5 Steps to Start Investing in ETFs for Beginners

To start investing in ETFs you need to choose the right brokerage, which will meet your financial goals first .
Then, you need to define your goals.
The third step is to learn which types of ETFs.
The fourth step is to have a detailed, all-inclusive investing plan.
The final step is to set up a buying plan.

5 Steps to Start Investing in ETFs for Beginners

Choose the Right Brokerage

Choosing the right brokerage to kick off your investment journey with ETFs is an important first step. Everything from the fees you pay to the ease of managing your ETFs can be impacted by your choice. Most of the well-known brokerages offer zero fees on stock trades, which includes ETFs as well. However, always double-check because distinctions between brokerages may exist.

As a newly minted investor, you should be aware of the fees. Although maintenance and trading fees are no longer levied by many brokers for their customers, a few fees are still in place. For instance, inactivity fees might be applied if you don’t make trades after a certain period.

You should also be aware of platform fees charged by the various brokerages. To open an account, you usually just require a requisite minimum deposit. As a result of this threshold, stock trades have never been more feasible for beginners. Some platforms have restrictions that are more stringent that others, though, so look up such requirements in advance.

Learn more about the assets each brokerage allows you to trade. Not every type of investment will be tradable on all platforms. Call them up if you want to trade bonds corporations’ shares and an international ETF all within the same range of investments without any additional fees.

How good is customer service? For instance, many beginners will want a robust set of support channels. Is live chat available? Will you be able to contact them via email and phone? For you, the answers could be critical. In the initial days, you’d want the ability to reach out to someone to guide you through a transaction you’re not confident in executing on your own!

Define Your Investment Goals

The first step in your ETF investment adventure, defining your investment goals is also vital. Goals not only determine your investment strategy but also inform asset allocation and ETF selection. Whether it’s saving for retirement, a down payment on a house, or an education, each goal has its time frame and risk tolerance.

First, you must identify what you are investing for. Are you doing it for the sake of growth, stability, income, or a blend of these? In general, specific goals imply certain types of ETFs that might be suitable for these purposes. For instance, you aim to fund your retirement in 30 years; then you would probably be more interested in stock ETFs since they yield higher average returns over the years comparing to bond ETFs.

Second, define your goal in terms of money and time. For example, you seek to have $100,000 to buy a house in 10 years. This target both dictates the amount of money you shall invest and imply specific return you require from your investments. Using historical data, stock ETFs have brought investors an average of about 8% return per year over sufficiently long intervals, and bond ETF returns fluctuate around 3-5% on average.

Third, you must evaluate your risk tolerance. This is critical since it determines how much you would be willing to bear temporary market losses. Hence, if you are younger, you might be more inclined to take higher long-run stocks-related risks and volatility. As you approach your need in money, you might want to steer the investment toward devises preserving your initial capital and favoring bond ETFs or a balanced ETF that contains a mix of stocks and bonds.

Finally, decide your investment strategy. Would you prefer making lump sum investments to regular small ones? Regular investments or “dollar-cost averaging” is often recommended to cushion the blows of market volatility. For example, imagine that you manage to invest $500 every month into, say, a broad-market ETF. Then, when the market price is lower, you get more shares, and when the price is higher, you buy less of them, reducing the average cost per share over time.

Index and Sector ETFs

Index and Sector ETFs play an important role in building your investment portfolio. To begin with, you first need to understand the usage of the term. Index ETFs allow you to directly or indirectly invest in a range of securities, thus reflecting the overall performance of a specific index. For example, the S&P 500 includes “stocks of the 500 largest U.S. companies” . Investing in an ETF that reflects this index’s performance allows investors to return exactly the performance of the American economy.

In contrast, investing through a Sector ETF involves choosing some subset of the economy. For example, technology, healthcare, financial, etc., Sector ETF would allow for if-not-perfect exposure to these sectors but at least relative exposure . Consequently, if you invest in the technology sector, your investments will directly correlate with the performance of the tech industry. It is important to note that Sector ETFs are more aggressive and volatile compared to broad indexed ETFs but allows for potentially high returns. For example, in the case of the tech bubble, the difference in the return of technology sector ETF and broader market ETF was striking.

