FT MarketWatch

Investing 101 – Beginner’s Guide to Building Wealth

Investing 101 is about understanding a few key ideas: why investing matters, how risk and return work, what you can invest in, and how to put together a simple, sensible plan you can actually follow for years.

Key takeaways:
  • You invest so your money can grow faster than inflation and support your future goals.
  • Higher returns usually require accepting more short-term ups and downs.
  • Most investors use a mix of stocks, bonds and cash via funds and ETFs, not individual picks.
  • A simple, diversified, low-cost plan you stick with usually beats complex strategies you abandon.

This Investing 101 guide is a broad overview. From here, you can dive deeper into specific topics like bonds, mutual funds, day trading, options and retirement investing.

Why invest at all?

You invest to give your money a chance to grow. Sitting in cash may feel safe, but over time inflation erodes purchasing power. Investing allows you to:

Investing does not eliminate risk. Instead, you choose which risks to take and how to balance them against potential rewards.

Setting goals and time horizons

Before choosing investments, it helps to define what you are investing for and when you will need the money. Common goals include:

In general, the longer your time horizon, the more short-term volatility you can tolerate, and the more growth-oriented your portfolio can be. Very short-term goals typically belong in safer vehicles like cash and high-quality short-term instruments, not aggressive investments or leveraged trading such as forex or futures.

Risk and return basics

Risk and return are linked. Higher potential returns usually require accepting more uncertainty and larger temporary declines. Key ideas:

A “safe” investment that loses to inflation every year may be risky in a different way: you might not reach your goals. A very aggressive portfolio may grow faster on average but be too stressful to hold through market downturns. Investing 101 is about finding a balance you can live with.

Core building blocks: what people invest in

Most long-term investors use the same main building blocks:

Some investors also use real estate, alternative assets or derivatives such as options and futures. These are typically considered more advanced tools, not core building blocks for beginners.

Active vs. passive investing

Investing strategies fall broadly into two camps:

Many studies show that, after fees, a large portion of active strategies fail to beat simple index approaches over long periods. This is one reason low-cost index funds are widely used as core holdings in retirement investing.

Asset allocation: mixing stocks, bonds and cash

Asset allocation is the way you split your portfolio among stocks, bonds and cash. It is one of the biggest drivers of long-term results and overall risk.

A few broad allocation ideas (for illustration only, not advice):

Over time, you can adjust your allocation as your goals, income and comfort with risk evolve. Our retirement basics guide goes deeper into this for long-term planning.

Using retirement and tax-advantaged accounts

Many countries offer accounts that provide tax advantages for long-term investing (for example, RRSPs, TFSAs, 401(k)s, IRAs and similar plans). While the details differ, ideas often include:

Using these accounts effectively can materially improve your long-term results. See Retirement Investing Basics for more discussion of how these fit into a bigger plan.

Fees and costs: why they matter

Fees may look small in percentage terms, but they compound over time just like returns. As an Investing 101 rule, it is worth paying attention to:

All else equal, lower-cost options leave more of the gross return in your pocket. Our mutual funds basics guide explains MERs and loads in more detail.

Simple beginner portfolio ideas

You do not need dozens of positions to have a diversified portfolio. Many investors use a small number of broad funds, such as:

The exact mix depends on your goals and risk tolerance, but the key principles are:

Rebalancing and staying on track

Over time, market movements will push your portfolio away from its target allocation. For example, if stocks perform well, they may become a larger share of your portfolio than you intended. Rebalancing means periodically adjusting back to your target.

Common rebalancing approaches include:

Rebalancing encourages the discipline of “selling some of what has gone up and buying what is relatively cheaper”, instead of chasing recent performance.

Common beginner investing mistakes

Some pitfalls show up again and again in Investing 101:

Having a simple written plan and sticking to it usually beats reacting to every headline or market move. Our guides to day trading, forex, options and futures explain why these are generally better treated as advanced or speculative activities, not the core of a long-term plan.

Getting started: a basic checklist

If you are ready to move from reading Investing 101 to actually investing, you might:

  1. Clarify your goals: short, medium and long term.
  2. Build an emergency fund: cash set aside for unexpected expenses.
  3. Choose an account: understand your local retirement and taxable account options.
  4. Pick a simple allocation: a mix of stock and bond funds that matches your risk tolerance.
  5. Automate contributions: regular monthly investing, if possible.
  6. Review periodically: once or twice a year, rebalance and adjust if your life situation changes.

This guide is for general education only and is not personal financial advice. Your own plan should reflect your income, debts, responsibilities, time horizon and comfort with risk. A qualified adviser who understands your situation can help you customise these ideas.

Investing 101 FAQ

How much money do I need to start investing?

You usually do not need a large amount to begin. Many brokers and fund providers allow small initial investments or low-cost monthly contributions. The important part is to get started with an amount you can afford and build the habit over time.

Is it better to pay off debt or invest?

High-interest debt (like credit cards) is often a priority to pay down, because the guaranteed “return” from eliminating that interest can be very high. For lower-rate debt, some people choose a mix of paying it down while also starting to invest for retirement. The best approach depends on your interest rates, cash flow and risk tolerance.

Should I pick individual stocks or use funds?

Many beginners find it easier to start with diversified funds that track broad markets, because they reduce company-specific risk and require less research. Individual stock selection adds another layer of complexity and risk. If you do pick stocks, some people limit them to a smaller “satellite” portion of a portfolio built mainly from funds.

How often should I check my investments?

Checking too often can make normal volatility feel more stressful and may tempt you to make emotional decisions. Many long-term investors review their portfolios on a set schedule (for example, quarterly or annually) instead of reacting to daily moves.

Next steps: if you are building a long-term plan, read our Retirement Investing Basics. To understand specific building blocks, see mutual funds, bonds and stock trading sites. For the higher-risk side of the spectrum, our guides to day trading, forex, options and futures explain how those markets work and why they are best treated as advanced tools. For quick definitions, visit our Dictionary Index.