s strategy and then issue. Their structure is similar to an index fund which results in low expense ratios.

Account Types

Taxable Account

Opening a taxable account, or brokerage account most often is the next logical step after maxing out your retirement contributions. Another reason to do so would be if you were saving/investing for a more immediate goal. There are no contribution limits or withdrawal penalties associated with a taxable account. Money can be moved back and forth freely, between your checking/savings accounts and a taxable account.

The difference between a taxable account and retirement accounts is simply the tax treatment. Unlike retirement accounts, taxable accounts receive no tax benefits. Money, you contribute is after tax and earnings are taxed as they are realized on investments.

Retirement Accounts

There are two types of retirement accounts based on their tax treatment. A pre-tax or traditional retirement account, and a post-tax or Roth retirement account. The table below shows the attributes of each, including their respective 401(k)’s and IRAs.

Other Considerations:

Rollovers: When you leave a job, you can “roll” your 401(k) into its respective traditional or Roth IRA counterpart. You may also move it into your new employers 401(k). However, by moving into an IRA you increase your available investment options. 401(k)’s are limited to the funds included in the retirement plan, unlike IRA’s, which can invest in many different securities. Rollovers are a non-taxable event if funds are moved to the new account within 60 days.

Roth Conversions: You can convert funds from a traditional IRA to a Roth IRA and pay income tax in the year that you do so. During years where your income is lower than normal or if you expect to continue to climb in your tax bracket, it may be smart to convert funds. There is no income cap on the ability to convert, therefore high-income earners can get more into Roth accounts by doing a conversion.

When to open a Traditional or Roth IRA

An appropriate time to consider opening a traditional or Roth IRA is when you’ve maxed out contributions to your 401(k). This allows you to put an extra $5,500 away in a tax-advantaged account. In most cases, I’d recommend a Roth IRA. The contributions to the Roth can be withdrawn tax and penalty free. If you ever needed funds, you’d be able to tap into your Roth contributions, whereas with a traditional, you’d be assessed the 10% penalty on top of income tax. You may also consider doing so before maxing out your 401(k) so that you can invest in securities outside what’s offered in your 401(k) plan.

Asset Allocation

Building your asset allocation is the next step in becoming an investor. Your asset allocation should reflect your tolerance for risk, time horizon, and liquidity needs. The goal of asset allocation is to maximize your return for any given amount of risk. This is achieved through diversification across asset classes, sectors, geography, size, style, etc. As you can see in the table below, it’s very hard to determine which asset class will perform best during any given year. Taking a diversified approach across asset classes helps mitigate volatility, and increase returns over time.

Risk Tolerance

To measure your tolerance for risk, do a mental exercise for yourself. If your account dropped by 20% in value over the course of a few months would you lose sleep at night? It’s always the downside exposure that investors must mentally prepare for. Keeping in mind that you’re in it for the long run helps, but some people can’t stomach swings of 20%, and unfortunately put themselves in a position where they feel they need to sell. This only usually only accomplishes realizing a loss. Many people forget that fluctuations in their portfolios are only paper gains or losses until they are actually sold, yet too often, people see the paper value of their portfolio declining and feel they must liquidate thinking they are “cutting their losses.” However, what they are really doing is “realizing their losses.” If you think you don’t think you have the stomach for potential swings of large magnitude on paper, you probably aren’t an aggressive investor and should consider adding less volatile securities such as bonds to your portfolio.

Time Horizon

Your time horizon is how long until you need the funds for which they are intended to be used. In other words, what goals are you investing for, and when will you need the funds to accomplish each goal? Most commonly it’s for retirement, in which case millennials have a great deal of time. The longer the time horizon, the more aggressive you can afford to be. The shorter the time horizon, the less aggressive you should be due to the potential volatility we discussed above.

Time Until Money is Needed Investment Choice
Less than 1 year Cash
1-5 years Cash and Bonds
More than 5 years Stocks and Bonds

Liquidity is also a critical component in determining your appropriate asset allocation. As investors’ portfolios become more complex, it becomes a much bigger priority. Stocks, bonds, mutual funds, index funds, and ETF’s are all liquid investments. Meaning you can convert them to cash quickly. There are investments such as private equity, penny stocks, collectibles, and other alternative investments that are classified as illiquid. You don’t want the majority of your investments in illiquid securities on the chance that you’ll need immediate access to the funds.

