But it also doesn't scare me.
Warning: I'm not an investment advisor. But I've been investing since 1993 and I know something about it.
I want to set your mind at ease a bit with investing. I also want to take this opportunity to remind you that the stock market is not intended to be like gambling. Investing is a long term thing. If you plan to put all your money on black or red and get rich, you won't be successful.
There are three rules about the stock market that you need to accept if you are a new investor:
Rule #1: On any given day, any given stock (or the market as a whole) can go down 10% or 20% or 30%. This is important because it slaps you in the face with some nice, cold water of reality. And if a stock goes down 20% in one day, that doesn't change the rule. It can still go down 20% the next day.
If you're tempted to individual stocks, just remember that they are the riskiest. If you're a beginner, you probably don't want to start buying individual stocks. You can be tempted all you want. Just don't do it. There are lots of places on the Internet where you can set up make-believe investment portfolios and see what your stocks would have done. Play with that.
Don't play with your retirement money.
Rule #2: The stock market eventually always goes up. There are two primary reasons for this. First, eventually there's going to be some inflation. Lots of inflation is bad. A little inflation is good. As the price of "everything" goes up, companies charge more and try to make more, so the value of their stock goes up.
Second, all the companies in the stock market are trying really hard to make more money than they ever have. This might be with new technologies or new marketing strategies. But whatever it is, they all have a primary goal of making more than they made in the past. That "value" is reflected in the price of their stocks.
If you look at the graphic below you can see that there's lots of volatility (ups and downs) in the short term. But as you pull back and look at longer and longer term investments, you can see that the market always goes up eventually.
Rule #3: Your safest long-term investment is in the market as a whole, not in individual stocks and bonds. The primary markets in the U.S. are the Dow Jones Industrial Average and the NASDAQ (pronounced nas-dak) National Association of Securities Dealers Automated Quotations System. The Dow is an "index" made up of exactly thirty stocks that are supposed to represent the most important companies in various industries within the U.S. economy. The NASDAQ is an index of over 4,000 companies that are traded on the NASDAQ system.
The best way to trade these companies today is by investing in an exchange-traded fund (ETF) of the Dow or NASDAQ. I won't talk about all the other alternatives and there are lots of people who have other strategies. But I just want to get you to $10,000 as safely as possible. Some of that will be growth, but most of it will be YOU adding money to your account by regular deposits. So there's no get rich quick scheme here.
Aside from ETFs that track the Dow and NASDAQ, there are ETFs that track the S&P 500 and other indexes that are intended to represent the total, broad market. ETFs are very tax efficient because you buy at one price and sell at another. You only pay tax on your gains. The most common alternative would be a mutual fund that tracks the whole stock market, but with mutual funds, all the dividends paid within the fund become taxable to you. So a fund price might go down and you still end up paying taxes. If you don't understand this point, don't worry about it.
Just remember: You want to invest in an ETF - exchange-traded fund - of the total stock market.
If you are starting out with just a small amount of money, I would recommend that you choose one, two, or three of these and nothing else:
- ETF that tracks the Dow Jones Industrial Average
- ETF that tracks the NASDAQ
- ETF that tracks the S &P 500
After twelve months of that, you will have poked around a bit and looked at other tempting things to invest in. In the meantime, you will invested in a good, solid, strategy that will serve you well in the long run. And you will have built the habit of putting money in the market!
- - - - -
This Week's Action Step: Set Up an Automatic Investment Transfer
Last time, I sent you off to create an investment account. One person in another country could not invest in the U.S. stock market. I understand that. So find the safest place you can to invest, and start there. If you're in the U.S., you should have an account at eTrade or Scott Trade or Schwab or someplace that allows you to buy and sell stocks.
This week, I want you to commit to a SMALL investment on a regular basis. In a perfect world, you will schedule a transfer from your bank to your investment account every week. If you have to, schedule it for once a month. No matter how small it is, I want you to make that transfer every week.
Even if you tell me you can't afford anything, I want you to do something. Everyone reading this can do something. $5 or $10 or $100. Something.
Next week we'll talk about ways to save money so you can invest it. For now, I want you to make the biggest deposit you can come up with and then schedule an automatic deposit either weekly or monthly.
It's better to put in $10/week than nothing. If the money's in your pocket, you'll spend it. If it's in the investment portfolio you won't.
- - - - -
This Week's Lesson: Markets Go Up and Down - But They Go Up Eventually
Don't try to "time" the market by getting in at just the right moment.
Don't pay attention to the news every day or every hour. Don't set up a tracking system and watch the market all day long. That will drive you crazy. Don't freak out when the market drops 300 points.
Do look at your portfolio every time you make a deposit. Remember, your primary growth is going to come from making deposits, not the growth of the stocks themselves. You do your part and let the market do it's thing.
Here's the ultimate reason that you shouldn't worry about the daily fluctuations in the stock market: If you had spent that money on beer and fried chicken for $10, it would still be gone. Better to have that money in the market working for you.
- - - - -
Thanks for all the emails about this. Tell your friends to get on board. Let me know how you're doing.
Reader John says:ReplyDelete
I pledge to make $10,000 this year!!
I was reading A Quick Primer on Investing and needed some clarification. Does your article state that every month a sum of money should be invested in an ETF, or should that sum of money go into the savings account? Are we actively purchasing an ETF or socking money away for a later date?
- - - - -
All I know is what I do.
I normally wait til I have about $1,000 and then invest. The main reason is that you pay about $10 for the trade, which is 1% of $1k and 2% of $500. So you get an extra 1% immediately if you buy a larger chunk
There’s no real reason for the $1k except it’s a big number. If you put in more than that per month, you might consider doing a “buy” once per month.
So put the $500 into savings or the investment account. And then make an actual investment buy at $1k or above.
As a rule, you want to make as few trades as possible because they cost money. One of the reasons I like the ETFs is that you just buy one big lump of the fund and it's their job to make sure it performs the same as the stock market. If you tried to do that yourself, you'd make all kinds of trades, buying and selling all day.
Lots of trades can add up and significantly affect your overall investment performance.
Just my 2 cents.
Thanks for the answer, Karl!ReplyDelete
So, it looks like we make an investment buy at *every* $1K that we've saved?