You need to do the same. By preparing your mind and your finances, as well as creating the right investment mix, you can be a successful investor.
That’s not a wild declaration either. Everyone needs to invest to grow their money. Life has all kinds of financial needs, including purchasing a house and putting your children through college. And virtually everyone needs to invest for retirement.
Unfortunately, holding your money in safe, interest-bearing investments won’t get the job done. Not only do they provide low rates of return, but in most cases, they won’t even keep you equal with inflation.
For example, let’s say you’re 30 years old, and hope to retire at 65 with $500,000. We can’t know what inflation will do in the future, but we do know what it’s done in the past and we can use it as a rough guide.
Using the Consumer Price Index (CPI) Inflation Calculator tool from the Bureau of Labor Statistics, we see that $500,000 in 1984 needed to grow to $1,238,801 today to maintain equal purchasing power.
Even if you were to invest your money with high-yield online banks paying as much as 2.5%, you still won’t keep up with inflation. $500,000 invested at 2.5% for 35 years comes to $1,186,602. Based on inflation, you’ll be $50,000 short of just keeping up. If you’re paying taxes on interest income, the outcome will be even worse.
Before deciding which stocks to purchase, you should first figure out the best way of purchasing them. You have three main options at your disposal – online brokers, traditional investment advisors, and robo advisors. Choose the one that best suits your personal investing needs.
1. Online brokers
In today’s investment universe, these are full-service, discount brokers, that allow you to invest completely online. The major advantage with online brokers is that you can invest in just about anything you choose.
That includes individual stocks, bonds, mutual funds, ETFs, options, futures, and just about any other investment you can think of. Even better, they usually charge low commissions to invest, especially if you’re a frequent trader.
Online brokers are best suited to self-directed investors, who have considerable investment experience, and prefer to manage their own portfolios. The better platforms offer investment tools and live assistance to help you improve your investment results.
A few examples of online brokers
You Invest by J.P. Morgan provides fee-free trades and the backing of the latest technology. With You Invest Trade, you choose where your money goes, at no cost to you. Through the platform, you’ll get access to tools to help you research thousands of investments so you can make fully-informed decisions.
If you’d prefer the expertise of a J.P. Morgan trader, though, you can pay a small annual fee of 0.35% and get a portfolio custom-designed for you. You’ll need to invest at least $500 to take advantage of this feature though.
Disclosure – INVESTMENT PRODUCTS: NOT A DEPOSIT • NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE
Webull makes trading convenient and easy, with a dashboard that helps you build and refine your portfolio. You’ll pay no commissions, and you can get started without a minimum investment.
There are two types of accounts to set up: an individual brokerage account or an IRA. Once you’re set up, you’ll have access to real-time stock market data to help with your research. It’s a great way to get acquainted with the stock market while also beginning to invest.
Zacks Trade is an online broker offering broker-assisted trades at no extra charge as long as they are made by phone. This is an attractive feature for sure along with their three innovative platforms.
Zacks Trade has no fees for inactivity for maintenance, and they have competitive commission rates with low-fee trading on stocks, ETFs, and options. Stocks and ETFs that are greater than $1 per share: the fee is $0.01 per share with a $3 minimum. Stocks & ETFs that are less than $1 per share: the fee is 1% of Trade Value also with a $3 minimum. Options are $3 for the first contract and $0.75 for additional contracts. Zacks Trade recommends a minimum of $2500 for cash accounts; for margin accounts, the minimum requirement is $2000.
International trading too is an option with Zacks Trade: you can also trade in 91+ exchanges in 19 countries.
E*TRADE has a low minimum investment of $500, and you can trade stocks and options for $0; ETFs, for $6.95. Plus, E*TRADE offers 100 commission-free ETFs and 4,400 no-transaction-fee mutual funds.
2. Traditional investment advisors
If going the robo-advisors route does not seem like the fit for you, rest assured you are not alone. There are still many dedicated investment management professionals who work with investors on an individual basis providing direct management of your portfolio, usually after determining your investment goals, time horizon, and risk tolerance. They create a portfolio that consists of mutual funds, ETFs, individual stocks, and other investments as deemed appropriate for your investor profile.
As a new investor, it’s unlikely you’ll be involved with traditional investment advisors. They typically work with clients with large portfolios, often $500,000 or more, though some will go as low as 250,000.
Note that traditional investment advisors typically charge a relatively high annual management fee, equal to between 1% and 2% of the value of your portfolio. And there are often trading commissions for the purchase and sale of stocks and bonds, as well as load fees paid for certain mutual funds.
I have had success using The Paladin Registry, a directory of fee-only financial planners that make recommendations for financial advisors wherever you live. The best part is that using the registry is 100% free, and there’s no obligation to work with any of the advisors.
