This is the part 1 of a 2 part article on how to start investing. If you are trying to figure out how to start investing you have come to the right place. I will explain what the pros do to set up a basic portfolio, and tell you a few things to keep in mind when you start building your own portfolio. If you have read this already, feel free to skip to part 2.

What you will need to do is decide what type of person you are. Managing a portfolio is not meant for everyone, there are plenty who would prefer the benefits of having not to think about their portfolio all the time, and there is nothing wrong with this. For others, picking individuals stocks may be intimidating and choosing an already selected portfolio of stocks may be more comforting. There are investment products meant for all people and all comfort levels, one popular example, an Exchange Traded Fund (ETF), has become so common now that they can be customized for everything and everyone. These products offer the benefits of diversification, while also cutting down on Front-Loaded and Back-Loaded fees. In many mutual funds run by money managers, you can expect to find substantial fees that they charge for managing your money. These fees are one of the primary reasons it is hard to obtain returns greater than that of any of the major indices. While many in academia recite from text books all too often that the market can not be beaten, I am telling you that it can be beaten when done right. Think about it, if the market could not be beaten, why are thousands of traders on Wall Street being paid so much to do what they do? There is clearly money to be made where you can outsmart the masses and take advantage of their herd mentality. If you have the will to put in the time and effort examining companies down to the most granular details, and carefully managing your portfolio on a regular basis, then you are ready to begin building your portfolio.

Creating an Account

The first step if you have not done so already is to set up an account with a broker – I prefer the online brokers such as Scottrade, TD Ameritrade, or E*Trade to name a few – and fund your account. Investing in stocks involves risk, and because of this risk you should only invest what you can afford to be without for a long period of time (think 15 -20 yrs). Once you have determined how much you can comfortably work with, you can put this into your account and begin thinking about building your portfolio.

To begin building a portfolio like a value investor, you will want to learn how to select companies that fall into this category. To learn more about what characteristics are common of this type of company you will want to refer to “How to Pick Value Stocks,” which explains some of the fundamentals that are common in most of the winners, and conversely, what you should be cautious of.

Diversifying

One of the most important aspects of investing your money, which can NOT be stressed enough, is Diversify..Diversify..Diversify! This is the biggest key to successful investing, and while we all want to make money, by diversifying we are less likely to lose money as well, and this is even more important than making money. So how does a beginner diversify? Well, if you gave your money to a professional they would most likely spread your money into 20 or so different stocks, but this is not necessary. Did you know that if you put a list of all the publicly traded companies on a board, and then threw darts at the list to create a portfolio, it would take roughly 15 companies to be maximally diversified (Maybe that’s why the pros pick so many)? Well, luckily we aren’t picking at random, because trying to keep track of 15 companies would literally be a full time job.

Creating a well diversified portfolio is possible with 5-6 companies, and this is a portfolio a beginner can sufficiently manage. The idea to diversifying a portfolio is to pick companies and their stocks that have no relationship with each other. That means each company should be in a different industry from the rest, and its revenue should not rely on similar sources (i.e. Insurance companies and Car Manufacturers both rely on consumers spending on related purchases – with a new car comes auto insurance).

In part 2 we cover Apt Investing strategies and Common Pitfalls. Continue on to part 2 here.