The “Dip Your Toes” Investing Strategy for Beginners.

If you are a beginner, there can be a lot of fear and uncertainty around investing. Fears of “market crashes” and “losing it all” run rampant. Usually, after investing for a while and seeing that you didn’t in fact “lose it all” (you probably actually gained) the fear subsides and you gain trust in the process. The strategy I propose today allows you to dip your toes in the water, gain the trust in the process, and decide whether investing is for you. And all this without putting anything overly consequential on the line…

Have any of you ever seen the movie Jaws? It’s an absolute classic and I enjoy it thoroughly. From ages 8 through 25, as a tradition, I watched it every summer when we would meet in New Hampshire for my mother’s anesthesia class reunion. It was a very small class and we would all stay together in the home of one of her classmates.

They graduated in 1975 which is the same year that Jaws was released, hence the tradition.

Good times.

One lingering byproduct of watching Jaws from age 8 thru 25 is that I am irrationally terrified of swimming in the ocean. Normally, I love to swim and always have. But I can think of many times when I opted not to, for fear that a 25-foot Great White Shark would gobble me whole.

As a result, I mostly stick to ponds and pools.

However, there are a few beaches where I can bypass this irrational fear, and a few reasons for it. The first reason is that the water is very clear. It takes out that element of sharks lurking in hidden shadows. The other reason is that I have successfully (“successful” as in not being eaten by a shark) swum there many times before.

This is essentially the same premise I propose for anyone who is a beginner with investing. Make it low risk and dip your toes in. Then, once you see the waters are relatively clear, you can enjoy the swim and all the benefits that accompany it.

What is the “Dip Your Toes” Investing Strategy?

Essentially, for the “dip your toes investing strategy, you take money that you “were going to spend anyways” and invest it instead. That way, if you were to lose it all (highly unlikely) and the market crashes, you can rationalize that you weren’t supposed to have it in the first place…

A sort of easy come, easy go way of thinking.

But, if the market behaves as it has since it’s conception, by trending up, then you might decide that investing isn’t so scary after all. The fear of lurking danger that is unlikely to materialize subsides, and your confidence rises.

I talked about this in my About page. For me, if I do not invest then I’m staring at 25 years of mandatory work. If I do invest, I calculate that my mandatory work time is reduced to somewhere between 5 – 9 years. This, along with knowing the history of the market, and having experience investing for a while, is enough to keep me invested long term.

But for others, that might not be enough. They might lack the experience, or because only bad news makes the news, the stories of the market crash of 1929 might have left an indelible print on their minds.

This is similar to how the movie Jaws affected my ability to swim in the ocean. Rationally, I know I am more likely to get in trouble driving to the beach, but rationale and fear don’t always mix so well.

So, if this is the case for you, and the idea of investing in the market seems daunting, I don’t blame you at all.

Maybe though, if you invested a little money that you were going to spend anyways, you wouldn’t be so concerned about it. You could watch it for a while and see if it takes some of the fear and mystery out of investing.

This is the premise that would work for me and that’s why I propose it. Now let’s look at where we can get these “expendable” funds with which to make the first investment…

Funding Your First Investment

We’ve already talked about “money you were going to spend anyways” above. So what is that? Nobody wants to frivolously throw money away or burn it up so what are we talking about here?

Well, first of all, I definitely don’t think of investing as “burning money” or “throwing it away”. Personally, I believe it’s a great tool to make your money grow.

But what I’m really talking about is money that you were going to spend on something you don’t actually need.

To start, take a month’s worth of the non-essential spending (that we all do), and direct it towards investing instead.

Instead eating out or getting a coffee out, set that money aside for investing. Instead of treating yourself to ice cream or purchasing a gadget for yourself on Amazon, put that money aside for investing instead.

That way, if your worst fears materialize, you’ll know that you only had to make your own coffee and some home-cooked meals instead of eating out for a month or so. In other words, it’ll be no big loss because you were going to spend that money anyways.

Another way of looking at it is that you are increasing your savings rate (if only temporarily). If this speaks to you and you want other ideas on how to save, check out this post I wrote on Drastically Improving Your Savings Rate.

Does that make sense? It’s just a way to rationalize taking that big step into the scary unknown.

Then, once you have accumulated this surplus of expendable cash (whatever the amount ends up being), you can think about investing it…

Making Your First Investment

Let’s face it, doing something that you find intimidating, is very difficult. As an aside, it’s also a worthwhile practice for teachers to do anyways. As adults we can more easily avoid the practices that we don’t feel successful at and that intimidate us. For students, many don’t have a choice what they do on a given day at school and it’s worthwhile to be able to empathize with this sensation.

So, if it helps, you can make this the thing you do that scares you (from Eleanor Roosevelt’s famous quote) and tell your class about it!

But, my suspicion is that once you try it, you’ll wonder what you were so afraid of.

You can go online or just call up the brokerage company you want to start investing with. Personally, I have accounts with Vanguard and with Fidelity. I like both.

Next, you open an account and you transfer money into that account. This whole process probably takes 15 – 30 minutes.

Then, after a few business days, once the money has transferred, you can choose the fund that you would like to purchase.

Finally, just sit back and enjoy the show.

And just to be clear, I do NOT get any kickback from Fidelity or Vanguard. Also, as anyone reading this site regularly already knows, I am not a financial expert in any way shape or form. You should only do what you think is right for your money.

