Getting started with investing in 7 steps

Getting started with investing in 7 steps

By Victor E Gersten, M.S., CFP® | August 10, 2020

Investing can be intimidating for many, but the best way to invest appropriately is by understanding that your behavior at investing is as relevant as the volatility in the market. The best way of investing is by identifying your financial goal(s) and having a disciplined approach executing the following seven steps of “Getting started with investing.” Investing 101 will help you understand the basics of investing and will set you in the path of financial success.

How does Investing work?

Step 1 Identify a financial goal; in other words, what are you investing for? Setting a financial goal is the first step toward a successful financial future. I encourage you to set a few financial goals—for example, a short-term goal, a medium-term goal, and a long-term goal. I’ve written additional resources on “Setting up Financial Goals”, this information is accessible in the Client Library on my website.

Step 2 Next, determine when you want to reach your financial goal. In financial planning, we refer to this step as “Time horizon.” It is essential that a financial goal is associated with a time horizon because that will be a very important factor in determining the type of investments used for this specific goal. Time horizons usually fall under 0-3 years, “short-term,” 3-10, “medium-term,” ten, or more years, and referred to as “long-term goals.”

Step 3 Understand your cash flow. In financial planning, we refer to this step as “Funding your goal.” During this step, understanding your cash flow is essential. Clients who have a clear monthly budget, know precisely what amount of “money is left” at the end of the month after paying expenses and debt. It is essential to mention that often we spend money as we earn it and we do not keep very good track of it. I highly recommend being very diligent in this step. I often find ways to save my clients money by carefully analyzing certain financial behaviors. Also, this is a great time to evaluate ways to earn additional income. I’ve written additional resources such as worksheets and articles on “Budgeting 101″ and “Ways to earn additional income,” this information is accessible in the Client Library in my website.

It would be best if you moved to the following step only after careful evaluation, and maximization of your cash flow to know what amount you have available to fund your goal(s)

Step 4 Determine your “emergency fund needs”. By now, we have established your financial goal(s), time horizon, and available cash flow to fund your goal(s). However, prior to investing all your hard, earned money toward your financial goal(s), an evaluation of your “emergency fund needs” is essential in financial planning. In this step, one needs to determine the amount of money that must be kept in a separate account to be used in case of unexpected, loss of income or increased expenses. Some professionals recommend three to six months of one’s income to be kept as emergency funds, but that is too simplistic and misses the complexity of individual situations. Thus, the evaluation of the needed amount should take into consideration your type of employment, seniority, job market, homeownership status, and other specific variables related to your spouse, kids, and investment homes. I’ve written additional resources on “The perfect emergency fund”, this information is accessible in the Client Library.

Step 5 Determine your risk tolerance. As a financial advisor who has worked with hundreds of clients, I consider this step one of the most important ones for the viability of the success of your goal(s). Let’s go over the following example, John is 35 years old, and his goal is to retire by 55. His cashflow allows him to contribute $1,200 per month toward this goal, and he has determined that, based on his particular situation, an emergency fund of $15,000 is required. John has $150,000 saved up so far for retirement and $20,000 in his emergency fund. He is single and works for a well-known company as an IT consultant, and he has worked there for ten years. According to all this information, John “should choose” and aggressive investment model for his goal because his time horizon is 20 years. He has enough savings and a stable job.

Nonetheless, John has no investment experience, and he does not feel comfortable with market volatility. John, like many millennials, has experienced two market crashes: one in 2008 and now in 2020. Indeed, an experienced financial advisor should recognize that even though John “should” have an aggressive portfolio, for the viability of the plan, a lower risk is recommended. Furthermore, the financial advisor should work with John over the next years to educate him about the importance of risk/ reward to be aligned to his goal(s)

I have seen financial plans where the advisor “tells” the client what risk tolerance he or she should adopt. However, when the market crashes (it eventually always does), the client may panic and sell all out despite the financial advisor’s advice of not to sell. Unfortunately, after a “panic sell,” the viability of the success of the goal is diminished. Indeed, financial planning is about working with your client to avoid expensive behavioral mistakes such as a “panic sell.” Thus, it all begins by understanding the true client’s risk tolerance so he or she will stay with the plan during good and bad moments in the market and adjust this plan over time. Step 5 is where the advisor and client establish the highest mutual trust, and this is a fundamental part of the viability of the success of the client’s goal. I’ve written additional resources such as worksheets and articles on “Understanding your true risk tolerance” and “Establishing trust with your advisor” this information is accessible in the Client Library.

Step 6 Establish the right type of investment account for your goal(s). There are taxable, non-taxable, tax-deferred, and tax-exempt accounts with various contribution limits and phase-out amounts. Choosing the correct account is essential for tax efficiency and part of the withdrawal strategy when, later, you need to use the funds. In addition, paying close attention to all fees associated with the account(s) is very important. Some financial institutions, also known as “custodians”, may charge administrative fees to open, close, and maintain the account(s). It’s important to understand all fees and take them into account for your final return on investment (ROI).

Step 7 Start investing. Now you are choosing the best investment strategy that aligns with the specific goal you have. In other words, the investment strategy from one goal may be very different than the investment strategy for another goal. Nonetheless, one common denominator in your investment strategy is the need for diversification. In financial planning, we refer to “diversification” to investing in different asset classes. For example, there four asset classes: equities, fixed income, cash, and alternative investments.

Furthermore, some asset classes may be broken down into domestic or global and further classified as small, medium, and large capitalization. Also, they can be classified by the type of industry to get maximum diversification. Indeed, a well-diversified portfolio is diversified across all asset classes, industries, and capitalization of markets. I’ve written additional resources on “Are you diversified?” this information is accessible in the Client Library.

If you have come this far doing step 1 through 7 all by yourself, congratulations! Most people do not feel that they have the expertise to go through all these steps all on their own. Often, clients want to invest in gold, cryptocurrencies, or the best-performing stocks from last quarter. However, those strategies may lack diversification on asset classes, market caps, industries, among others. I suggest steering clear from investing in those types of investments without the help of an expert. I highly recommend working with a Certified Financial Planner™, who is your fiduciary. Fiduciary means that your advisor is working in your best interest and not in his/ her firm’s best interest. I would recommend that you ask your financial professional the following questions: How do you earn money? Are you a fiduciary? Are you a Certified Financial Planner™? Are you a Fee-only financial advisor? How many years of experience do you have? These are important questions. The Certified Financial Planner™ (CFP®) has become the golden standard of excellence in the financial services industry. CFP® professionals are required to participate in ongoing education, uphold strict ethical standards, and exemplify best business practices. In addition to working with a CFP®, make sure your advisor works as a “fee-only planner” this ensures that he or she is working in your best interest and not earning commission from third parties.

If you want to begin a conversation about investing, Gersten Financial Planning offers investment management services, among other services. We are Certified Financial Planners, fee-only, and fiduciaries for all our clients. For more information, visit my website and book an appointment to speak to us.





©2020 Gersten Financial Planning Inc. All rights reserved. | 08/2020