I have been investing in the stock market for over 20 years. My returns have allowed me to give up working full time.
How Do I Invest? Where Do I Start?
Investing can be scary. How do you invest and where do you start? These are the two most common questions for unexperienced investors. Keep reading and I'll tell you everything that you need to know. You'll do fine as long as you map out your goals and stick to a plan.
The stock market is your best friend over the long haul. Forget about dragging all your rusty junk to pawn shops. Forget about antiques and uncut diamonds and coins or whatever. There's absolutely no problem with having hobbies or collections, but building wealth over time starts with the stock market.
You don't need a bunch of books or magazine or newsletter subscriptions to get strong returns. Anything useful that can be extracted from all of those sources is included in what I'm about to tell you. All else will get in your way. It's actually all the noise and hype that gets potential investors rattled and jittery. That's when investors start to make mistakes with their hard-earned money.
If you have some experience in investing, then you might know most of what I'm about to tell you. It's so basic that it flies out the window when greed and panic set in. Here are some simple rules that everybody knows, but nobody remembers . . .
Note: Let me first say that I am not an expert. I have no formal training or certification. All I have is my experience. I have been investing in the stock market for over 20 years. But thanks to my investments, as well as my particular lifestyle, I no longer need to work full time. I have left the rat race behind forever and live as an expat.
10. Invest in Yourself Everyday in Any Way
Luckily, it is not a problem if you are short on cash. If you haven't saved any money to invest, then start by investing in yourself. You won't find this advice in many books about investing, but it's the simplest and most basic investment that guarantees you'll always see a return. Now, I know this isn't a stock market investment, but it's the best thing you can do if you don't have money to invest. It won't cost you a dime, and you can start at any age.
You may be wondering what exactly this entails? Investing in yourself has more to do with your habits than your money. It's about investing the time and effort to make yourself a better person. There are small things we can do everyday that will benefit us in the long run. For example, if you smoke, then why not stop? Probably because it's hard, right? But if you live in New York and can stop for a day, then you could save up to $30 a week (if you smoke two packs a day). Your body will thank you too.
I'm sure you can think of lots of other ways to save money, but investing in yourself is also about learning new things. You keep your brain forever, so why not invest some time in learning something useful? You could try picking up another language, for example. I live in Japan, so I'm trying to learn Japanese. I also know a little bit of Korean because it seemed like a good idea to learn while I was in the Army. Books and classes cost money, but Duolingo is a helpful and free resource to check out if you have time to spare.
The possibilities are endless. Anyone can get more exercise, eat more fruits and veggies, make more friends, or even start writing articles online. A few useful things to learn would be basic first aid (including CPR), driving a manual transmission, or public speaking.
Do you know how to start a fire? Great! Now learn how to put one out.
9. Don't Invest in the Stock Market Until You Get Your House in Order
It's good if you have some money to spare. It's time to take a look at the big picture; this includes everything you own as well as all of your debt. This step seems so basic, yet nobody does it. People often compartmentalize money. Investing is separate from personal finance. The idea is that investing is exciting and personal finance is boring.
Simply put, it doesn't make sense to invest $3,000 in stocks when you have $10,000 in credit card debt. You may have a lucky run and make a 10% return, but it pales in comparison to the 27% you're paying in interest. Also, stock returns can fluctuate. That 10% gain might be only 5% next year. That doesn't include any capital gains, taxes, or trading fees. Your credit card debt will cost you the same 27% next year.
Before you consider investing, take a step back to examine all of your accounts. There are plenty of websites that help you organize your finances effectively for free. I've used Quicken Loans for over a decade, but it's expensive. My sister swears by Mint.com, though I've never used it. If you want to keep things simple, just write everything down on a sheet of paper. Be sure to include interest rates and annual fees.
Once you have everything listed, take a good look at any debt that charges you over 10%. This will include all credit cards and car loans. Use any spare cash you planned on investing to knock off as much of this debt as possible. Don't touch money that you have set aside for a rainy day. Also, it's fine if you've already set up a 401k account at work.
8. Remember Your Goals and Stick to Them
So now your most expensive debt is gone and you have some money to invest with. What are your goals? To make tons of money, right? Great! What would you do with tons of money? These questions seem obvious, and that is why people ignore them. Oftentimes, those who do make goals don't remember them.
Take a few minutes to daydream a little. What do you want to purchase with your money? Retirement is a popular answer. Let’s use that as an example. If retirement is over 20 years away, then it’s ok to get aggressive with investing in stocks. You may lose money now and then, but depending on how much you invest, you should have a nice nest egg when it’s time to retire. If retirement is much sooner, include some bonds in your portfolio. Bonds are much safer because they focus on income.
