Photo (cc) by Andrew 94
If you’re a newbie to the investment world, the stock market can seem confusing, complicated and, as a result, scary. Check out this recent e-mail and see if you can relate…
Hi, Stacy! I’m wondering if you could direct me to a how-to website for those of us who’d like to invest in the stock market on our own. I have a 401k through my employer and a good income. I contribute the max allowable yearly to my 401k. However, I feel like I should be doing more. I’m interested in investing in some of the stocks I’ve read about via your newsletter, but since I have never done this on my own, it’s rather scary! I want to be careful with my money and deal with only reputable people/companies, but I feel like I don’t even know where to start. Any information would be greatly appreciated!
Thanks so much!
This is a really good question, Jill, and an important one. It’s a good question because a lot of people ask it, and it’s important because how you invest your savings can change your life. Consider these two scenarios…
- Scenario 1: On Jan. 1, 1981, you invested $10,000 in a savings account at your bank. For 30 years, you earned a safe and steady 5 percent. By Dec. 31, 2010, your savings grew to about $44,000.
- Scenario 2: On Jan. 1, 1981, you invested $10,000 in the stocks of 500 of America’s largest companies, also called the S&P 500. For 30 years, you rode a roller coaster of up-and-down markets. By Dec. 31, 2010, your savings grew to about $210,000. (This is a real number, according to this interesting calculator from my friends at MoneyChimp.)
I don’t have to tell you that the difference between $210,000 and $44,000 can make a difference in your life. It could send your kids to college. It could change when (and where) you retire. It could determine whether you work for yourself or someone else.
And that’s what makes Money Talks News different. Websites that offer savings tips don’t have the slightest idea how to invest. Sites about investing don’t help you find the money. We try to do both – by helping you save on stuff like food, entertainment, and clothes, then helping you invest those savings so they work as hard for you as you do for them.
And when it comes to investing, not only do I offer advice, I put my money where my mouth is. I show you the exact stocks I own.
OK, that concludes the advertising portion of this post. Let’s move on to Jill’s question, which was essentially: How do I start buying stocks?
Do you like the track or handicapping horses?
Now I’m going to tell you something surprising, especially in light of what I just said: Buying individual stocks is a bad idea. Here’s the cut-and-paste of an entire chapter of a book I wrote seven years ago called Money Made Simple….
The Only Chapter of a Book About Investing in Stocks You’ll Ever See Whose Title is Longer than the Information it Describes
Don’t ever try to pick individual stocks. It’s hard, it’s expensive, it’s time consuming and it’s totally unnecessary.
I believe that’s good advice for the vast majority of investors. I buy stocks because I enjoy investing in individual companies. But I do the homework necessary to feel confident in my decisions, and I have the resources to spread the risk around. If that’s not how you picture yourself, don’t invest in individual stocks.
But you don’t have to handicap individual horses to make money at this track. Rather than buying individual stocks, you can buy mutual funds, which are just giant baskets of stocks. For example, the S&P 500 Index Fund mentioned above is 500 of America’s biggest companies. Invest $3,000 into a mutual fund, and you can own all of them. That’s less risky than buying 100 shares of one.
S&P 500 Index funds are available in any number of places, but if you’d like a specific recommendation, I’ll suggest Vanguard. They’re the brokerage firm I use, because they’re big, safe, old, and typically charge the least in fees. Here’s the page of their site that describes their S&P 500 Index Fund.
My advice when investing in mutual funds (or anything that fluctuates in value) is to use dollar cost averaging, which just means investing a fixed amount over fixed periods. In other words, treat it just like your 401(k) – put in a certain amount every month. Why? Because when the market tanks and prices are low, your fixed amount will buy more shares. When the market is high, you’ll buy fewer.
Buying fixed amounts at fixed intervals will always make money, no matter what the investment, as long as it fluctuates in value and ends up higher in the long run.
I like the track but don’t mind betting a long-shot now and then
Suppose Jill is totally on board with the whole mutual fund and dollar cost averaging thing, but she also likes the idea of buying a stock or two now and then. I’d encourage it. Maybe you find a company with a cool product that you feel is going to take off, or you have a firm conviction that a certain industry or company is going to do well. Great! Go for it. Just do a little homework first.
If you open an account with a brokerage firm like Vanguard, you’ll have access to free research. Use it. Also visit places like MSN stocks, Yahoo Finance, and TheStreet.com and see what experts and other investors are saying. Watch TV shows like Jim Cramer’s Mad Money. There’s no shortage of information out there.
Just be careful. Buying individual stocks is risky – and the smaller the company, the riskier it is. When you look at my portfolio, how many small companies do you see? Zero.
Should I rely on a professional handicapper?
We just did a post on picking a financial adviser. If that’s something that makes you feel better, do it. My opinion? If you’re going to do simple things like invest in an index fund, you don’t need one. If you’re going to do something like buy individual stocks, many won’t know more than you do. Despite what the commercials tell you, investing isn’t rocket science. The hardest part is sticking a toe in the water.
Of course, you never put all your eggs in any basket, especially one as risky as the stock market. How do you know how much to invest? Here’s a post that will teach you in less than a minute.