The Ultimate Guide to Online Investing

At one time, my idea of investing involved purchasing as many Beanie Baby collectibles as I could find and then let them appreciate in value. Terrible idea on so many levels.

Now I understand that the best way to invest for the future is through old-fashioned securities, like stocks, bonds, and mutual funds.

And these days, the best method of online investing is easy AND cheap.

I’m used to paying for performance but thats not true with investing. The best services often have the lowest fees. Were in the golden age of online investing.

Learn everything you need to know with our Ultimate Guide to online investing.

New to IWT?

And join over 800,000 readers getting our Rich Life Insiders newsletter:

What Kinds of Returns to Shoot For


As with any kind of investing, risk exists in online investing. You have no guarantee the investment will appreciate in value.

Theres a saying in the investing rule: average returns are hardly average. Take stocks for example which have an average of 8% per year. What this means is while youll average 8% in returns over time, youll hardly see a year with an 8% return. One year will be 23%, then 2%, then 14%, then -10%, and so on. It bounces around a lot.

The returns you expect will depend on the type of investment that youre considering

Determine Your Willingness for Risk

No one can predict what the markets will do in the future. Instead of trying to hit a precise return over time, I like to bucket my investments into three groups.

  1. Low risk investments

  • Average annual return: 1% to 2%
  • Poor return: 0%
  • Strong return: 3%
  • Risk of initial principal: Little to none
  • Investment examples: Municipal bonds, savings bonds, CDs, money market funds, bank savings accounts

  1. Average risk investments

  • Average annual return: 3% to 8%
  • Poor return: 0% or worse
  • Strong return: 12% or better
  • Risk of initial principal: Partial
  • Investment examples: Stocks, index funds, ETFs, corporate bonds

  1. High risk investments

  • Average annual return: minus-5% to 10%
  • Poor return: minus-15% or worse
  • Strong return: 20% or better
  • Risk of initial principal: High
  • Investment examples: Real estate, commodities, penny stocks, high-yield bonds, venture capital, private equity, cryptocurrency

Those who have a longer time horizon for investing and can afford a loss of principal can stomach the ups and downs of average risk investment. Thats why younger folks should be putting the bulk of their portfolio into stocks.

Those who need to protect the principal and who have a short time horizon will appreciate the peace of mind with a low risk investment. As you age, youll weight more of your portfolio into bonds and CDs.

Options For Investing Online

When youre just starting with investing online, you have quite a few options. Some have been around for a few decades, while others have become available in the past few years.

Online Brokerages

An online brokerage works like the traditional in-person broker, except you pay far fewer fees.

Online brokerages will allow you to purchase all of the traditional types of investments, including individual stocks, target date funds, mutual funds, index funds, ETFs, money market funds, bonds, and others.

Through their web sites and apps, online brokerages will give you plenty of research data. This helps you learn more about investing in general or about individual investments you want to make.

Online brokerages will have different levels of personalized help available to you. Some are full service brokerages, where a live person helps at every step. Others only provide a live person for help when you request it.

Mutual Funds

If you only want to invest in mutual funds, you can do so online through a mutual fund family online account. Mutual funds are considered active investing where a fund manager picks and chooses investments in an attempt to beat a benchmark. They usually charge higher fees for that service.

But in proactive, performance from mutual funds lags the overall market. In other words, you pay more for less.

Instead of using a mutual fund, put your money into a basic index fund or a target date fund. Both are super simple, have really low fees, and will make you more money over time.


Robo-advisors have gotten popular over the last few years and works nicely for people just starting out.

When you open an account with a robo-advisor, youll just answer a few questions to determine your risk tolerance and time horizon for investing. The robo-advisor then will invest your money for you, based on your answers. Annual fees are extremely low.

Its perfect for the person who wants to invest effectively without having to think about it.


Online investing can involve things like REITs (real estate investment trusts) or loan making (where you receive interest payments). Sites like Fundrise and LendingClub allow you to invest using peer-to-peer technology.

These are new ways to invest online, so the long term risks and benefits arent clear. But they may appeal to someone who dislikes traditional stock market investing or who wants an option for diversification.


The world wants you to be vanilla...

…but you don’t have to take the same path as everyone else. How would it look if you designed a Rich Life on your own terms? Take our quiz and find out:

Things to Invest Into Online

Here are the main choices for what to invest into:

  • Stocks: With individual stocks, you purchase a piece of ownership in a company, like Apple. Its a tiny, tiny, tiny piece, but, still, a piece.
  • Mutual funds: Mutual funds are a collection of several to hundreds of related individual investments. Mutual funds exist for stocks or bonds, as well as for related company categories, like restaurants or entertainment companies. These are actively managed in an attempt to beat the market.
  • Index funds: These are passively managed funds, meaning they have lower fees than a traditional mutual fund and less volatility (both less upside and downside). They dont try to beat their market, they merely match it.
  • Target date funds: Think of these as a basket of index funds based on your age. Youll pick a target date fund based on when you expect to retire (hence the name target date) and that fund will shift its allocation between safe and riskier investments as you get closer to the final date. The fees are slightly higher than index funds but you never have to worry about allocation, rebalancing your portfolio, or anything. For simplicity, these are your best option.
  • ETFs: Exchange traded funds work like mutual or index funds but they trade easily like stocks. You can buy and trade them during the day.
  • Bonds: A bond is a debt security for a business or municipality. Bonds have a face value for trading, but they also pay interest.
  • Treasuries: A treasury is a type of bond backed by the federal government, like treasury bills or savings bonds.
  • Savings accounts: Savings accounts pay a minimal amount of interest, but you risk no principal. Certificates of deposit (CDs) or money market accounts work in a similar manner.