Think of a plan that you can stick to once you have a goal in mind. Don’t worry about how much money Warren Buffet or anybody made. Don’t even worry about the returns of the rest of the market last year. Forget all of that and just stick to your plan.
It’s ok for goals to change. You decide that you still want to retire in 20 years, but you want a house in 5. Most people can’t afford a house, so they go for a mortgage. The bank will expect a heavy down payment. The closer your goal is, the safer you should play it.
Try to keep your goals realistic. The stock market has done some wild things now and then, but over the long haul (more than 10 years), I don’t expect more than a 4% annual return after taxes and inflation. I don’t expect more than 1% with bonds.
7. Learn About Index Funds and Why You Should Start With One
An index fund is a mutual fund that tries to mimic the returns of a stock market index. The most famous stock market index is the Dow Jones Industrial. Another famous one is the S&P 500. An index fund will only buy all the stocks of the index. It sounds boring because it is.
Boredom is the biggest drawback of an index fund. However, the advantages are plenty. An index fund offers instant diversity because it holds so many stocks. Also, since the idea is so simple, you don't need a bunch of Ivy League MBAs in power ties charging heavy annual fees. You don't need to worry about some fund-manager turned-celebrity going to another company either.
Another positive of index funds is that the turnover is low. This means that an index fund buys stocks to own them. The idea is to mimic the returns of the stock market index and not to sell them later on for a quick profit. Less churning means less capital gains taxes. Finally, because index funds are so simple, they consistently beat the returns of the most actively managed mutual funds over the long haul.
Index funds have caught on, so lots of mutual fund companies offer them.
The video below best describes an index fund without trying to sell anything.
6. Steer Clear of the Hype
If your holdings are in index funds, then you probably realized that you are not glued to your TV for the latest financial news. You’ll also note that you are not glued to your computer monitor looking for the hottest stock of the day that traders are juggling. Thankfully, your investments are not keeping you up at night.
You might get a quote (check the prices) everyday, but you won’t need it. Later on you’ll check quotes once a week or even once a month. This is actually a good thing. Investing doesn’t have to be a full-time job.
The books, magazines, and newsletters are all out there for one thing: sales. The writers and publishers want your money. The TV shows only want ratings. The websites only want traffic. Heck, even I want traffic (but I don’t need it). None of these folks care if you make money.
There’s so much information out there that the stuff that stands out will always be the craziest and zaniest gimmicks. Nobody is going to spend twenty-something dollars to buy a 300-page hard-cover book titled Index Funds for the Long Term.
Everybody knows this is all hype, but they still get hypnotized. They keep on buying and watching. They stop thinking and start believing. This is when investing becomes speculation (also known as gambling). Gambling is not investing. One thing I notice with gamblers is that they don’t stop when they’re ahead. They only stop when they’re totally cleaned out.
Please ignore the hype. Forget about the dying industry titan that will suddenly make a turnaround just because you bought its stock. Forget about that tiny pharmaceutical company that will cure cancer and make you tons of money. Forget about that tech company that will be bought out because it does something you can’t explain much less understand.
Sure you’ll have a few cool stories, but that’s about it. Remember: stick to your goals.
5. Knowing When to Buy Your Investments (This Is Easy)
Knowing when to buy is easy. When it comes to index funds, buy when you have money to invest. Don't wait. A lot of people sit on the sidelines. When prices are low, they may get scared, especially if they're watching the news about the doomsday economy.
They'll say 'Let me wait longer to see if the price drops lower'. Then, when prices are high, they'll say, 'Prices are too high, let me wait for them to drop.' They might end up kicking themselves for missing the profit and walk away altogether.
Remember, start when you can. Most index funds have a 'minimum investment' amount. For some funds, it's as low as a $1000. For others, it can be as high as five million! Start at the minimum investment amount and buy monthly.
Be sure to invest the same amount every month, no matter how much the price fluctuates. Don't worry, when prices are steep you will automatically buy less. Likewise, when the prices drop, then you will automatically buy more. You will win as long as it's the same amount each month.
Most mutual fund companies can help you set up a monthly investment plan. You can also do it yourself as long as it's something you can put on autopilot. It will seem weird, but if it's an index fund, you'll actually look forward to days when prices fall. You'll dread days when prices are high—I know I do!
What you don't want to do is stir things up. Don't complicate things. This is easier said than done because it's so simple. Over the long haul, the stock market outperforms every other kind of investment there is. Remember your goals and stick to your plan.
4. Knowing When to Sell Your Investments (This Is Harder)
Maybe you own a fund or even some stocks. When do you sell an investment? Eventually we all sell—that's the whole point. But knowing the right time to sell is probably the hardest part of investing. Some expert might say something meaningless like, 'Can't hurt to take a profit.' OK! Good job high-speed here's your own TV show!