If you are interested, and not sure where to start, I follow a very basic investing strategy that I wrote about. It outlines some of the simple strategies I employ and the reasons I got there (as well as the people that influenced me). It’s called Investing Basics Made Very Simple.

In it, I talk about total market index funds as the main vehicle I use to invest. If you’re interested, I did a horse race between 3 of these funds to see which one came out ahead. The results are pretty interesting and you can find them in the post entitled Total Market Index Fund Horse Race.

Based on that article, and based on how much money you decide to “dip your toes” in with, you may want to choose FZROX (Fidelity Zero Total Market Index Fund) as your first fund. The reasoning is simple. Unlike other funds it does NOT have a minimum investment requirement. You can invest just one dollar if you want to! Most funds require a minimum investment somewhere around $2,500 so FZROX, might be a good one to try out if you only want to try a little at first… But that is entirely up to you.

Side note: In that horse race post I linked to above, there is another fund I reference as well that does NOT require a minimum investment either. It could be more to your liking so give it a look!

So far, the steps seem pretty simple don’t they?

1. Save some money you were going to spend frivolously anyways.
2. Open an account with a brokerage company like Fidelity or Vanguard.
3. Wait for the money you are investing to transfer into your account.
4. Buy into a fund.
5. Sit back and observe.

That’s where we are so far. And really, depending on how that goes for you, there may only be a few more steps in the process!

There are No Guarantees in this World

There is a scene from Jaws that loosely connects to what I’m about to say here. Really though, it’s just a classic scene that I’m shoehorning in! It’s a great opportunity to meet Quint, the cagey, seasoned captain hired to catch Jaws. It’s also a way to see a very young Richard Dreyfus!

The part that captures it starts around the 30 second mark. Go ahead and take a break to view it. You deserve it!

In the scene, Dreyfus’s character is packing an “anti-shark” cage, the likes of which old Quint has never seen. He has questions.

You go inside the cage? Cage goes in the water… You go in the water… Shark’s in the water… Our shark?

Singing: Farewell and adieu to you fair Spanish lady…

A total classic! But also totally ruined me for swimming in the ocean! Oh, the inner conflict!

Really though, all this is my way of saying that there are no guarantees in this world. If I go swimming in the ocean, I could be bitten by a shark. The odds are exceedingly low. But technically, it could happen.

The same, is true in investing. You could, in theory, lose it all.

Here’s what helps me think through this though:

1. The odds for this are exceedingly low (according to the experts that I trust).
2. Over time and throughout history, the reality has been that the market has gone up. I don’t want fear to interfere with my opportunity to capitalize on those money-earning opportunities. If fear dictated my actions I probably wouldn’t get out of the bed in the morning.
3. I heard JL Collins (a major player in the Financial Independence movement)speak about this and he said something along the lines of this: if the market crashes and burns and there is nothing left of it, we will all have far greater problems on our hands than the loss of our money.

That last one is kind of grim. Nevertheless, it, along with the other 2 reasons, are more than enough to keep me fearlessly swimming! No, there are no guarantees, but for me, the pros far outweigh this slim possibility of cons.

Deciding Whether or Not to Invest Long-Term?

After employing the “dip your toes” strategy, people may differ in how long it takes them to decide if investing is for them. This can be based on your personality, how well the fund does in that time, or any number of other factors.

But, if you do decide you want to make the plunge, there really isn’t much more you have to do.

You’ve already got the account open and, in theory, you have probably decided that investing might be the thing for you.

The probable next steps, as I see them, are as follows:

1. Continue to increase your savings rate so you have more to invest.
2. Set up a monthly deposit amount into your investing account. (You can automate this from your bank account or your paycheck (usually). You can also have it automated so the money automatically invests in whatever fund(s) you decide upon.)
3. Optional. Consider setting a pre-tax investment account through your district. This can be a 403b, 457 or a HSA (Health Savings Account) depending on what your district offers. In most cases, these are very favorable because they get deducted from your check before taxes. Once you are certain that you won’t be needing the money any time soon (perhaps after establishing your Emergency Fund ), you may find it beneficial to start thinking long term and getting more bang for your buck with those pre-tax savings.

That’s it! As you can see, taking the time to set up the “dip your toes” account, was more than half of the battle. After that, once you have everything automated, you really don’t have to do a thing!

Beginning Investment Strategy – In Summary

I think it’s very natural to be intimidated by the idea of investing especially if you are a beginner. All the imagery that we absorb from the ether paints a certain image. This image suggests that investing is very complicated, time-consuming, stressful, difficult, and only for a select few people.

The reality, however, can be so far from that perception. There are paths that are recommended by very successful people, and are very easy to follow. These paths take advantage of the idea that has held true since the market’s conception.

Over time, the market always goes up.

The “dip your toes” investing strategy for beginners is a way for people to shed all of those preconceptions and view investing through a much clearer lens. Then, through this clarified view, they can make a decision that works for them.

It’s a simple, set -it-and-forget-it, approach to investing that reassures you about your future. It also allows you to focus on whatever important work you are doing in the present! Having such a low-risk, high reward proposition, is exactly what it would take to get someone like me to take the plunge.

I hope you find it helpful in your own lives as well.

Thanks for reading everyone. If you have any thoughts on what tipped the scales for you towards investing, I’d love to hear them. I’d also be interested in hearing about what, if anything, is still holding you back. Feel free to comment below or reach out and contact me any time!