Robo-advisors only hit the market about 10 years ago, but they’ve exploded in popularity since. The reason is simple – they perform similar services to traditional investment advisors, but do it at just a fraction of the cost.
Robo-advisors charge less fees
For example, a typical robo-advisor charges an annual advisory fee of between 0.25% and 0.50% of the value of your portfolio. But they don’t charge trading commissions, because they don’t trade individual stocks. And they don’t involve load fees, because they usually don’t invest in mutual funds.
They also do the same thing as traditional brokers
Robo-advisors evaluate your investor profile similar to traditional investment advisors. You complete a questionnaire, in which your investment time horizon, goals, and personal risk tolerance are determined.
Your portfolio is constructed based on your answers to the questionnaire. It will be constructed using low-cost, index-based ETFs, which is what enables robo-advisors to provide complete investment management at such low fees.
They’re great for every investor
Best of all, robo-advisors are available for investors at all levels. Most will enable you to open an account with just a few hundred dollars, or even no money at all.
It’s basically traditional investment advice and management, but designed with the small investor in mind.
A few examples of robo-advisors
Betterment charges an annual management fee of 0.25 percent of your account balance for their Digital package, which has a $0 minimum balance requirement.
Personal Capital charges you nothing to use their financial tools, but if you want Personal Capital to manage your investments, they charge a 0.89 percent annual fee on investments up to the first $1,000,000.
M1 finance is completely free, but it’s hybrid of a robo-advisor and personal management. That means you can choose your own investments, but M1 will take on the task of rebalance your portfolio, so you don’t have to worry about not having a diversified portfolio.
Comparing all three platforms
The table below provides a side-by-side summary view of the three main investment platforms:
|Investment Platform/Category||Online Brokers||Traditional Investment Advisors||Robo-advisors|
|Minimum investment||$0 to $1,000||$250,000 to $500,000||$0 to $5,000, but some are higher|
|Typical fees||$4.95 to $9.95 per trade||1% to 2% of account value + trading commissions and load fees||0.25% to 0.50% of account value|
|Investment knowledge required||High||None||None|
|Choose your own investments?||Yes||No||No|
|Individual stocks||Yes||Yes||Generally no|
|Investment advice||Limited||Yes||Generally no|
|Best for…||Self-directed investors||Large investors||New or passive investors|
Using stocks to outpace inflation
Historically, stocks have easily outperformed fixed income investments over the long-term. According to the New York University Stern School of Business stocks have returned an average of at least 10% since 1926.
With that kind of return, $500,000 would be worth – are you sitting down? – $14,051,215!
Not only would you outperform inflation, but you’d be at least 10 times wealthier than you are today in real terms.
That’s how stocks can be used outpace inflation, and it’s something every investor needs to be aware of and to take advantage of.
Make stocks your primary investment
You don’t have to put all your money into stocks, but it’s clear that stocks should be the primary investment in your portfolio.
A good rule of thumb to use to determine what percentage of your portfolio should be in stocks is 120 minus your age.
For example, if you’re 30, 90% of your portfolio should be invested in stocks (120 – 30 = 90%).
120 minus your age works to adjust your portfolio in a more conservative direction as you get older. For example, when you turn 40, your stock position should be reduced to 80% (120 – 40 = 80%).
By 50, it should be reduced to 70% (120 – 50 = 70%). But even by 65, 55% should still be invested in stocks (120 – 65 = 55%). No matter what your age, you’ll still need a healthy stock allocation so that your portfolio will outpace inflation.
And of course, as you get older, and the stock allocation gets lower, your bond/cash position will get gradually rise. This will serve to reduce the volatility in your portfolio, which is necessary given that you’ll have less time to recover from market declines.
The best stocks to invest in
With the caveat that investing in individual stocks isn’t usually the best course of action for new investors, what are the best stocks to invest in if you choose to do so?
Many financial advice sources focus on specific individual stocks. But for a new investor, the best strategy is to go bigger picture, and focus mostly on stock categories.
The best approach is to hold some stocks in each of the following categories:
This is how you can invest like Warren Buffett. He’s been using this strategy since he first stepped into investing in the 1950s.
Value stocks are stocks that trade at low prices for a number of reasons. Sometimes a company is recovering from a difficult stretch. Others may have faced legal or regulatory problems in the past. But once these companies recover, they’ve historically been the best investments on Wall Street.
Investors like Buffett have literally made a fortune investing in the stocks of these companies. They tend to outperform the general market over the very long term.
High dividend stocks
These are stocks that pay dividend yields higher than the average yield on S&P stocks, which is currently around 1.9%.
Historically, nearly half the return on stocks has come from dividends. For that reason, stocks with high dividends tend to be the better performers over the long-term.
