I am starting a new series.  I am going to walk investors through the steps of investing. As always I am targeting investors who are just starting out or small money investors. It has been my intention for a while to set up a separate chroma investing account and to use it as an example of how to and not to do things. I have always invested my own cash in every investment idea I suggested. But I also realized that while this can show returns accurately, as well as eliminate hypothetical bid ask spread issues, it is not ultimately accurate because I am not factoring in  how asset allocation affects total return. Hopefully, during this process those of you who need to will learn value investing.

Before you can begin investing,  you have to have money set aside for this purpose? This is not a personal finance site, but one must get control of their personal finances to invest effectively. I like to keep things simple. So here it is. If you have a $10,000 credit card balance at 18% you are not ready to invest, unless you have oodles of cash and that is your Starbucks bill. First, make sure you are saving some money every month above all your bills. If you have credit cards pay them off, unless you have somehow lucked into a zero percent credit card. If you don’t have a budget, make one. If you have a budget, stick to it. None of this new, and if you are undisciplined with your finances or have no financial education, it may take some time to master this first step. Be patient and dig in. Once you have repaired your personal balance sheet. You are ready for the next step.

For the purposes of this example I am going to assume that I can put aside $200 per month for your eventual investing project. You will need to save some money, if you are starting off with very little, just to open a brokerage account. This will be come clear in the next installment when discuss constructing an investment portfolio. If you have any ideas, please post.

2 Responses to “Investing 101 for Small or Beginning Investors – Let’s Start”

1. Parker Bohn
   March 12th, 2010 @ 5:43 am

   I am an amateur (I’ve been investing for 3-4 years), but here is my most basic advice for any investor, even passive investors.

   1) Have a method. If you don’t have a method, or if you switch methods every 3 months, you will not achieve good results, and your mind will always exist in a state of tension and uncertainty.

   2) Spend some time thinking about market price volatility. It is scary when a stock or even the entire market drops 50%. How will you react emotionally? Does your method prepare you for this? Will you be able to stick to your method?

   3) Also spend some time thinking about commissions and other expenses. If you think about your returns in annual %’s, perhaps you should think about your expenses in annual %’s of your portfolio as well. If your expenses are high, are you confident your results can overcome this drag?

   4) Practical advice – if you plan to buy/sell thinly traded stocks, NEVER place a market order on one of them. You could be eaten by the bid/ask spread. Use limit orders exclusively on these stocks.

2. chroma
   March 12th, 2010 @ 11:18 am

   Parker,

   As always thank you for your advice. These are all good ideas. While I have covered some of these topics in my blogs, it is important reiterate vital concepts. I think your point number two is particularly relevant, which is intimately tied to number 1. If you look at market volatility through the prism of a value investing method, it is not scary, but an investing opportunity.

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