This week’s question concerns investing:
I would like to invest in the stock market, but I don’t know how to do it. Is there like a crash course on investing in the stock market you could point me to? Thanks. — Louise
First lesson: Don’t ever put the words “stock market” and “crash” in the same sentence.
While I’m sure there are courses designed to get you up to speed as a stock investor, I’m going to tell you a lot of what you need to know in this short article. Investing in the stock market looks way more complicated than it actually is.
Let’s start with a video about things beginning investors often don’t know, but should.
Now, let’s add some simple, but important, rules.
Rule No. 1: Long-term money only
When it comes to stocks, the longer your investment horizon, the lower the risk . Day trading, holding stocks for very short amounts of time, is exceedingly risky because nobody knows what’s going to happen at any given hour or day. Investing over decades carries far less risk because quality companies become more valuable over time and so do their shares.
That’s why you should never invest in stocks with money you will need within five years, minimum.
Rule No. 2: Moderation
Because the stock market is risky, it’s not the basket for all your eggs . Here’s the formula I’ve suggested countless times over the years: Start by subtracting your age from 100, then put no more than the resulting percentage of your long-term savings into stocks. So if you’re 25, 100 minus 25 equals 75 percent in stocks. If you’re 75, you’d only use stocks for 25 percent of your savings. Important: That’s just a rule of thumb. If you’re nervous, you’ve invested too much.
Rule No. 3: Use mutual funds
I like buying individual stocks (you can see my online portfolio here) but it’s not necessary or, for most people, advisable. You can do perfectly well with a mutual fund, while at the same time lowering your risk and reducing your hassle.
What’s a mutual fund? A giant pool of investments. It could be a pool of stocks — a stock fund. It could be a pool of bonds — a bond fund. Or it could have both stocks and bonds — a balanced fund.
The appeal of mutual funds is threefold:
- A mutual fund allows you to spread the inherent risk of stock investing by diversifying among a bunch of stocks instead of investing in just a few.
- Mutual funds have professionals who do the buying and selling.
- Mutual funds keep track of a lot of the paperwork for you.
The stock mutual fund that I personally use in my retirement account is one of the lowest cost, and most popular, in the world: Vanguard S&P 500 Index fund. Here’s the way Vanguard describes it:
The fund invests in 500 of the largest U.S. companies, which span many different industries and account for about three-fourths of the U.S. stock market’s value.
Doesn’t that sound like it fits the bill nicely? Funds like this are a simple way to own a slice of the American economy. This fund started in 1976, and its average annual return is just more than 10 percent per year. Not bad. And the cost? Less than 0.2 percent per year, which is way less than most funds charge. The minimum investment is $3,000.
This isn’t a commercial for Vanguard funds, just some insight into how I happened to make the choice. But it’s not the only option. Growing in popularity, and equally good, is another type of mutual fund known as an exchange traded fund or ETF. As the name implies, they’re mutual funds that trade on exchanges like stocks.
How do you learn more? Do a web search for “best sites to research mutual funds.” You’ll get plenty of articles to read, like Best Mutual Funds from US News, and sites that screen funds, like Morningstar. Poke around. There’s tons of free information out there and tons here as well in our investing section.
Rule No. 4: No trying to time the market
Yes, we’d all love to buy at the bottom and sell at the top. But none of us are smart enough to do it consistently.
Try to time the market and you’ll likely find yourself on the sidelines when the market takes off and overinvested when it crashes. The best way to approach stock investing is also the simplest — dollar cost averaging, also known as systematic investing. All you have to do is invest fixed amounts, like $100, at regular intervals, such as monthly.
This method works for a simple reason: It automatically buys more shares when they’re cheap and fewer when they’re not.
What about individual stocks?
As I said, I like buying both individual stocks and mutual funds, even though mutual funds are easier and, in most cases, smarter. It’s hard to beat the overall market by picking individual stocks, and it’s a lot more risky and time consuming.
So why do I own individual stocks? Because I enjoy the research, and the thought of a home run is tempting.
In 2001, I put about $1,500 into Apple stock. I did it for a simple reason: All my friends were carrying Apple iPods around. I wouldn’t buy one myself — too rich for my blood — but I did buy Apple shares. Then came the iPhone and a meteoric rise in Apple.
I sold half of my Apple shares when the market tanked in 2009, netting a profit of about $35,000. The half I kept is now worth an additional $150,000.
While that story represents the exception and not the rule, returns like that explain why individual companies can be compelling investments. So if you’re interested in buying individual stocks, there’s nothing wrong with trying it. Just keep in mind that the less diversified you are (the fewer stocks you own) the more risk you’ll be taking on. You can see by looking at the stocks I own, I’ve had some spectacular failures and some decent winners. If you don’t spread your money around into different companies and different industries, you’re asking for trouble.
In order to invest in stocks, you’ve got to have a brokerage account. Opening one is no big deal. It’s like creating an online bank account: Fill out a few online forms, send in some money, and you’re ready to rock. Once you’ve established your account, you can buy stocks or mutual funds online simply by putting in the symbol and number of shares, then clicking “buy.” Most brokerages also provide live support, however, if you need it.
You can compare various online brokerages here.
Look, listen, learn, leap
When the economy was tanking in 2008-2009, I was glued to the tube and the Web. I was watching and reading everything I could for two reasons: First, I was worried about investments I already owned, and second, I was on the lookout for stocks to buy as the market cratered.
I watched a lot of CNBC, including shows like “Fast Money” and “Mad Money.” I surfed lots of sites, like MSN Money, Yahoo Finance, TheStreet.com and many others. When I heard about a stock that seemed to make sense, I’d learn more about it. If it seemed cheap relative to its earnings and historical price, I bought it. The result is my online portfolio.
Today I’m paying less attention to the overall market, but more attention to one part of it: energy. As I write this, the price of oil is hitting lows not seen for a decade: less than $35 a barrel. It seems logical that eventually the price will recover, so I’m doing a lot of reading about companies that could benefit from that eventual recovery; companies like Exxon Mobil, ConocoPhillips, which I already own, and Chevron. If oil rebounds, there’s money to be made in stocks like these. As for when and whether I’ll pull the trigger, the jury is still out.
And this is how we get started investing. We pay attention to what’s happening around us. We put a little money into a stock mutual fund every month so we’re investing in the overall American economy. Then, if we’re so inclined, we look into companies that seem to be doing well, or soon could be, based on any number of factors. We see what we can find out, check out the advice of others, then maybe we buy a share or two.
Just do it
I’ve been buying both individual stocks and mutual funds for 35 years. I don’t remember the trepidation I must have felt at first. But one thing’s for sure: The more I’ve learned, the fewer mistakes I’ve made and the less fear I’ve felt.
When I started down this path, there were only two ways to learn this stuff: reading books and talking to those with more experience. These days, there’s a ton of free information out there. There are online investment clubs, websites, TV shows, radio shows, brokerage firms — everything you could possibly need to become an informed investor.
So use money you won’t need for while, get smart and get started. As my dad was fond of saying: You can’t get a hit from the dugout.
Got a question you’d like answered?
A great way to get answers to just about any money-related question is to head to our Forums. It’s the place where you can speak your mind, explore topics in-depth and, most important, post questions and get answers. It’s also where I often look for questions to answer in this weekly column. You can also ask questions by replying to our daily emails. If you’re not getting them, fix that right now by subscribing here.
I founded Money Talks News in 1991. I’ve earned a CPA (currently inactive), and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate. Got some time to kill? You can learn more about me here.