What’s the biggest reason people don’t invest? Because they “don’t have” money. If you wait until you have money to invest, you might wait forever. You need to curve it out of your existing expenses and make it a priority to invest. The second reason people don’t invest is that they don’t know where to start. So much information about investing in the stock market, real estate, krypton, etc. Don’t let that paralyze you from starting to invest.
What to watch out for
If you are a beginner, you should NOT invest in anything that promises a quick and high return with minimal risk; if it looks too good to be true, it probably is.
There are scams out there preying on your lack of knowledge to make a profit. Stay away from an individual company’s stock if you are not willing to read and able to understand their financials and SEC filling.
Don’t try to beat the market: when you think you can earn a higher return than average return, you risk losing it all.
Avoid day trading as your investing strategy, especially if you are a beginner. I’ve seen people claiming that they made a ton of money trading but that’s not a beginner’s game. It’s very speculative and the buyer & the seller both think they are winning the game. That’s not to say that you can’t make money, but it’s hard and I like to keep things simple.
So, how do you start?
My favorite tool for investing (whether a beginner or not) is MUTUAL FUNDS or INDEX FUNDS. There are so many benefits:
You don’t have to read any financials. You don’t even need to know the companies you own. Individual companies’ performance has little effect. Generally speaking, mutual funds are “actively” managed and try to out-perform the market while index funds are passive and mimic the benchmark performance.
Funds are already diversified. You own a share of a diversified portfolio. All you need to choose is how aggressive you want to be (how much risk are you willing to take). Do you want to invest in stocks, bonds or a mix.
You can own a portion of very expensive stocks at a low price. The current price of one share of Amazon is $3,167 (as of 8/07/20) but you can own a piece of Amazon by purchasing Vanguard total stock market index fund for $82.64.
You don’t have to worry about beating the market. The market will go up and down but looking back at history, it goes up more than it goes down.
Index funds have very low costs (expense ratio). This is critical because if your portfolio grows and the expenses grow, that reduces your return.
Individual companies can be removed or added to mutual funds by the fund manager as part of regular maintenance.
401k also invest in those funds
If your employer offers a 401K plan with a match, that’s also a good starting point in your investing journey. Check the funds available in your 401K plan then decide how much you will contribute. If the plan doesn’t have great funds, I would suggest contributing enough to get the maximum match from your employer. If there is no match, you might want to consider opening your own IRA (individual retirement account) with Vanguard or Fidelity (or any other financial institution of your choice).
The key is to get started and keep it simple. Your strategy will change and evolve as you become more knowledgeable, but you can’t make up the time lost.
“Never depend on single income. Make investment to create a second source. Investing is simple, but not easy.” Warren Buffett
