There’s a certain romanticism associated with the stock market. It promises riches to an average person with very little effort involved. It’s also intimidating due to the prospect of losing it all constantly looming overhead.
Watching your own money rise and fall with no control causes many novices to retract. It can be very overwhelming if you’ve never used it before with charts and graphs and numbers all over each page.
You have probably heard of people making millions on the stock market; buying Amazon as a baby startup and watching their $500 turn into millions. Who wouldn’t want that? Every billionaire on the news owns stocks, and in the movies, it just looks so easy to make it big. Maybe you have family or friends who invest and hell if they can do it, why can’t you?
As much as I would love to tell you that all you have to do is read a few books, take a class or two, then start watching your money pile up, it just isn’t realistic. What I can do is give you the tools you need to start the process. Once you start, it’s just baby steps and consistency that will create that sought-after growth!
What are your goals?
The first thing you need to do is establish your goals in the stock market. Are you trying to earn a living or just make some side income? Are you looking to be a stock market- millionaire? Maybe it’s to fund your child’s future college tuition.
What are your expectations? Do you expect to make money quickly or do you expect to put in a lot of time and money first? Are you willing to lose money in order to make money? How much time do you want to invest in research and watching the market?
Whatever you want to do with your investments is up to you, but it is crucial to make those goals clear as you start investing. Everything you buy on the stock market should reflect your goals and what you are trying to do. If your goal is to make money on the side and you don’t want to put a lot of time and effort into it, maybe finding a couple of reliable stocks and investing in them consistently will be your best bet. Or if you want to make money fast, looking into new startups and volatile companies could earn you a lot of money but at the same time be risking a lot more too.
With your expectations and goals in mind, what kind of companies do you want to invest with?
Startups Vs Established Companies
As a basic rule of thumb, do not invest in a startup no matter how world-altering their concept may be if you do not want to risk everything you are investing! Startups can make or break your investment portfolio at the drop of the dime, so when you are thinking of putting all your savings into the “next Amazon” make sure you are okay with losing it all.
Startups are good for a seasoned investor or just someone with a lot of balls. Always remember it isn’t just whether they have a great idea or not. A startup’s available resources, funding, and management all highly contribute to its success. So make sure you’re doing the research when you see a bright-eyed baby company with high hopes emerge to the market.
On the flip side, fully-established companies like Microsoft, Apple, or Coca-Cola are a great way to ensure financial success. Unfortunately, you will never see someone earn millions of dollars today by investing in Coke. These are safe companies that you may earn some dividends with and can rely on to keep your portfolio strong.
Most people have heard of the S&P 500 Index Fund. An Index fund is a premade portfolio of stocks and bonds. The S&P 500 is an index fund compiled of the 500 largest publicly-traded companies in the US. When you own a share of an Index fund, it means you own a tiny bit of each of those 500 companies.
The S&P 500 is not the only index fund available. There are thousands of index funds available from green energy companies to retail giants. You can find volatile index funds or reasonably safe ones. The benefit of using them is to broaden your portfolio with safe and easy stocks.
There is very little management involved with index funds and you can often just let them sit as long-term investments. Since they are so many companies compiled together, they are often very safe options. If an index fund is smart, it will take a number of volatile stocks (maybe a startup or two) and counterbalance it with well-established businesses. That way if the startups falter, you won’t lose it all since the established companies will hold the majority of the shares.
Dividends are small payouts given by companies to their investors as a “thank you” for being an investor. That’s right, dividends are free money! So why would a company willingly just give away its money? Some people see it as they are buying your loyalty. Often times a volatile company will reward you with a high dividend percentage because they know their stock value drops often and/or dramatically.
Dividends are a great way to add growth to your portfolio. They can be paid out monthly, quarterly, or annually depending on the company. A great way to make the most out of them is to automatically reinvest them into the company giving them. Since they are percentage based on what you own with the company, the more money invested the higher the dividend. This is called compound growth and the simple math says that with time, that can mean the difference between rags and riches.
If you are interested in compound growth, a great place to start and get a good visual is with Acorns.com. “From Acorns, mighty oaks do grow” is their slogan and it couldn’t be more true. Plug in a couple numbers to their website to see how compound interest works and you will be hooked.
