For many people, especially millennials, investing is a scary word. Millennials watched their parents, friends and relatives struggle through the most recent financial crisis of 2008-2009, where investment values were nearly cut in half. Many individuals lost their jobs and a significant portion of their retirement savings as stocks, bonds, mutual funds and 401K values all declined. With the crisis now well behind us, the market has rallied from those lows and hit all-time highs, which for some resulted in significant gains. However, many people missed out on those gains because they were scared to invest and put their hard earned money to work because they feared another great collapse. The good news is that investing doesn’t have to be scary; in fact, it can be fun (if you’re a little nerdy like me or if you’re a fan of gambling, but with a bit more certainty that you’ll win). Below I’m sharing with you a few tips for novice investors. For more basic information on investing and as a preface to this one, check out my previous post What to Know Before Investing.
Before you even think about investments, you need to find a broker or investment company to work with. There are hundreds of different companies out there, each with their own pros and cons. Mutual funds can be purchased directly through the fund’s manager itself or through an independent broker. Stocks, bonds, options and the like are purchased through a broker. For the beginner investor, I recommend using one of the more well know brokers to manage your investments. TD Ameritrade, Fidelity and Charles Swab are some of the common electronic brokers that offer investors low trading commissions. Picking a broker with the lowest commission rate may not always be the best way to go. For example, some sites may have very low commission rates, but may not offer any research or training and may be difficult to use. My husband and I use TD Ameritrade because we like the research and tools they offer to their customers and the commissions they charge are reasonable (but certainly not the cheapest). Some brokers offer referral incentives for both the referrer and the recipient, such as free trades. That’s always a nice way to start! Do a little research and pick the broker that you are most comfortable with.
Do Your Research
Investing is very similar to school. In order to do well in school, you usually have to study and do your homework, among other things. The stock market is the same way, and this is true regardless of whether you are buying individual stocks, ETFs or mutual funds. Before you purchase any type of investment you should do research and study what you are planning to invest in. People may think that they don’t need to research anything because they are buying a mutual fund or ETF and that simply isn’t true. If you are buying a mutual fund you should research the fees being charged to you. For example, are you being charged a front-end or back-end load fee? Or is the expense ratio being charged high? Some funds have higher expense ratios that don’t necessarily convert into higher returns. Ideally, you would want a mutual fund that offers high returns, with relatively low risk and a low expense ratio. By doing research, you can find the funds that offer that ideal combination. If you are investing in individual companies you want to learn as much as you can about those companies, the industry and the financial performance of those companies as you can. Even for ETFs it’s helpful to research what the ETF invests in and the securities it holds before purchasing anything. ETFs can hold stocks, bonds or commodities and different ETFs will have different types of risk. Doing your research will allow you to narrow down your choices to the ones you are most comfortable with.
For individual companies, the research needs to be slightly more detailed. For a beginner investor if you want to invest in individual companies I suggest starting with larger, well-known companies, or what many people call “Blue Chip” stocks. These companies are typically lower risk and offer consistent returns. Many of these stocks even pay dividends which increase your returns. A few key things to look for are: earnings per share growth (EPS), a high return on equity (ROE), relatively small or manageable amounts of debt, a good management team and a price to earnings (P/E) ratio that is in line with its peers and the market as a whole. I find Simply Wall Street a great site for investors because it has a fun interactive way to learn about companies and it provides a tutorial that guides new users through the site and teaches them how they can use the site to do research. Those items will help a beginner investor narrow down his/her list of stocks to choose from.
Once you have committed your capital to an investment, be sure to check in on it. This is especially true if you have invested in individual companies. If you have or are building your own portfolio of stocks, checking in at least once a week on each stock is a good way to stay up to speed with the company and its developments. There are plenty of apps that enable you to watch stocks without even having to log into a brokerage account. I personally like Apple’s “Stocks” app, which comes standard on the iPhone because this shows you the current stock price (down to the minute), historical stock prices, news and much more, all in one location. If you own ETFs or mutual funds, checking in on the industry or the market as a whole is also a good idea. Being well-informed can only help you make better decisions later down the road. Keep in mind that the market doesn’t always go up. There will be fluctuations and your investments will go both up and down. If you have done your research and are comfortable with your investment, the short term gyrations are just bumps in the road as your investment value grows into the future
If you are new to investing, you don’t need to put your life savings into the market all at once. In fact, you should avoid that! Before investing anything in the stock market, you should have an emergency fund set up and some additional savings that you can use if needed. When you have established those savings, start small and open up an account with $1,000. The idea is that you have to be comfortable with the risk that there is a chance that you may lose some money, so if you plan on taking that $1,000 out in the short-term because you’ll need it for something in the near future, it might not be the right time to invest for you yet. You also don’t want to put so much money into investments that it forces you to struggle financially because you have no liquid assets. It’s all about finding your balance and your own magic number. I suggest $1,000 as a starting point simply because it’s enough to buy multiples shares of a few stocks with (if that’s the route you choose), but it’s also not a fortune. When I first opened up my brokerage account, I started with $1,500. Six years later and I have added more to that and that money has grown. Once you get the hang of it and you start to feel more comfortable or have more money to spare, you can always add more. Plus, adding that small amount may help you overcome the fear of investing.
What broker do you use, or plan to use, for your investments? What amount did you first put into the stock market when you began investing or what do you plan to start with? Do some research and get back to me in the comments 🙂