5 tips to start investing in the stock market
Updated May 6, 2022 at 10:07 AM ET
Millions of Americans invest in the stock market as a way to build wealth over time, and while the market can fluctuate, investing in stocks is a good way to grow your savings in the long-term. Even when the stock market feels like it's got some wild swings, getting started on investing now can help set you up for a more financially prosperous future.
If you're an everyday investor trying to sift through Reddit threads and YouTube tutorials, this is for you. Here are a few tips to get you started on your own investing path.
Betting on a hot stock isn't worth it
Despite news headlines on life-changing investments on a one stock item (remember GameStop in early 2021?), it is too risky to make short-term bets with sizable sums of money on what a stock is going to do next. Instead, some of the most respected investors in the world have long said the best way for everyday investors like you and me to make money is to invest in index funds and hold those investments over long periods of time.
Most index funds offer low fees and will allow you to essentially buy the entire stock market. That way, if any one stock crashes it won't affect your portfolio. And if you really want to bet on individual stocks, the best advice is to do that with a very small part of your portfolio — and only with an amount of money you can afford to lose.
Build a diverse portfolio
The key to everyday investing is diversification, which means owning different types of investments to spread out the risk. According to investment manager Paula Volent, you definitely want to own stock index funds because stocks over time have always offered the best return. She suggests owning a broad U.S. stock market index fund, a foreign developed markets index fund and an emerging markets index fund.
Volent also says you need investments that can do well when stocks are doing poorly. These include Treasury bonds and real estate funds. As far as how to know how much of each of these components is the right mix for you, there are different ways to figure that out. Age-based, or so-called "target-date," index funds put together a mix of many of these components for you with a risk profile based on how many years you are away from retirement.
Working with a financial adviser? Make sure they're fee-only
Checking in with a financial adviser is strongly recommended by experienced investors, but make sure you're speaking with a fee-only expert, who isn't receiving commissions for steering you into one investment over another. Once you find someone acting in your best interest, try to meet with them once a year or every two to three years. Find someone you can pay a flat fee for each visit. This will save you money in the long term.
Rebalance your investments for stability and to maximize your return on your investments
There is no need to panic, even in times of big corrections in the market. With a diverse investment portfolio, you actually have an opportunity to make some extra money off of big swings in the markets by selling what has gone up in value and buying more of what's gone down.
Let's say you've decided you should have 50% of your portfolio in a mix of stock index funds. If stocks crash and bonds rise in value, then the stock portion of your portfolio might only be worth 45% of your overall portfolio. You can sell some bonds and buy more stocks to get back to the target in your investment plan. Buying low and selling high is the right way to make money investing. But you're not doing this randomly. You are sticking with your plan for your target allocation in your core portfolio.
Bottom line — please don't panic and sell everything just because the stock market crashes and you see other people panicking and getting rid of their stocks. That can do irreparable harm to your portfolio. Buying high and selling low is not a good way to make money.
Check out some great books to help guide your investing
Want to learn more? If you're going to read one book, check out economist David Swensen's Unconventional Success. It's the ultimate introduction to everyday investing from a world famous investor who set out to tell the rest of us how to do this right. Jack Bogle's book Common Sense On Mutual Funds is another classic.
The podcast portion of this story was produced by Janet W. Lee.
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