Jim writes about personal finance atBlueprint for Financial Prosperity and My Retirement Blog, both of which are both exceptionally dull and boring blogs that will bore you to tears about money and all things financial. If you fear not the mundane, please do check them out because Jim is really a nice guy and is uncomfortable writing about himself in the third person.
Are you scared about investing in the stock market? If so, don’t worry, I was once scared of investing in the stock market because I hate to lose money. I worked so hard to earn it, why should gamble it away on something I don’t understand?
Well, let me tell you one thing. The stock market is a fairly simple creature as long as you have time on your side. Time heals all wounds, including those inflicted by the market, and when coupled with a careful strategy, you can earn money in the stock market with minimal risk. Below, I’ll outline how I started investing in stocks and perhaps it will spur you on to consider investing too.
Why You Need To Be Invested
The stock market may seem like a big and scary place, lots of traders screaming at each other, millions of dollars won and lost each day – it can be a very intimidating place. However, given all the hustle and
bustle, it’s a very simple creature with a simple set of rules and and expectations. If you can overcome your fears of the stock market, you can use it to your advantage and reap the rewards that history has shown the stock market can bear.
From January 1926 through December 2007, the historic annual return of the S&P has been 10.43%. That’s 10.43% annual return on your investment. Of that 10.43%, 40.59% of that was the result of dividends. Almost half of the return came from dividends distributed by the companies of the S&P and not with stock appreciation – that’s a pretty good insurance policy. Dividends are more dependable than stock appreciation, which can depend on the fickleness of the market and has less to do with the performance of a company.
Just Dip Your Toe In
Leave the hustle and bustle of the stock market, the hours of research and “due diligence”, and start off easy. The easiest way to get invested in the stock market is to go with an index fund, my favorite choice is an S&P 500 Index. Investment giants like Warren Buffett and Vanguard’s John Bogle all recommend index funds for the novice investor, and we are all novice investors, and so do I. Passively managed funds, such as index funds, have expense ratios of less than 0.2% (two-tenths of a percent!), and represent the most
affordable way to get invested in the market.
If you want to get an index fund you have two options:
- Open an account at the mutual fund firm itself (such as Vanguard or Fidelity), or
- Give yourself flexibility and select a good discount online broker and purchase the fund through them.
The benefit of the mutual fund firm is that you can buy the funds for free, usually, but you lack the flexibility of investing in stocks and often have to meet relatively high account minimums ($5k for Vanguard). The benefit of a discount broker is that you can move onto individual stocks or other mutual funds and trade those on the cheap (the most reputable firm, TradeKing, is rated best by Smart Money two years in a row and costs only $4.95 a trade). I prefer flexibility, especially if it comes at an affordable price, but it’s certainly up to you.
Moving To Individual Stocks
After you’ve done index funds and other mutual funds, you might be tempted to go into individual stocks. This is where I warn against selecting individual stocks unless you have a hearty stomach, time to read, and enough discretionary investment income to risk. You can get free trades, $4.95 trades, and all that from a discount broker but you can’t predict the future and you can’t predict the swings. My recommendation, especially if you are just starting out, is to pass on individual stocks and stick with index
funds and actively managed mutual funds until you’re more prepared and educated.
Don’t Be Scared
If you’re afraid to lose money, as I was, then be sure that you only invest money you won’t need in the next five years. The stock market goes up, it goes down, it goes sideways… but if you can limit your need for that money, you can be patient and wait until it goes up before cashing out your positions. If you need a place to stash you cash and you can’t let it sit for five years, consider a high yield online savings account instead.