Opening an Investment Account

Here are five of the most popular sites for opening an online investment account for the average beginning investor. All have mobile apps.

TD Ameritrade

TD Ameritrade is an online brokerage, so it has quite a few features and services. You can use as many or as few of them as you want.

  • Offers stocks, bonds, mutual funds, ETFs, and more
  • Retirement and education savings account options
  • Full service help if desired
  • May confuse some new investors


This robo-advisor has low fees. New investors only need a few hundred dollars to start using Wealthfront.

  • Chooses from multiple investments for you
  • Hands-off investing
  • Retirement and education savings account options
  • Limited full service help options


Betterment is another robo-advisor with low fees thats perfect for new investors. But it does have some hands-on advice options too.

  • Chooses from multiple investments for you
  • Hands-off investing or full service help available
  • Retirement and education savings account options
  • Fees are a little higher than some other robo-advisors


Acorns is perhaps the most hands-free robo-advisor around. It allows you to round up purchases linked to credit or debit cards to fund your account.

  • Chooses from multiple investments for you
  • Hands-off investing
  • Allows for automatic deposits less than $1 at a time
  • No retirement savings account options


Vanguard offers dozens of mutual fund options through your online investing account, simplifying portfolio diversification.

  • Full suite of index funds with some of the lowest fees available
  • Retirement and education savings account options
  • Self service or full service help if desired
  • Requires large initial deposits (typically $3,000 per fund)

Developing Your Plan and Strategy

In developing a strategy to use for online investing, note that multiple plans can work for you. It just depends on your goals, your risk tolerance, the amount you have to invest, and your time span for investing. Here are a few tips to help you create a strategy.

Do: Invest in What You Understand

If options trading is confusing to you, you almost certainly will not make smart choices when investing while using it. Stick with what makes sense to you. If you want to invest in a particular vehicle but dont understand how it works, do research before investing.

If this investment stuff sounds like a horrible chore, get a target date fund at an online brokerage, put all that money into that fund, and never worry about it ever again. Its as safe as it gets, youll have solid returns over the long-run, and the fees are very reasonable. And you never have to make a single decision ever again once you set up your account. The simplicity, performance, and fees cant be beat.

Do: Pay Yourself Regularly

When paying your bills, always pay yourself too. Place some money in your online investing account. Even if you start with $50 per month, it will add up over time. Try to keep your personal spending as your income increases, then put the extra growth into your investments.

Do: Diversify Your Investments

Dont place all of your online investing money in one thing, like a favorite companys stock. Purchase a variety of investments. If one type of investment has a dip, another type may increase, balancing your gains and losses. (Mutual funds and index funds are an easy way to diversify.)

The one exception to this is a target date fund, itll do all the diversification for you.

Dont: Panic

When online investing with a long term time horizon in mind, dont panic if the stock market has a few days or months of poor returns. Through decades of data, the general direction of the stock market is up. If youre diversified properly, you can wait out any downturns rather than panicking and selling off your investments.

Dont: Invest What You Cannot Afford to Lose

When investing online, you could lose some or all of your principal. Dont place money youre going to need in a year or two for school or a wedding in a mid or high risk investment. Stick with low risk investments for money youll need soon within the next 5 years. Stocks are pretty safe as long as you dont need that money within the next 10 years.

Dont: Put Off Starting to Invest

Perhaps the best advice is to start investing as soon as you can in life. With the way compounding interest works, the sooner you start investing, the more success youll have.

  • Invest $100 per year at a 7% annual return when youre 20, and youll have $22,859 when youre 60.
  • Invest $200 per year at a 10% annual return when youre 40, and youll have $13,946 when youre 60.


Time crushes everything else when it comes to growing your money. Theres nothing more important than starting as early as possible. Even if you waited in the past, start now. Today is better than tomorrow.

Budgeting is unsustainable. Start “Conscious Spending” instead.

As seen on the IWT podcast, my Conscious Spending Plan helps you buy the things you love, guilt-free.

When you sign up, I'm also going to send you my newsletter full of my best money advice for free.
Written by

Host of Netflix's "How to Get Rich", NYT Bestselling Author & host of the hit I Will Teach You To Be Rich Podcast. For over 20 years, Ramit has been sharing proven strategies to help people like you take control of their money and live a Rich Life.