Expecting a Bonus? Part 2: How to Get Started Investing

In my previous article, I discussed how people in the enviable position of expecting a bonus should consider investing a portion toward their long-term financial future. My own rule-of-thumb is to invest at least half of any bonus, but everyone should try to invest as much as they can afford. The idea, especially if you’re young and just getting started, is to build an investing foundation that can grow in the decades ahead through the power of compounding.

If you like the idea of investing a portion of your bonus, you might still have no idea how to get started investing. There’s so much information available on investing, it can become very confusing and leave you unsure of what to do. But doing nothing is not an option. Here are some quick steps to get you started on your investing journey.

1. Open a brokerage account: to invest in securities, you’ll need to have a brokerage account to buy & sell and hold your investments. A brokerage account is similar to a bank account, except that it holds securities (stocks, bonds, ETFs) instead of cash. Make sure your account is with a government registered and regulated broker. Once you deposit funds in your brokerage account, you’re ready to start investing.

2. Decide what asset classes to invest in (asset allocation): The two main asset classes for most investors are ‘stocks’ and ‘bonds.’ Stocks are considered more risky than bonds, but also have the potential to produce higher investment returns than bonds. (See the table of historic annual rates of return of various asset classes below.) Think about your investing time horizon and your risk tolerance before settling on an asset allocation If you’re young and have a long investing horizon, you might be willing to allocate more to riskier assets, such as stocks. As an example, let’s say you decide to split your assets 80% in stocks and 20% in bonds.

3. Schedule Your Investments: When you’re investing a lump sum, such as a bonus, it’s usually a good idea to break it up into smaller pieces and spread it out over time (for example, 25% every month or each quarter), rather than just invest it all at once. That way you can reduce the chances of investing at a market top and increase the chances of acquiring the same investment at a lower cost. The technique is called ‘Cost Averaging.’ The idea is that no one can accurately ‘time’ the market (pick tops and bottoms) all the time, so just invest on a fixed timetable, and let the market do what it will. Chances are good you’ll buy portions at higher and lower prices, resulting in a lower average cost than if you invested all at once. And you won’t have the stress of trying to out-guess the market. Remember, you’re investing for the long-term, so it shouldn’t matter where the market is today or tomorrow, but 20 or 30 years from now.

4. Select your Investments: This is the last step before you actually invest your money. While some people think it’s the hardest part, it can be made very simple and easy. Don’t be overwhelmed by the huge number of individual stocks and bonds you can invest in. (Picking individual stocks and bonds is a more involved process and beyond the scope of this article.) Instead, you can focus on indexes of global securities markets, which are readily available through ETFs (Exchange Traded Funds—learn more about ETFs). ETFs are baskets of stocks or bonds that are traded like shares of individual stocks. There’s a wide variety of ETFs with different strategic focuses, such as global markets (e.g. developed/emerging world), regional markets (e.g. Asia, Latin America), national markets (e.g. China, Germany), and sectors of markets (e.g. technology, energy).

Example: You might think investing in Technology stocks is the way to go. You could pick a single technology stock, such as Apple (AAPL) or Baidu, and hope it does well. Or you could invest in a technology-focused ETF, such as the Vanguard Information Technology ETF (VGT), which contains 386 technology stocks. Buying the ETF gives you built-in diversification versus buying a single stock.

5. Invest in your Strategy: Now it’s time to put your money to work. Invest through your brokerage according to your asset allocation strategy and individual security selections. If you’re investing a lump sum, stagger the timing of your investments at regular intervals and in equal amounts. Try not to get caught up in the day-to-day changes in the value of your portfolio. Stay focused on the long term. Do make adjustments periodically to stay within your allocation strategy (rebalancing), perhaps quarterly or semi-annually.

If you get a bonus, congratulations on your hard work! If you’re able to invest a portion of that bonus, congratulations on building your financial future! Somewhere down the road, you’ll look back and see how smart it was to skip that new smartphone and invest for your future.

If you get a bonus, congratulations on your hard work! If you’re able to invest a portion of that bonus, congratulations on building your financial future! Somewhere down the road, you’ll look back and see how smart it was to skip that new smartphone and invest for your future.