I made a big mistake when I started investing by jumping into the deep end with both feet and learning how to invest through the school of hard knocks. It ended up costing me some of my hard-earned capital as a result.
If you want to avoid making the same mistakes I did early in my investing journey, read on. There's a far better way to go about it and the first step begins with focusing on the right type of investment; in this case, a single Vanguard index fund.
Here's how I should have started when I was a beginner investor.
Experience matters when it comes to investing
Whether it's the best way to learn or not is debatable, but it's well-known that humans learn by making mistakes, and, boy, did I make a lot of mistakes when I started investing.
I thought Wall Street was a way to get rich quick, a misconception that (early on) resulted in me investing in penny stocks , high-risk turnarounds , and fads, among other things. To be fair, I made some money along the way, but that just fed the beast, leading me into more and more dangerous investing territory.
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It took years for me to find a path forward that was reasonable, risk-appropriate, and right for me. The way I found that path (selecting stocks of longtime dividend payers with historically high yields) was by reading. And reading some more. Books by Wall Street legends like Benjamin Graham ( The Intelligent Investor ), Philip Fisher ( Uncommon Stocks and Uncommon Profits ), and Geraldine Weiss ( Dividends Don't Lie ) got me on the right path. The writers made the mistakes and offered me a chance to learn from what they had already figured out.
But at the same time, I was putting money to work without any idea of what I was really doing. I was throwing darts at a wall. And I didn't even know if there was a dart board on that wall. It was a risky, ill-advised way to learn to invest. I was learning, but still making robust mistakes.
You don't have to do that. You can learn from accumulated knowledge and do it while investing in a time-tested manner.
The Vanguard Balanced Index Fund is the foundation you need to learn
What should I have done? I should have bought shares in the Vanguard Balanced Index Fund (NASDAQMUTFUND: VBIAX) .
This fund effectively buys two other mutual funds, one that tracks the entire U.S. stock market and one that tracks the entire U.S. bond market. The mix between the two is 60% stocks and 40% bonds. In one single fund you get the entire U.S. investable universe, or, to put it another way, you own the market. And all it costs is an expense ratio of 0.07%.
This one fund provides a foundation that, frankly, you could use for the rest of your investment life. You could just own this fund and never do anything else and if you invest for long enough you're highly likely to come out very well when you retire. And it doesn't have to be this particular balanced fund. You could select another one, just make sure that you own a fund that gives you broad exposure to both stocks and bonds.
That said, you could do something similar with two exchange-traded funds (ETFs), as well. Simply put, ETFs are like mutual funds that trade like stocks. Just make sure one of the ETFs offers broad equity exposure, like the Vanguard S&P 500 ETF (NYSEMKT: VOO) , and the other broad bond exposure, like the Vanguard Long-Term Bond ETF (NYSEMKT: BLV) . Those are just two examples. The key is buying broadly diversified equity and bond ETFs. Then invest 60% or so in the stock ETF and 40% or so in the bond ETF.
Once you have that foundation, you can build off of it. You can read and digest the knowledge that has been offered up by investors who have real-world experience and decide what makes sense to you. Then you can take a small portion of your investment savings, say 5% to 10%, and dip your toes in the water with the knowledge you have gleaned from the successes and failures of those who came before you.
As you get more and more comfortable with investing and fine-tune the approach that works for you, you can actively manage more of your money. Keep going until you are managing 100% of your own savings. Alternatively, you could decide that the task of investing is best left to others and leave most of the money in your index fund or ETFs. Maybe you switch from the broad funds you started with and fine-tune by shifting in an investment direction that makes more sense to you, giving a growth or value bias to your portfolio, for example. The important part, however, is to make these decisions from the knowledge foundation you build on top of your early investment foundation.
Take your time and learn to walk before you run
When I was a young investor, I wanted everything instantly and that's just not how the world works. Don't make the mistakes I made by rushing into the wild sea of Wall Street before you actually know what you are doing. Take a measured approach by using a balanced fund /portfolio as your first investment approach. Read and learn. And then, slowly, start to invest on your own so you can really figure out what works best for you.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy .
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