There are several reasons why this is true:
- As discussed above, a high dividend yield is indicative of a company with strong fundamentals.
- Many investors are looking for the combination of growth and income that high dividend stocks provide.
- High dividend stocks typically provide at least some downside protection during market declines. That’s when investors begin to realize the virtues of stocks that also produce income.
High dividend stocks have become so popular that there’s even a special category of more than 50 stocks considered to be Dividend Aristocrats.
Though they aren’t always top performers in the short run, they tend to be among the best stocks to own long-term. And if you’re young, that needs to be your focus.
These are stocks of companies that are growing faster than companies in the general stock market, and even faster than their competitors.
Most don’t pay dividends at all, preferring to reinvest earnings to generate more growth. The return on growth stocks is in their rising stock price over the long-term.
These are also highly risky stocks to own, and are best owned through funds (which we’ll cover shortly). While they have strong potential for price growth, they can also be highly volatile. Though they usually lead the market during bull market runs, they often take the biggest hits in market declines.
Still, growth stocks are among the best type to hold for long-term return.
Investing in stocks for beginners
Before you begin investing in stocks, you first need to create a stable financial foundation. That has three parts:
- You should have a stable income, sufficient to support your lifestyle, plus room for extras.
- You should have an emergency fund, held safely in high-yield savings, to cover unexpected events. A good rule of thumb is to have three to six month’s living expenses in the account.
- You’ve gotten into the habit of being a regular saver. Investing isn’t a one-time event, but a long-term process. It’s a combination of growing your investment through regular contributions and investment returns.
You should also work to educate yourself about investing.
Never invest in anything you don’t understand, particularly individual stocks. When you buy stocks, you’re investing in a business. You need to know as much about that business as possible, including the industry it operates in.
There are three primary ways to hold stocks:
This is the most basic way to invest. A stock represents a share of ownership in both a company and the income it produces. One of the advantages of investing in individual stocks is the potential to hit a home run. That would be something like buying a stock today for $20, and selling in five years at $100. If you purchase 100 shares, your $2,000 investment will grow to $10,000.
That kind of performance is notoriously hard to come by, however. For that reason, it’s important to diversify across several different stocks. Most investment advisers recommend holding at least 10 or 15 individual stocks.
A mutual fund, or any type of stock fund, is basically a portfolio of stocks. What differentiates mutual funds from ETFs is that they’re typically actively managed.
That means the fund manager holds certain stocks he or she deems will outperform the general market. It also means stocks are bought and sold in an effort to maximize return.
Unfortunately, only a small percentage of mutual funds actually outperform the market. Complicating that fact is that mutual funds typically have load fees equal to 1% to 3% of the value of the fund, either at time of purchase, time of sale, or split between the two. That reduced investment performance.
Exchange traded funds (ETFs)
Much like mutual funds, ETFs are a portfolio of stocks. But unlike mutual funds, ETFs are not actively managed. They’re often referred to as index funds, because they invest in market indexes, like the S&P 500, the Russell 2000, or even indexes based on industries or countries.
In addition, ETFs don’t charge load fees, improving the long-term return on the funds. For this reason, they’re often used by professional investment managers and robo-advisors to create investor portfolios.
That should be taken as a strong hint that they’re a preferred stock investment vehicle for new investors.
Unique tips for new stock investors
We’ve talked a lot about how to invest in stocks. But there are some specific tips that are important for new stock investors to know:
- Start with a managed investment option, like an ETF or a robo-advisor. A robo-advisor will be the better choice, since they spread your money across several different ETFs, then provide full portfolio management for you. All you need to do is fund your account.
- Once you build a base of investment funds with a robo-advisor, start an account with an online broker. The idea is to use the robo-advisor as your primary investment vehicle, while gradually transitioning into self-directed investing.
- Split your investments between a taxable brokerage account, and a tax-sheltered retirement account. The taxable account can be used to invest for intermediate goals, like purchasing a house. The retirement account provides tax-deferred investment income, that will enable your portfolio to grow more quickly.
- Keep your debt to a minimum. This isn’t direct investment advice, but the interest you pay on debt is often higher than what you can earn on your investments. It will do little good to invest money at 10%, while you’re paying 20% or more on credit cards.
Don’t be intimidated by the whole idea of investing. Everyone has to start somewhere – even today’s millionaire investors did at one point.
Follow the basic advice, put your fears aside, and go forward boldly. Yes, you’ll be taking some risks by investing. But if you set up both your personal finances and your portfolio the right way, you’ll minimize those risks, while providing generous returns for a better future.
- 5 Easy Ways To Start Investing With Little Money
- How To Invest: The Smart Way To Make Your Money Grow