We receive a lot of questions about how to actually get started investing in the stock market. Here are my answers to four common questions that come up when people want to start investing. To make this easier to follow along, each question has a “short answer” and “longer answer.” Let’s dive in!
1. How much money do I need to start investing?
Short answer: No amount is too small. Whether you’re starting with $50 or $50,000 or somewhere in between, the key is to just get started.
Longer answer: Just as you typically start small when you’re training for a race or learning about a new subject, there’s no magical amount of money needed to start investing. Rather than investing a lump sum all at once, I tend to encourage people to start smaller and come up with a recurring schedule to add to your investments over time.
In other words, set up a schedule where you automatically set aside more money to invest every one month, three months, six months, or a schedule that makes sense for your situation. (For example, set aside 5% of your paycheck each month to invest.) This approach has a few benefits:
- You’re not going “all in” at one point in time, which can be risky and very disheartening if you do so before the stock market drops. Think of it as diversifying across different points in time.
- If the stock market goes up, you’ll be glad you got started. If it goes down, you’ll be glad you’re setting aside new money to invest on a regular basis.
- It helps you focus less on short-term movements of the market and focus more on the long term, which is critical to succeed investing in stocks (more on this later).
- It helps you see stock market declines as opportunities to invest more at lower prices rather than something to fear.
2. How do I actually buy stocks?
Short answer: Open a brokerage account. It’s similar to a bank account, but you can buy and sell stocks in it. It can all be done online and/or on a mobile app. There are a ton of options, but Robinhood is a good (and free) place to start. You should also look into setting up an IRA in your brokerage account to take advantage of tax savings.
Longer answer: If you’re looking for a quick and easy way to open a brokerage account, Robinhood is a good place to start. It doesn’t have a ton of frills but it also doesn’t charge any commission fees, which is especially helpful if you’re starting out with a smaller amount of money.
Firstrade, Fidelity, and TD Ameritrade are other brokerage accounts that I use, and charge between $5 and $10 each time you buy or sell a stock. These brokerage accounts are worth exploring particularly if you want to set up an IRA (which you should). Think of IRAs as brokerage accounts for retirement that help you save money on taxes — what’s not to like?
3. What should I invest in first?
Short answer: A low-cost index fund. This gives you instant diversification (a fund owns hundreds or thousands of different companies) and is much easier than picking individual stocks. I recommend starting with Vanguard’s index funds.
Longer answer: Index funds own hundreds or thousands of different stocks, giving you broad diversification across a host of companies and industries. This instant diversification helps you avoid putting all your eggs in one basket and is a safer way to start your investing journey.
Research has shown that lower fees are the best indicator of future performance with funds. Keep your costs low (e.g. stick with Vanguard funds) and your odds of success will be higher.
4. How long should I hold my investments?
Short answer: The longer the better. At least five years. Data shows the longer you can hold your stocks, the higher your odds of making money. If you’re under 40, you likely have decades ahead of you to invest. Stocks should be among your long-term investments that you don’t plan on touching for years or decades.
Longer answer: Stocks typically scare people because in any given day, month, or year the stock can fluctuate all over the place. During the Great Recession (between 2008 and 2009), the stock market lost more than half its value. And that’s painful!
However, between 1950 and 2009, the average return of the stock market was 11% per year — and that includes multiple recessions, stock market crashes, wars, and all sorts of other negative events. Over the long term — emphasis on long term — nothing has come close to the wealth-building returns of the stock market.
In an article, The History of the Stock Market, financial columnist Morgan Housel dug into stock market data going back to 1871, and this is what he found (emphasis added):
- Hold stocks for less than five years and you’re at the mercy of lots of randomness. Stocks rise in about 70% of all years, but huge booms or huge busts are more common than returns of 0% to 10% a year, the historic “average” annual return people tout.
- Hold for five years or more and your odds of success rise significantly. Eighty percent of five-year periods produced a positive result.
- At ten years, the odds of success are solidly in your favor. Almost 90% of 10-year periods are positive, and the 10% with negative results are nearly all small losses, especially once dividends are factored in.
- There’s no 20-year period where you’ve lost money in stocks, even after inflation.
Again: the longer you hold your stocks, the higher your odds of investing success. The key to successful investing really comes down to two factors:
1. Don’t freak out and sell when the stock market goes down.
2. Hold for the long term.
If you can do both of these things — and continue adding new money to your investments over time, if possible — you greatly increase the odds of making money in the stock market in the coming decades.
This is why getting started investing at a young age is so important: Time is your biggest advantage as an investor. The more time you have to invest, the better your chances of investing success. So go out there and get started. Time is on your side.
Originally published on The Vantage.
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