JIFU Long-term investing

Beginner's guide

How to start investing

Investing sounds complicated because the industry uses words designed to sound complicated. The actual process is short: decide how much you can set aside, open an account with a cheap broker, buy a broad fund, and keep adding to it. This page explains each step.

In order

Six steps

Work through these in sequence. Each one depends on the one before.

  1. Sort out your safety net first

    Before investing anything, keep enough cash in an accessible account to cover three to six months of living costs. Investing money you might need for rent or an emergency forces you to sell at the worst possible time. This is the step most beginners skip, and it is the one that causes the most damage.

  2. Decide what you can genuinely leave alone

    Pick an amount you can add to regularly — even a small one. Consistency matters far more than the size of your first deposit. A person adding a modest sum every month for twenty years usually ends up ahead of someone who invests a lump sum once and then stops.

  3. Choose a low-cost broker

    A broker is the company that holds your account and places your trades. The things that matter, in order: is it regulated in your country, what does it charge per trade, and what annual fee does it take from your holdings. Fees come straight out of your returns, so a fund charging 0.05% a year leaves you meaningfully more than one charging 1%.

  4. Learn the difference between a share and a fund

    A share is a stake in one company. A fund (like an ETF) is a basket of many investments bought as one. Most beginners are better served by a broad fund: it spreads your money automatically, it is less work, and it removes the need to guess which single company will do well.

  5. Understand what you are buying

    Whatever you pick, read what it actually holds before you buy. A fund called "S&P 500" holds America's largest 500 companies. A "total market" fund holds essentially all of them, large and small. An "international" fund holds everything outside your home country. If you cannot explain what is inside it in one sentence, do not buy it yet.

  6. Buy, then leave it alone

    Place your first trade, then set up a regular automatic purchase if your broker allows it. After that the main work is not touching it. Markets will fall — sometimes sharply — and the people who do well are usually the ones who kept buying quietly through those periods rather than selling in a panic.

The vocabulary

Concepts worth knowing

Six terms that explain most of what you will read about investing.

Compounding

Your gains earn gains of their own. It is the single most powerful force in long-term investing, and it needs time above all else — which is why starting early matters more than starting big.

Diversification

Spreading money across many investments so no single failure hurts you badly. A broad fund gives you instant diversification across hundreds of companies, industries and often countries.

Expense ratio

The annual percentage a fund takes from your money to run itself. Charged quietly, every year, forever. On a large pot it adds up to a substantial sum, so lower is better.

Dividend

A cash payment some companies make to shareholders out of profits, usually quarterly. You can take it as income or reinvest it to buy more shares — which is how compounding accelerates.

Index

A defined list of investments used as a measuring stick — the S&P 500 is an index of 500 large US companies. An "index fund" simply holds everything in that list rather than trying to outguess it.

Time horizon

How long until you need the money back. This determines how much risk is reasonable. Money needed in two years should not be in shares. Money you will not touch for twenty years is the right candidate for investing.

Avoid these

Common beginner mistakes

Trading instead of investing

Frequent buying and selling is not investing — it is an attempt to predict short-term price moves, which most professionals fail at. It also generates fees and, in many countries, tax events. Buying and holding for years involves far less work and has historically produced better results for ordinary people.

Chasing whatever went up last year

Strong recent performance is not evidence of future performance. Notice that our Top 10 list is ranked by one-year change — that is a historical fact about the past, and it is not a forecast. Reading it as a prediction is exactly the mistake this section is warning about.

Paying high fees on a simple product

If someone offers to manage a simple basket of large companies for 1–2% a year, you are almost certainly paying for something you can get for a fraction of that. Fees are guaranteed; outperformance is not.

Investing money you will need soon

If the money is for a house deposit next year or an emergency, shares are the wrong place for it. A market fall at the wrong moment turns a temporary dip into a permanent loss.

Putting it together

See the shortlist

The Top 10 page shows ten large companies and ten broad funds, with a plain reason to hold each one — and no buy or sell signals.

See the Top 10 →