Ask Stacy: How Do I Get Started Investing?

Photo (cc) by 401(K) 2013

Interest rates are a double-edged sword. With the exception of credit cards, rates to borrow are extremely low. Mortgage rates, for example, are as low as they’ve been since the end of World War II. So, if you’re a borrower, it’s all good. But if you’re a saver, it’s all bad. Rates on savings accounts are so low they’re practically zero.

What’s a saver to do? Here’s a question from a reader.

Dear Stacy,
How are middle-class Americans supposed to get ahead? Wages aren’t going up, but gas and food prices are. And the money banks are paying on their savings accounts are nothing. I’d like to try other kinds of investments, like stocks, but I’m afraid of risk. Is there anything I can do that to earn more without losing money? Please tell me what to do.
– Dave

I feel your pain, Dave. Compounding your savings by earning interest is critical to getting ahead. But the interest on savings accounts is doing the same thing as wages: going nowhere.

One alternative to crappy bank interest is stocks, but stocks involve risk. And while stocks and risk have always gone hand-in-hand, today it’s even worse for at least two reasons. First, the European debt crisis could ultimately hurt our economy, and in turn, our stock market. And second, the inability of the U.S. Congress to agree on anything from debt reduction to stimulus could also have a negative impact on our economy and stock market.

Nonetheless, every saver should always have some money in investments other than risk-free bank accounts. The reason is simple. Risk-free investments rarely keep up with inflation over time. And maintaining the purchasing power of your savings by earning more than the rate of inflation is the prime directive.

For a 90-second primer on investing, watch the following news story I shot on the floor of the New York Stock Exchange. We’ll continue the conversation on the other side.

To recap those tips:

  • Don’t ever put any money into stocks that you could possibly need within five years. The longer your time horizon, the lower your risk.
  • Don’t put all your eggs in one basket. If you can’t afford to own stock in at least 10 different companies, use a mutual fund or Exchange Traded Fund. That way you own a sliver of lots of different companies rather than just one or two.
  • Don’t invest in stocks all at once. Invest small amounts monthly. That way, should the market fall, you’ll have money on the sidelines to buy at lower prices.
  • To decide how much to put in stocks, here’s your rule of thumb: Subtract your age from 100 and that’s the percentage you might want to put in stocks. So if you’re 25 years old, you’d take 25 from 100 and put that amount, 75 percent, of your long-term savings into stocks. If you’re 75 years old, you’d only take that kind of risk with 25 percent of your savings. But remember, this is a rule of thumb. If you’re going to freak out when the market falls, invest less.

What should you buy?

Regular mutual funds: The idea behind mutual funds is pooling money from lots of investors to buy a large, diversified portfolio of stocks. And as I said above, it’s safer to own a sliver of a giant group of stocks than a bigger chunk of just one or two. One fund to consider is the Vanguard 500 Index fund. As the name implies, it owns the shares of 500 of the largest companies in America. The minimum investment is $3,000, but it costs nothing to buy or sell shares in the fund. There is an annual management fee, but it’s only 0.17 percent – pretty small for a mutual fund. The fund, like the stock market overall, hasn’t done well over the last 1, 5, or 10 years. But it’s averaged better than 10 percent per year since its inception in 1976.

Once you open a mutual fund account, you can have money automatically added every month by linking it to a bank account.

ETFs: An Exchange Traded Fund, or ETF, is just a mutual fund that trades on an exchange like a stock. Here are two that allow you to get a lot of diversification: The Vanguard Total Stock Market ETF invests in 3,000 U.S. stocks. As I wrote this, the cost per share was about $65, so that would be your minimum investment: 1 share.

If you’d like to invest internationally, check out the Vanguard Total International Stock ETF (VXUS). This ETF is currently trading around $40 a share.

The disadvantage of an ETF is that to buy shares, you’ll need to open a brokerage account and pay a commission with every transaction. And even if you use a discount broker (I use Vanguard as my brokerage firm, but there are plenty out there) you’ll still pay at least a $5 commission every time. While that may not sound like much, if you’re only investing $100 a month, that’s 5 percent off the top. Here’s a site that has commission prices and reviews on lots of brokerage firms.

By the way, if you’re wondering why my recommendations are all Vanguard-related, rest assured that’s not because they pay me. Other than having a brokerage account there, I have no relationship with them whatsoever. I recommend them exclusively because they’re one of the lowest-cost players in the business.

Conclusion: Don’t expect miracles

I wrote this post in answer to a question regarding earning more than banks. Over time, stocks have done this. And the difference it can make on your savings is remarkable.

Let’s say you find yourself with an extra 10 bucks a day, or $300 a month. If the only thing you do is put your savings in a 1-percent money market account, after 20 years you’ll compound your way to a balance of $80,000. Nice. But if you earn 10 percent instead of 1 percent, your nest egg will increase to about $228,000. Way nicer.

