So you’ve finally decided to get started in the stock market. Well we say congratulations! Jeremy Siegel showed us in his 2005 book “The Future for Investors” that stocks always perform better than any other investment option in the long run. While it is true that another investment may outperform stocks in the short term, stocks are the way to go for long term success.
The problem with the stock market is that there are almost too many ways to enter it. With so many choices, such as individual stocks, mutual funds, index funds, ETFs, domestic and foreign options, how do you even begin? That’s what we’re here for. We’ll explain some of the issues that you may want to consider in order to choose the best option for you and get the most out of your investment.
Should You Be a Risk Taker? Risk Averse? Or Somewhere In The Middle?
It’s tempting to just get stuck in and try and get those returns everyone is always talking about. You need to slow down though. There are some questions that need to be answered first. Thinking about these questions will give you the best start to investing and save you money in the long run.
Think about the kind of person you are. Do you take risks? Would you risk your money to earn more money, or are you the kind of person who is going to wait for a sure thing? How would you respond if your stock dropped 10% or 35%? Would you hold on and hope for it to go back up, or would you panic and sell it?
Thinking about these questions will bring you to thinking about the different equity investments including mutual or index funds and individual stocks. If you’re not much of a risk taker but you still want to start investing then you should consider a mutual fund or an index fund. These options are diversified and have plenty of different stocks. This means that the risk is reduced and you don’t need to do any extra research on individual stocks.
Do You Have Plenty of Time for Investing? Are You Really Interested?
Should you be investing in funds, or stocks? Perhaps you should invest in both. The choice you make is determined by the amount of time you feel you can put into investing. Choosing the right mutual r index fund can allow you to invest money while leaving the hard part (picking stocks) to the fund manager. It’s even easier to keep track of an index fund. Changes in these funds are determined by the company, industry or market that they track.
It takes a lot of time and effort to invest in an individual stock. You need to make sound judgements and consider the earnings and prospects of the stocks. Investors need to be able to determine if a stock will make money or be a disaster. Investors in individual stocks need to know how stocks perform, how money is mad from them, the risks and prospects they have, and even more.
So you need to know how much time you’re going to be able to put into investing. Do you have a few hours to spare that you can dedicate to staying on top of companies? Or do you have just too much happening in your life for all of that? It’s a real skill to invest in an individual stock. As a skill you need to dedicate time to master it.
Avoid Putting Your Eggs In One Basket
When you get started, and even when you’re more investment savvy, it’s best to spread your investments across multiple assets. So you should avoid putting all your investment money in the biotech industry to give an example. There could be a big gain to be had, sure, but what happens if the FDA begins rejecting drugs? The entire portfolio goes down.
So you need to diversify your efforts and spread the money across different industries. Invest in real estate (consider a real estate trust), consumer goods, insurance, etc. Don’t choose to focus on just one industry. Spread your money across a wide range of assets and put some of your money in bonds and cash rather than investing entirely in stocks. You can decide for yourself how much of your money goes into each sector but spreading your money across multiple choices reduces the risk should one industry begin to fail.
The Beginners Portfolio
When you’re starting out with investing you should invest the money in a few index funds, such as a broad market one like the S&P 500, and a fund that has a lot of international exposure. You should also think about investing in one that keeps track of small companies such as the Russell 2000 to give your portfolio a shot in the arm.
Investing in those three things will give some real diversity to your portfolio, give you the steadier performance you earn with a large company, and provide you with the extra flair of international companies and smaller caps.
Placing Individual Stocks In Your Portfolio
If you want to invest in an individual stock then choose 12-20 and put some thought into it. This means you have plenty of diversification in your portfolio but you aren’t trying to keep track of too many stocks. It’s still important that you research the company and know their business and the risks they face. If you want to only invest in stocks then really diversify your portfolio and invest in multiple businesses and industries such as healthcare and technology, while investing in both small and big companies.
If you’ve not got the time you need to pick out so many stocks then mix it up by investing in index funds and individual stocks. If you’re entering the market with limited funds then accept that you might not be able to invest in 12-20 stocks and should spend your money on funds to get steady returns while choosing six or so stocks to give your portfolio a boost.
When you decide how you want your portfolio to look it’s time to actually get started with investing. Choose a broker that you feel comfortable with; it doesn’t matter if you go online, offline, or use a mix of both. Feel free to contact the people there to make sure they are right for you. Then fill out the necessary paperwork and deposit some money to open your account.
After you decide what to buy it’s time to get started. Don’t invest all your money at once. You want to start out slowly. What would you do if the market suddenly went into a downturn after you spend all your money? It won’t help your confidence at all to suddenly be in the red. Come up with an investment plan that spans a few months so that you don’t risk your money. Don’t forget to also set aside a little time each week to check on your investments and see how they are performing.
Build Your Portfolio
As you gain more investment experience you will likely change how you invest your money. So don’t be afraid to adjust your portfolio as time passes. Switch it up once a year or so by selling off one investment and putting the money in something else. You can also deposit more money into your account to boost your portfolio in an area that is doing particularly well for you.
You can use the extra money to further diversify your profile or add more money to your existing holdings. Doing this regularly means that you’ll have a pretty significant profile without even realising it. This money will do wonders for your retirement plans, help you secure a second home, or just meet the other financial goals you set out when you got started with investing.
Before you jump down the rabbit hole called the stock market take some time to think about your goals and how you plan on meeting them without risking more than you want. Consider how much time you can put into investing. Getting all of this sorted before investing your dollars helps to protect you from investing, panicking, and then investing in something else and never really understanding why you’re doing it. Think carefully at all times while investing and you can do a lot more for your portfolio than you would if you just chase the latest hot stock and invest where someone tells you to. Remember that you are using your own money here. It’s important you know what you do with it and why you do things that particular way.