Here are a few questions to ask before you sell:
- What's the reason you bought it? Is it still there? For example, let's say you have a few shares of a ginormous soda company. It's spent nearly a century building its brand and its distribution chain. Its profits are massive and everyone loves its product. If it decides one day to leave the beverage industry forever and go into privatized space exploration, then it's time to sell. By the way, this is not likely to happen with an index fund.
- Did you meet your goals or did they change? Most people invest for retirement. Time goes by and as retirement gets closer, it's time to shift from stocks to bonds for their stability. Yes, there are index funds for bonds as well. Market fluctuations won't bother you and your portfolio will develop more income. When you finally reach retirement you can start selling your bond funds. In other words, you will be able to cash out and enjoy retirement!
- Are you rebalancing? Rebalancing your portfolio means buying and selling to correct your asset allocation. For example, you've invested 50% in stocks and 50% in bonds. Your bonds yielded income, but when it comes to value, the winner was stocks. Your portfolio on the whole has increased in value but the assets are at 60% stocks and 40% bonds. Now it's time to sell some stocks and buy some bonds. How much of each? Until you're back to your original goal ratio of 50/50.
3. Include All of Your Investments—Don't Lose Track of Anything
We talked about this earlier when looking at debt. If you followed this advice, you probably realized that you already have investments. You may have started a 401k with a company you worked at for a few years. (By the way, regardless of your financial situation, investing in a 401k is always a good idea.) Or maybe you inherited some bonds from your grandmother a while back. This is all your money, so don't forget about it!
I started a TSP account when I was in the Army. The Thrift Savings Plan is the 401k of Federal government workers. I completely forgot about it until recently. It's not a lot of money, but it made me rethink my asset allocation.
The reasons many people don't do this is because they forget about these investments or they think the money won't make a difference. This is not true. Even if they remember them in the beginning, they don't remember to include them when rebalancing . . . not cool.
So scour your brain once a year, remember all of your accounts and include them all into your plan.
2. What to Remember When Investing in Individual Stocks
You may want to invest in individual stocks after investing in index funds and realizing you have extra cash to invest with. Here are some questions to ask yourself before you do so.
- Why are you interested in individual stocks? Do you want to 'make a killing' as a day trader or are you genuinely interested in investing in businesses?
- What would make you choose one stock over another? Is it the hype? A tip from your friend or a forum?
- Do you know what a 10-K (annual report) is? Do you know what a 10-Q (quarterly report) is? Do you know how to get one from a company you're interested in?
- Can you sit still for hours reading a bunch of boring information and looking at financial data several times a month? Do you have the time?
- What's the difference between price and value? Are you better at finding value than thousands of computer programs, experienced analysts and hedge fund managers from all over the world? Can you do it every day until you reach your goal?
- Let's say you bought a stock. If its price plunged 30% in a week, what would you do? Buy? Sell? Hold?
1. Learn Humility Now Rather Than Later
I’m not trying to scare you, but it can be extremely tempting to buy into the hype. It’s easy to get overconfident, especially when looking at the past. Your friend thought so too until he got cleaned out in a couple months. When you see someone else tumble, it’s easy to say, 'That would never happen to me,' or 'I’m too smart for that.'
Thinking like this keeps people dreaming. They often say to themselves, "Yeah, I can do it. If I try hard enough. I can jump in and out and make some serious money. Then, I can retire early or get my kids through college or buy a new car. Let me give it a shot."
These voices get louder because we only hear about the winners. And who is telling us about the winners? The experts sitting on the sidelines. Yes, lots of them are making their money too, but they aren’t in hurry to tell us about some of their past mistakes.
Before you start acting on your fantasies, take a deep breath and snap out of it. Humility is the most powerful lesson you can learn here. Not a lot of folks will tell you about it because it doesn’t sell anything. It’s better to accept your limits now than after you’ve lost thousands of dollars you that couldn’t afford to.
Play it safe. Remember your goals. Stick to your plan.
Check Out These Resources for More Information
- Multpl.com S&P 500 Historical Prices
This will show that over time your best bet is stocks
- Morningstar's Fair Market Value
Is the market cheap or expensive? I love this chart but it's impossible to find without this link.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
What Do You Think? - Did I Miss Anything?
Joanie Ruppel from Keller, Texas on August 07, 2014:
Thanks for this practical advice written in a style for my non-investing brain. It all made perfect sense!
Denise McGill from Fresno CA on August 06, 2014:
I know nothing about investing. Most of it is Greek to me so I usually avoid it but this was helpful. Thanks.
Eugene Samuel Monaco from Lakewood New York on August 06, 2014:
I like the fact that you talk from experience, and agree with you on make a plan and stick to it. Thanks :)
RinchenChodron on August 06, 2014:
Great advice. Well written.