I’ll end this post with the same analogy I started it with: the double-edged sword. Stocks pay more over time because they’re riskier. While they can go up, they can go down, and by a lot. They can also go sideways, which is what they’ve done for the better part of the last decade. So don’t expect instant results. Over the long-term, stocks will help conquer inflation. But over the short term, there’s no telling.

Got more money questions? Browse lots more Ask Stacy answers here.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
5 Cheap and Easy Ways to Make Your Car Smell Delightful
5 Cheap and Easy Ways to Make Your Car Smell Delightful

These tips will leave your ride smelling delightful for next to nothing. Some options are also chemical-free.

Want a Healthy Retirement? Turn This Device Off
Want a Healthy Retirement? Turn This Device Off

A common behavior becomes increasingly dangerous for those who are 50 or older.

8 Surprising Things No One Tells You About Retirement
8 Surprising Things No One Tells You About Retirement

Knowing what to expect can help you prepare for — and adjust to — life in your golden years.

15 of the Most Outrageously Overpriced Products
15 of the Most Outrageously Overpriced Products

Retailers mark up products by hundreds of times their cost — but you don’t have to pay the premium.

11 Expenses That Quietly Drain Your Wallet
11 Expenses That Quietly Drain Your Wallet

It’s scandalously easy to overspend in these areas of your life.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
7 Kirkland Signature Items to Avoid at Costco
7 Kirkland Signature Items to Avoid at Costco

Even if it seems you save a bundle buying Costco’s Kirkland Signature brand products, they may not be the bargain they appear to be.

If You Find This Thrift Shopping, Buy It
If You Find This Thrift Shopping, Buy It

Whether you resell it for a big profit or add it to your own wardrobe, this type of clothing is a hidden steal.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

9 Things You’ll Never See at Costco Again
9 Things You’ll Never See at Costco Again

The warehouse store offers an enormous selection, but these products aren’t coming back.

This Surprise Factor Can Raise Your Risk of Dementia
This Surprise Factor Can Raise Your Risk of Dementia

Nearly half of U.S. residents may face this threat.

Organize Your Home With These 10 Thrift Store Finds
Organize Your Home With These 10 Thrift Store Finds

Resolve to be clutter-free in 2021 with these secondhand purchases.

11 Laws You Could Be Breaking Without Knowing It
11 Laws You Could Be Breaking Without Knowing It

Seriously? Fibbing about the weather is a crime? This and other little-known legal traps await the unwary.

Is This Treatable Condition Causing Your High Blood Pressure?
Is This Treatable Condition Causing Your High Blood Pressure?

Researchers say too many doctors are overlooking this potential source of hypertension.

13 Things Seniors Can Get for Free — or Almost Free
13 Things Seniors Can Get for Free — or Almost Free

There are many ways to get cheap or free services and goods after reaching a certain age.

These Are the 3 Best Used Cars You Can Buy
These Are the 3 Best Used Cars You Can Buy

These vehicles boast reliability, safety and long-lasting value.

Taking a Multivitamin? Here’s Why You Should Reconsider
Taking a Multivitamin? Here’s Why You Should Reconsider

A new study has bad news for the millions of Americans who spend money on multivitamins.

21 Items to Cut From Your Budget That You Won’t Even Miss
21 Items to Cut From Your Budget That You Won’t Even Miss

Start off the new year by implementing these small-but-smart savings strategies. They’ll soon add up.

This Is America’s New Favorite Grocery Store
This Is America’s New Favorite Grocery Store

Consumers say a familiar name has become their go-to source of grocery items.

Internet Providers Can’t Charge You for This Anymore
Internet Providers Can’t Charge You for This Anymore

Starting this month, your ISP no longer can bill you for this fee.

15 Painless Ways You Can Cut Costs in 2021
15 Painless Ways You Can Cut Costs in 2021

Follow these tips to save, so you’ll have money for things that really matter.

Prepare to Pay More for These 31 Drugs in 2021
Prepare to Pay More for These 31 Drugs in 2021

More than 700 prescription medications have seen price hikes so far this year. Here’s a look at the worst.

10 Cars You Are Most Likely to Keep for 15 Years
10 Cars You Are Most Likely to Keep for 15 Years

The cars that owners hold onto the longest have one thing in common, a new study shows.

The 10 Golden Rules of Becoming a Millionaire
The 10 Golden Rules of Becoming a Millionaire

I’m a millionaire several times over. I got here the same way you can — by following these simple steps.

5 States Lowering Taxes This Year — and 2 Raising Them
5 States Lowering Taxes This Year — and 2 Raising Them

State personal income tax rates, brackets and deductions just changed in these places.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.