Next step would be to explore high-level information about these two types of ETFs. First of all, you will need to understand the need for index ETFs. ETFs that track the performance of any broad index are ideal for someone with limited experience who simply wants a low-risk investment to grow. Thanks to having lower risks, depending on the selected index, in our case, the S&P 500, you can speculate whether the corresponding ETF is appropriate for your portfolio. If your goal is long-term growth, the choice of an S&P 500 index ETF would be a good choice, as it has a lower risk compared to individual stocks. For analyzing Sector ETF, the following need can be identified: if you are interested in predicting something and willing to devote some time to this task – you may choose Sector ETF. If you have a strong opinion on the behavior of any industry, then to strengthen it, you can turn on the growth or emergence of projects, technologies of this sector.

Develop an Investment Strategy

When you start investing in ETFs, developing an investment strategy is one of the crucial things to do. Such an approach determines how your portfolio grows and develops. Your strategy accounts for your financial goals, timeline, and risk tolerance. This deliberate plan guides the allocation of assets and your choice between the available ETFs to optimize your investments for growth and safety.

First, decide on asset allocation. This means that you have to determine what percentage of your investments will consist of assets that classifies as different categories. For example, it might be fixed income, relatively safe bonds, or high expected return stocks. One of the most common allocations is the “100 minus your age” . According to this strategy, if you are 30, then 70% of your investments should be in stocks and the remaining 30% into bonds. This allocation should change as you age; as you reach your retirement date, the investments should be adjusted towards more conservative options.

Second, create the right selection of ETFs to balance your Stock: Bond ratio. If your asset allocation suggests a larger percentage of stocks, then to optimize safeties, consider putting the money into stock exchange-traded funds that are spread across various industries and locations. These are riskier given their specifics, but risk spread might be the right decision. With bonds, focus on more conservative options that might include, depending on your risk taking and view on near future interest rates, government, corporate, or international bonds.

Third, consider rebalancing strategically. Over time, the value of your different investments will change with the market. Rebalancing means bringing your account back to the target allocation you set based on your risk tolerance and goals. For example, if your balance is too stock-heavy, meaning a higher percentage of stocks than your chosen target, you should sell stock ETFs and buying bond ETFs. Technology and developed trading platforms might also help. For example, if you are investing through Vanguard or Fidelity, you can automate your rebalancing. Similarly, you might consider utilizing brokerage platforms that offer in advises based on your situation.

Set Up a Buying Plan

Decide how much you will invest and how often you will do so. The systematic investment by an individual on the market is often a general approach. With a designated plan, you can be sure that your cash will end up on the market as required. As such, you will be much more disciplined and specific in your goals.

Decide on the amount. Collect all the financial documents and estimate how much money you can lose each month. Working out a balance is essential – avoid investing the money you cannot plan to use and live comfortably at the same time. For example, if you have a $3,000 monthly salary, and your everyday expenses equal $2,500, then you can safely say you are potentially spending $500 in exposure on investments.

Decide on the frequency. Usually, beginners find it a great idea to have a monthly investment plan. It will coincide with the receipt of money, as people usually get their salary monthly . As such, they will also save their routine and be systematic about it. Dollar-cost averaging is a simple method that the systematic investment is also a part of. Regardless of the net asset value of shares, the investor spends the same amount of money. The thing is, in the end, he makes more purchases for his dollar – the investor buys expensive shares in advance with his dollar and at a lower price later on. As a result, the average value of a share bought by a man with a dollar is lower than the average value of a share in the same period. Decide on the assets to invest in. If your plan presupposes buying both-stock and bond ETFs, then you will be spending 60% on first and 40% of the second. Make these adjustments according to your risk/reward balance plan.

Automate. Decide on the automatic system of transfers from your bank account to your broker account – this is where your EFT assets will be placed. Automated investments help avoid emotional bias when the investors see the news reports or their bank accounts and forget about monthly purchases.

Personally, I think that the best way of systematic investing is as simple as putting down much of your salary while making sure you are not exposed to extreme danger. At the same time, I am confident that it should coincide with your plans. Many investors work under the assumption that you will stick to your investments and never alter them. However, if you feel you are receiving more funds than you can invest, there is no real shame in letting up a bit. Especially consider it when you need this money to use eventually.

Scroll to Top