How to start investing: an order of operations, not a list of tips

Most conversations about investing open with the question of what to buy. It is the last question worth asking, and moving it to the front guarantees an answer that is wrong.

First, the money that stays out

Before the first trade you need a reserve that sits outside the market and covers several months of ordinary expenses. The reason is mechanical rather than cautious: an investor without one is forced to sell securities at the moment the money is needed — and that moment has no relationship to the state of the market. Selling out of necessity is the one reliable way to turn a temporary drawdown into a permanent loss.

A reserve outside the market: why it matters more than picking securities is a separate conversation, and it matters more than the choice of broker.

Then the horizon and the goal

The horizon determines what can be held at all. Money needed in a year and money not needed for fifteen years are different money, and they cannot share a portfolio even when they share an account. More on this in The horizon: the one parameter you cannot change by deciding to.

Only then the account

A brokerage account opens in minutes, which is precisely why people open one first. It is more useful to understand first how it differs from a bank deposit: The brokerage account: what it is and what it is not.

And only at the end, the instruments

A share, a bond and a fund are not three versions of the same thing but three different mechanisms that behave differently. The distinction is set out in Shares, bonds and funds: three different mechanisms.

{{figure:compounding|caption=The gap between spending your income and reinvesting it is barely visible in the early years and decides the outcome in the later ones}}

What happens next

The first year looks much the same for almost everyone: a few impulsive trades, one painful drawdown, and a gradual realisation that discipline matters more than security selection. Going through it costs less if you know in advance where people usually go wrong: Eight mistakes of the first year.