Investing tips for beginners
Even if you have zero interest in the stock market, you can still reap the rewards of investing. For the vast majority of Americans, investing isn't optional; it's the only way to amass enough money to retire someday. Here's what to do if you want to build wealth without keeping track of what's happening on Wall Street.
1. Set an investing budget
Before you decide what to invest in, you need to decide how much you can afford to invest. Taking advantage of free money in the form of your company 401(k) match is always a good first move.
But beyond that, try to build a six-month emergency fund that you keep in a bank account or CD. That helps you avoid losing money because you won't have to sell investments when they're down if you encounter an unexpected expense. Once you're ready for an emergency, try to invest about 15% of your pre-tax income, though you may need to aim higher if you're getting a late start.
2. Invest regularly a little bit at a time
One secret of successful investors: They invest no matter what the stock market is doing, using a practice called dollar-cost averaging. That means you commit to investing a certain amount at regular intervals.
If you have a 401(k), you already do this through payroll deductions. Same goes if you automatically fund an individual retirement account. Sometimes you'll invest when the market is up, and sometimes you'll invest when it's down. But you can reduce your overall investment costs because you lock in some of those low prices.
3. Accept some risk
Whether you just don't care about the stock market or watching it sends you into a panic, investing in stocks is the only way to achieve the growth that will build a nest egg. Bonds are safer than stocks, but low risk comes with low returns, especially given today's rock-bottom interest rates.
One good guideline is the Rule of 110: You subtract your age from 110 to get your ideal allocations of stocks to bonds. If you're 30, you'd aim for 80% in stock investments and 20% in bond investments.
4. Invest in S&P 500 index funds
An S&P 500 index fund is one of the most surefire ways to build wealth. Rather than cherry-picking stocks, you'll automatically invest in 500 U.S. large-cap companies that have to meet stringent criteria to be listed in the S&P 500 index. Some of its biggest names include Apple, Amazon, Microsoft, JPMorgan Chase, Johnson & Johnson, and most recently Tesla. A $10,000 investment in the S&P 500 at the beginning of 2001 would be worth around $43,500 today.
5. Keep your expense ratio low
To find out if you're overpaying for fees, look at the expense ratio for the funds you choose. Anything under 0.1% is good. A 0.1% expense ratio means just $1 of a $1,000 investment is going toward investment fees. But you may be able to lower your fees even further. In fact, Fidelity now offers four index funds with no fees at all.
6. Avoid individual stocks if you don't want to do research
Individual stocks can help you earn even better returns than those S&P 500 funds. But avoid picking stocks unless you're actually willing to research them. If you chase big returns by investing in the latest hot stock, you're likely to overpay.
Investing in penny stocks (dirt cheap stocks priced at a couple of dollars or less) is a bad move no matter what your level of experience. Those stocks are usually cheap because the company that issues them is in trouble or they've never been profitable. Your risk of losing your entire investment is incredibly high.
7. Get started as early as possible
Investing in your 20s is challenging because these typically aren't your high-earning years. But making the sacrifice to invest early will have big rewards. If you invest $500 a month and earn 8% annual returns starting at 30, you'll have $745,000 by the time you're 60.
But if you start at 25, you'll have nearly $1.15 million by 60. That doesn't mean it's too late if you didn't get started early on. But the longer you wait, the more you'll need to invest.
8. Keep a long-term perspective
You may hear a lot about short-term stock market performance, but investing isn't about making money tomorrow or next year. Only invest if you're willing to let it grow for five years or more. If you need the money sooner, it doesn't belong in the stock market.
9. Don't start following the stock market just because it crashed
The worst time to start obsessively following the stock market is right after it's crashed -- that is, unless you're taking that long-term perspective and looking at it as an opportunity. If your stomach is in knots because the market just tanked, try reading up on the facts about crashes instead of focusing on what just happened. You'll learn that crashes are incredibly common, and the stock market has always recovered.
10. Look around you for investment ideas
You may decide eventually that you do want to learn more about the stock market. Start by following a few companies that offer products and services you like. Read up on the companies to learn more about their competitive advantages, what analysts have to say about them, and how they make money.
If you find a company you want to invest in, you shouldn't invest a huge chunk of your portfolio at once. In fact, many brokerages allow you to buy fractional shares, so you can invest small amounts if you don't want to buy an entire share.
There's no need to be intimidated. No one expects you to become a stock expert overnight.