Finally, once you’ve considered these three factors and applied them to your unique situation, you’re ready to build your asset allocation. You should consider the entirety of your investments in your asset allocation, including your 401(k). Historically, stocks are a riskier asset than bonds, and thus reward investors with higher returns. An aggressive investor, with a long-time horizon, would have anywhere from 80%-100% of his assets invested in stocks, and 20%-0% in bonds. Please note, this is not a recommendation – each investor’s situation is unique and there is no “one-size-fits-all”. It is merely a general guideline and what you are likely to see from investor to investor in some form or fashion. Remember, the idea of asset allocation is to maximize your return based on the amount of risk you are willing to take and this is accomplished through the use of diversification.


As your account balance begins to grow, your asset allocation will begin to change as well. For example, let’s say you have an account that is 60% stocks and 40% bonds. Because stocks historically provide greater returns than bonds, the stock percentage will grow faster than the bonds. This will result in a higher allocation to stocks than bonds than what you had originally started with. This would mean your account is now riskier than you had originally intended. Over time the allocation will continue to move towards stocks and the risk will continue to grow as well. Rebalancing allows you to control your risk and keep you on track with your plan, regardless of what the market does, by bringing those allocation percentages back in line with your original targets (60%/40% stocks/bonds in this case).

How to Rebalance

Your first monthly statement will allow you to look back and see what your original asset allocation was, including your percentage in each security. Rebalancing on an annual basis is typically the rule of thumb. Sell the positions that have grown to a larger percentage than what you started with and allocate those funds to the positions that have shrunk. This will get you back to your original asset allocation.

Tax Efficient Investing

Being mindful of taxes as an investor is extremely important in maximizing your returns. Uncle Sam will always dip into your pocket, but being mindful of tax implications can go a long way in ensuring your keeping the most of your hard-earned money.

Long Term vs Short Term

If you hold a stock or bond for longer than 1 year, it appreciates in value, and you decide to sell it, you will owe long-term capital gains tax on your earnings. Long-term gains are taxed at either 15% or 20% percent depending on your income tax bracket.

If you hold a stock or bond for less than one year, it appreciates in value, and you sell it, you will owe short-term capital gains on the earnings. Short term gains are paid at your income tax bracket.

Therefore, holding securities for longer than a year, especially if they’ve appreciated in value, will allow you to pocket more of your earnings.

Dividends (paid by stocks)

There are two types of dividends that stocks pay for tax purposes. Ordinary, taxed at your income bracket, and qualified, taxed at either 15% or 20% dependent upon your income bracket. For a dividend to be “qualified” it must meet these two criteria:

  • Must be issued by a U.S. corporation, or by a foreign corporation that readily trades on a major U.S. exchange, or by a corporation incorporated in a U.S. possession.
  • The shares must have been owned by you for more than 60 days of the “holding period”, which is defined as the 121-day period that begins 60 days before the ex-dividend date, or the day on which the stock trades without the dividend priced in.

Again, holding stock for longer periods of time will reward you by charging less in taxes.

Interest (paid by bonds)

Most interest received from bonds is paid at your income tax bracket. The exception is with municipal bonds, which can be especially attractive the higher your tax bracket. Eaton Vance has a calculator for determining what you must earn on a taxable bond for it to be equivalent to a municipal bond where you pay no taxes on interest. Municipal bonds, in most cases, aren’t exceptionally attractive until you’ve hit the two highest tax brackets, or if you are looking conservative investment.

Tax-Loss Harvesting

Every year most investors have at least a few securities that have gone down in value. They are carrying what’s called an unrealized loss. An unrealized gain or loss is what the security has appreciated or depreciated in value since you bought it. The price that you bought it at is called the securities cost basis. You only realize a gain or loss when the security is sold.

Throughout the year, or most commonly near the end of the year, it’s smart to capture any unrealized losses. First, these losses can be used to offset gains in a portfolio, such as long-term or short-term capital gains. This means you won’t have to pay taxes on the realized gains up to the amount of realized losses. Any remaining losses can be used to offset up to $3,000 of income in the year you capture them. Furthermore, any losses that aren’t used in the year you capture them, are carried forward indefinitely, until you are able to use them.