Playing the Long Game
It’s important to keep in mind that you have not made or lost any money until you sell your share. While you own shares in the market, you will see their value go up and down constantly. Just because it is 28% higher today than yesterday does not mean that money is readily yours to spend. When the market opens the next day, it could’ve plummeted 32% overnight.
To have made money, you will have had to sell your shares at a higher price than what you bought them at. This is basic investing and many people translate that to just keep buying and selling constantly.
A reliable method is to buy and hold instead. Buying and holding your shares for sometimes years instead of selling the moment you see the value rise is a safe tactic. The market value has consistently risen by 9.2% each decade for the past 140 years. So theoretically, it should continue to rise in the next couple of decades meaning you will see an even higher average value in the future.
As a beginner investor, it is very unlikely that you know exactly how the market works nor can you predict what it is going to do. It is unrealistic to expect to make thousands of dollars in the first couple of months without losing any money in the process. Playing the long game creates a better chance of making more money over time.
Putting your “eggs in one basket”
A diverse portfolio is a happy portfolio! Even the most well-informed real estate investor does not own exclusively real estate stocks. He may know that market inside and out and has all the “insider knowledge” available even! But if he just invested in real estate, then he’s majorly missing out on all the other market types like consumer products or services, banking, emerging markets, international, and more.
Even if you feel very comfortable with a single market type, and even if that market is thriving, it’s important to own pieces of multiple markets. When you diversify your portfolio, it means you are just taking your $1000 and investing in eight companies rather than three. You won’t gain as much if the three real estate companies triple their value, but you still have money if it crashes.
What happens if the real estate bubble crashes to an all-time low? What if it struggles to recover and many of your businesses go under? There’s nothing else to counteract the loss in a non-diversified account.
If you do not retain anything else from this post, at least retain this. My number one piece of advice corresponds with many experts on the subject: invest consistently. This means even when you are tight on money, don’t stop investing. In the long run, that $20 you put into the market every week will exponentially grow if done correctly. In 20 years, that $20 could be $2000.
I get it, life happens and sometimes there is no extra money to spare. If you are able to make cutbacks on other expenses in times of need to keep your consistent investments going, then do so. Think of the long-term potential rather than the short-term comfort.
A good rule to try to uphold (and often a very manageable rule) is to save 10% of each of your paychecks to the stock market. Put on automatic investments to an assortment of stocks to keep your portfolio expanding safely.
Be reasonable though. Investing is not always worth it if you don’t have the money to do so. It’s important to be aware of the risks. Yes, you could invest everything you own and work your way out of poverty or debt. Unfortunately, it can be just as likely that you double the size of the hole you’ve dug into debt as well.
Buy Low, Sell High
A popular strategy of investing is to buy when the price is low and sell when the price is high. This sounds very obvious because it is. It’s an easy method when you are working with only a few stocks, or when you have a lot of time to spare to research.
Many people watch the market and wait for that exact moment when they think the price won’t go any lower to make their purchase, and vice versa to sell their shares at a high.
When working with this strategy, it’s imperative that you are always aware of what is going on in the market or you might miss your chances to buy or sell. It is a simple and effective short-term hold with the potential for instant profit.
Don’t get scared of a drop
One of the most common mistakes made by novice investors is the pull-out. It’s a very understandable concern, you see your hard-earned money flying away hour after hour on the market’s harsh bear pull and you can’t do anything about it. Your brain yells at you; Sell your shares! Get out before you lose anymore!
This is the initial reaction you will have and everyone has been through it. But stay strong and do not sell! The market always corrects itself when given a dramatic reduction.
As I mentioned, in the last 140 years, which includes the Great Depression and The 2008 crash, the market has risen an average of more than 9% each decade. In fact, this past decade has given a 13.6% average return. Meaning even though your stocks may be giving a bear return right now, on average they will supersede their lows for new highs later on.
Invest On Your Own Terms
Everyone has different strategies and it’s up to you to make your own decisions on how you want to invest. Create a goal and a plan to reach it. The best method is to combine your strategies for both long-term and short-term investments. Stick to your goals and be consistent!