A Simple Way to Invest in the Market
If you are suddenly given a pot of cash, or receive a windfall or even win the lottery, what should you do with your winnings?
- Jan. 2017
As a basic investor, how do you get started? Let's assume you have $100,000 to invest. This is just a sample number chosen to illustrate the concept. It could be a larger or smaller amount. The idea is similar.
Assume you also have created an account at a trading company such as e*Trade.
Assume you have analyzed your own financial situation and have a good snapshot of your personal financial health.
What to do next?
How to Invest...
The most simplest strategy to invest in the stock market is to buy index funds. These are funds that are an average of a large number of individual stocks. The idea is spreading the risk.
There are a few choices of index funds. My personal favorite is SPY. This fund tracks the S&P index. It is diversified and can be bought and sold at any time during the day.
Assume you have the 100,000 sitting in your cash account at e*Trade.
- Determine the amount you may need over the next 24 months. For example, between your retirement pension and your social security payment, the extra amount you may need to live at your current level. For this example, lets say it is 40,000. (20K per year). This is your cash reserve.
- The 60,000 left should be invested fully in the index fund (SPY). The current value as of today is $227.21.
- Use dollar cost averaging to buy into the fund over the next 5 or 6 weeks. The reason is simple. You want to minimize your cost. No one has a crystal ball. You can't know what is a low price and what is a high price. The next best thing is to dollar cost average. That is buy a portion of the whole at a fixed day for the next 5 weeks. For example, you want to buy approx.10,000 worth of SPY (rounded to the nearest 10 shares). 50 shares on a Monday morning. Repeat the order for the next 5 weeks until your 60,000 is fully invested.
- That's it, just sit back and wait...
Dollar Cost Averaging
What about Fees?
It cost $7 per trade. 7*6=42. 42/60000=0.07 %. That is insignificant. The average return of SPY for the past 10 years has been 6.87%.
Assume your 100,000 at the beginning of year, with 60,000 invested in SPY will end up with 104,100. A net of 4.1% return.
The simple strategy is this. Keep a portion of your savings in cash as a reserve. Invest in an index fund for the greatest diversity. Check periodically and monitor it yearly. Don't panic sell when the market undergoes periodic corrections and be patient.
© 2017 Jack Lee