Wash Sale Rule

When you sell a security that has lost value you can’t buy that security, or something ‘substantially’ similar for 31 days. If you do buy it back within those 31 days, the wash sale rule will enact and you won’t receive credit for the loss. This keeps investors from selling a security at a loss, buying it back the next day, and resetting their cost basis.

Trading Fees

As with anything you choose to purchase, you should be aware of your fees as an investor. Whether you choose to do it yourself, automate, or work with a professional, you should know what you’re paying for and how fees can affect your returns.

Commission Fees

Online brokerages such as TD Ameritrade, Charles Schwab, E-Trade, to name a few, offer low-cost options on commission trading. Commission trading is paying per trade. If you’re a do-it-yourself-er, you’re getting access to their trading platform, services, and research, however outside of that, not much else. Might as well keep this cost low.

Robo- Adviser Fees

Automated investing through robo-advisers is another option for investors. Sites such as Betterment and WealthFront offer this service. For a low annual fee, they will manage your entire portfolio, including your asset allocation, rebalancing, and tax-loss harvesting. If you want to be hands-off and control it from your computer, you’ll get a lot more bang for your buck this way.

Financial Adviser Benefits & Fees

As wealth grows, your financial life tends to become more complicated and stressful to manage. You may not know the ins and outs of financial laws and regulations or potential tax consequences. You may also be more likely to make more irrational decisions with your growing wealth in down markets or when you come upon a cash windfall. It is a financial adviser’s job to help you navigate all this terrain and keep you focused and on track. However, you’ll want to make sure you work with an adviser solely on a fee-only basis. This fee ranges, but typically it’s typically around 1% per year of your investable assets they are managing. Hiring a fee-ONLY adviser helps eliminate any potential conflicts of interest as they do not sell or recommend any sort of investment products that offer a commission to the adviser upon your purchase of them. Most of the traditional wealth management firms out there operate in some hybrid form of this, where they will charge you a management fee, but may also sell you commission-paying products like annuities or life insurance. That’s not necessarily bad, but it does naturally raise the question of whether the product they are recommending is being recommended solely with your best interests in mind, regardless of any sort of potential gain or loss to the adviser.

Financial Advisers also provide an invaluable service in their financial planning capabilities. An excellent financial adviser will act as your very own personal CFO for you and your family and walk you through each step of the path towards achieving your financial goals and needs. They will also do this with the utmost care, caution, and regard for you and your family. It is important you can completely trust your adviser to fulfill this for before you choose to work with them.

Automatic Contributions

The best way to stay true to your commitment as an investor it to automate your contributions. Whether you align deposits on payday or contribute at the beginning or end of the month, automation forces you to save in a similar fashion to how you contribute to your 401(k).

  • By automating contributions to IRAs or taxable account, you are dollar-cost-averaging into your investments. Dollar-cost-averaging allows you to buy more shares when prices are lower, and less when prices are higher.
  • Automation can also help take the emotion out of investing. Emotional responses to market fluctuations can be an investors downfall. By simply adhering to your automated strategy you can force yourself to stay the course.

Over time, you’ll be surprised at how quickly your accounts start to accumulate. The compounding of your investments and added contributions is very powerful.


The hardest part of becoming an investor it taking the initial steps to educate yourself on the basic concepts. Once you’ve done that, you know more than the average person and have set yourself up for success. It’s never too early, or too late to begin investing. Let your money work for you!

Have any questions? Schedule a free consultation with us today. 



Levi Sanchez, CFP®, CPWA®, CEPA®, BFA™
Levi Sanchez, CFP®, CPWA®, CEPA®, BFA™
Levi Sanchez is a CERTIFIED FINANCIAL PLANNER™, CERTIFIED PRIVATE WEALTH ADVISOR®, CERTIFIED EXIT PLANNING ADVISOR®, BEHAVIORAL FINANCIAL ADVISOR™ designee and Founder of Millennial Wealth, a fee-only financial planning firm for young professionals and tech industry employees. Levi’s been quoted in the New York Times, Business Insider, Forbes, and is a frequent contributor to Investopedia. He is an avid sports fan, personal finance and investing geek, and enjoys a great TV show or movie. His mission is to help educate his generation about better money habits and provide financial planning services to those who want to start planning for their future today!

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