Ever feel confused or overwhelmed by the world of investing? With the fancy words, mixed advice, and news that makes your heart race, it’s easy to feel a little lost. 

But the truth is, investing doesn’t have to be intimidating. In the long run, investing can be one of the best ways to outrun rising costs and build lasting wealth. All it takes is a little research and self-reflection to take the next step. 

And we’re here to help. In this article, we’ll cover the basics of investing and how to get started with confidence. 

What is investing?

Investing is the process of buying assets — like stocks, bonds, or funds — that grow in value and/or provide income. The goal is to build and preserve your wealth to meet your financial goals. (More on those below!) 

Let’s explore a few ways to achieve your money dreams. For instance, you might:

  • Buy an asset when it’s cheap and sell it when it’s more expensive 
  • Purchase assets that dish out payments in the form of interest or dividends
  • Invest in rent-paying real estate that can also increase in value

Note that investing differs from stashing cash in a savings account — most notably in the amount of risk you take. Compared to savings accounts, most investments run a much higher risk of loss, especially in the short run.

Higher-performing investment portfolios generally require a higher level of risk-taking. But just because you take on more risk doesn’t guarantee you’ll make more money — in fact, there’s a real chance you’ll lose more. 

After all, investment conditions change. Just because a stock was performing well yesterday (or last year) doesn’t mean it will perform well today (or this year).

However, with careful research and preparation, you can craft a plan to navigate the twists and turns.

How to start investing in 5 steps

If you’re not sure how to get started, break down investing into smaller, more manageable steps. Tackling one piece at a time makes the journey more approachable.

In fact, you can start building wealth in just five simple steps:

  1. Choose an investment goal
  2. Open an investment account
  3. Plan your investment strategy
  4. Diversify your portfolio
  5. Adapt for your risk tolerance

Once you’ve learned each step, you can “rinse and repeat” for every goal and account you need. 

Let’s examine each one in more detail. 

1. Choose an investment goal

Before getting in your car, you have at least an idea of where you’re going, right? 

That same principle applies to investing. Before putting your dollars to work, you should know where you’re going. Setting investment goals helps guide your way and outline your purpose. 

You can divide your investment goals into:

  • Long-term goals — Give yourself a longer time period, perhaps 5 or more years, to reach these goals. Common long-term goals include:
    • Building a house fund
    • Funding education  
    • Saving for retirement
  • Short-term goals — These goals can be achieved in under 5 years. Short-term goals may include:
    • Building an emergency fund
    • Paying for a wedding 
    • Taking a luxury vacation
    • Buying a car

Your current financial situation and each of your financial goals will impact your investing timeline and ideal investment accounts.

For instance, using a tax-advantaged retirement account like a 401(k) can defer taxes and give your investments a better chance to grow. But short-term dollars are usually better off in safer, low-risk accounts and investments — especially because there’s a penalty for withdrawing funds from your 401(k) early.

If you haven’t started investing for retirement yet, Quicken’s retirement calculator can simplify your math. Just plug in your numbers and we’ll help you set realistic, achievable goals.

2. Open an investment account

After determining your goals, your next step is opening an investment account that can help meet those goals. There are two main types of investment accounts — brokerage accounts and retirement accounts. Let’s take a look at them both.

Brokerage accounts

Brokerage accounts are your “regular” investment accounts. They provide plenty of flexibility in when, where, and how much you invest and withdraw.

If you want to build wealth, invest in non-retirement goals, and take control of your asset strategy, a standard brokerage account usually fits the bill.

Retirement accounts

Retirement accounts, like employer-sponsored 401(k)s or individual retirement accounts (IRAs), have more restrictions than brokerage accounts. They set rules and limits on contributions and withdrawals. 401(k)s also offer a limited set of investment products.

However, these accounts offer attractive tax advantages to help you save for retirement. For instance, you can usually choose between traditional or Roth accounts, which impacts when you pay taxes.

Employers also typically match your 401(k) contributions up to a certain percentage to encourage retirement savings. It’s as close to free money as you can get!

If you’re looking for an employer-matching contribution or want to enjoy a tax break on your savings, retirement accounts make a lot of sense.

3. Plan your investment strategy

Your investment strategy provides your roadmap to investing. Simply put, your strategy describes which assets you invest in, how much you contribute, and when. 

Your strategy also factors in your current financial situation and includes your preferences, your savings goals, your age, and even your comfort level in terms of risk. 

Because everyone invests for different reasons, your exact roadmap will be unique to you. But most strategies pull from some combination of these common investment strategies:

  • Buy-and-hold investing — literally buying and holding assets, usually for the long run 
  • Dollar-cost averaging — investing the same amount at regular intervals
  • Index investing — buying stocks or investing in funds that follow indexes like the S&P 500
  • Active investing — trading frequently to capture short-term profits
  • Growth investing — buying assets you think will see faster-than-average growth
  • Value investing — buying assets you think that other investors have undervalued
  • Income investing — generating steady income from interest and dividends

Learn more about popular investment strategies here. 

4. Diversify your portfolio

Portfolio diversification is the investment equivalent of not putting your eggs in one basket. By spreading your dollars across many different investments, you can manage and minimize certain kinds of risk. 

Let’s look at an example — if you only invest in stocks, your portfolio could take a hit when the stock market plunges. But if you own a combination of stocks and bonds, which often move in opposite directions, your bond holdings may prop up your portfolio when stocks decline. 

And that’s just the beginning. As you gain more experience as an investor, you might start to diversify across many factors, such as:

  • Asset classes (stocks, bonds, real estate, etc.) 
  • Industries and sectors (tech, finance, healthcare, manufacturing, and so on)
  • Geographic regions (domestic vs. international assets)
  • Company size (small vs. large companies) 

Ideally, you’ll want to diversify in several ways, like buying stocks from different industries, sizes, and geographies. Portfolio diversification acts like your financial safety net, balancing out the highs and lows to keep your portfolio on track.

5. Adapt for your risk tolerance

Your risk tolerance describes how much investment risk you’re willing and able to take. Tolerance levels range from very conservative to very aggressive, with different assets for different levels.

On your investment journey, here are the key elements that affect your risk tolerance:

  • Finances — Income, debt, and savings all impact how much risk you can afford
  • Timeline — As you get close to your goals, you may want to reduce your risk level
  • Goals — If you want to preserve your wealth more than you want to grow it, you may not want a high-risk portfolio
  • Personal comfort level — If you experience high levels of stress whenever your investments drop in value, you may prefer a lower-risk portfolio

Remember, investment risk and asset return are often linked. In general, the more risk you take, the faster your money may grow — if you don’t lose it! Conversely, taking less risk may mean that your portfolio grows slower — but it’s less likely to swing wildly in value.

It’s all about balance — you’ll need to take enough risk for your portfolio to be able to reach your goals, but not so much that you’re risking more than you can afford to lose. This is where diversification comes in handy! 

Finding your perfect risk tolerance as a beginner can be tricky — so we have a guide for that, too.

The big takeaways

Investing may sound complex — but really, it doesn’t have to be. Every seasoned investor once started exactly where you are today, and every investment journey begins with the basics. 

To get started, identify your goals, determine your strategy, and adjust for your risk tolerance. After that, you’ll keep building confidence and experience on the road to long-term success.