If you’ve never done it before, investing in stocks can be intimidating. Yes, there are risks. But you are sure to know people who have become incredibly wealthy or even rich as a result.
You have to do the same. By preparing your mind and finances, and creating the right mix of investments, you can be a successful investor.
That’s not a wild explanation either. Everyone has to invest to grow their money. Life has all kinds of financial needs including buying a home and studying for your children. And practically everyone has to invest in retirement.
Unfortunately, keeping your money in safe, interest-bearing investments doesn’t get it done. Not only do they offer low returns, but in most cases they don’t even keep you level with inflation.
For example, let’s say you’re 30 years old and hope to retire at 65 with $ 500,000. We cannot know what inflation will do in the future, but we know what it has done in the past and we can use it as a rough guide.
Using the Bureau of Labor Statistics’ Consumer Price Index (CPI) Inflation Calculator, we see that in 1984 it took $ 500,000 to grow to $ 1,238,801 to maintain the same purchasing power.
Even if you put your money in high yield online banks that pay up to 2.5%, you won’t be keeping up with inflation. $ 500,000 invested 2.5% over 35 years comes to $ 1,186,602. Based on inflation, you will have $ 50,000 less than just keeping up. If you pay taxes on interest income, the result is even worse.
Different types of stock investment platforms
Before deciding which stocks to buy, the first thing you should do is figure out how best to buy them. You have three main options available – online brokers, traditional investment advisers, and robo-advisors. Choose the one that best suits your personal investment needs.
1. Online brokers
In today’s investment universe, they are full-service discount brokers that allow you to invest entirely online. The main advantage of online brokers is that you can invest in just about anything you choose.
This 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 on investments, especially if you are a frequent trader.
Online brokers are best for self-managed investors who have extensive investment experience and prefer to manage their own portfolios. The better platforms offer investment tools and live assistance to improve your investment results.
Some examples of online brokers
Webull makes trading convenient and easy, with a dashboard that you can use to build and refine your portfolio. You don’t pay any commissions and you can get started with no minimum investment.
There are two types of accounts: a single brokerage account or an IRA. Once set up, you’ll have access to real-time stock market data to make your research easier. This is a great way to get familiar with the stock market while investing.
Download the Webull app to open an account.
Zacks Trade is an online broker that offers broker-assisted trades at no extra charge as long as they are done over the phone. This is certainly an attractive feature along with their three innovative platforms.
Zacks Trade has no maintenance inactivity fees and offers competitive commission rates for trading stocks, ETFs and options with low fees. Stocks and ETFs greater than $ 1 per share: The fee is $ 0.01 per share with a minimum of $ 3. Stocks and ETFs less than $ 1 per share: The fee is 1% of the trade value, even with a minimum of $ 3. The 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 is also an option at Zacks Trade: You can also trade on over 91 exchanges in 19 countries.
E * TRADE
E * TRADE has a low minimum investment of $ 500, and you can trade stocks and options for $ 0. ETFs for $ 6.95. In addition, E * TRADE offers 100 commission-free ETFs and 4,400 mutual funds with no transaction fees.
2. Traditional investment advisor
If the robo-advisor path doesn’t suit you, you can be sure that you are not alone. There are still many dedicated investment management professionals out there who work individually with investors and manage your portfolio directly, usually after setting your investment goals, time horizon and risk tolerance. You create a portfolio composed of mutual funds, ETFs, individual stocks, and other investments that are deemed appropriate for your investor profile.
As a new investor, you are unlikely to work with traditional investment advisors. They typically work with clients with large portfolios, often $ 500,000 or more, although some cost as little as $ 250,000.
Note that traditional investment advisors typically charge a relatively high annual management fee, which ranges from 1% to 2% of the value of your portfolio. And there are often trading commissions on buying and selling stocks and bonds, as well as fees on certain mutual funds.
I have had success with The Paladin Registry, a directory of paid financial planners who make recommendations for financial advisers wherever you live. The best part is that the registry is 100% free to use and there is no obligation to work with any of the consultants.
Robo-advisors only came out about 10 years ago, but have grown in popularity ever since. The reason is simple: they provide similar services to traditional investment advisors, but at a fraction of the cost.
Robo-advisors charge fewer 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. However, they do not charge trading commissions as they do not trade individual stocks. And they don’t include loading fees as they don’t typically invest in mutual funds.
They also do the same thing as traditional brokers
Robo-advisors rate your investor profile in a similar way to conventional investment advisors. You fill out a questionnaire in which your investment horizon, your goals and your personal risk tolerance are determined.
Your portfolio is based on your answers to the questionnaire. It is built using low-cost, index-based ETFs, which enables robo-advisors to provide complete investment management at such low fees.
They are great for any investor
Best of all, robo-advisors are available to investors at all levels. Most of them let you open an account with just a few hundred dollars or no money at all.
It’s basically traditional investment advice and management, but it’s designed for retail investors.
Some examples of robo-advisors
Betterment charges an annual management fee of 0.25% of your balance on the digital package, which requires a minimum balance of $ 0.
Personal Capital does not charge you anything for the use of their financial instruments. However, if you want Personal Capital to manage your investments, they charge a 0.89% annual fee on investments up to the first $ 1,000,000.
M1 Finance is completely free, but a mix of robo-advisor and personal management. That said, you can choose your own investments, but M1 does the job of realigning your portfolio so you don’t have to worry about not having a diversified portfolio.
Comparison of all three platforms
The following table provides an overview of the three most important investment platforms side by side:
|Investment platform / category||Online broker||Traditional investment advisor||Robo-Advisor|
|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 the account value + trading commissions and loading fees||0.25% to 0.50% of the account value|
|Investment knowledge required||High||None||None|
|Do you choose your own investments?||Yes||No||No|
|Single stocks||Yes||Yes||Generally no|
|Investment advice||Limited||Yes||Generally no|
|Best for …||Self-directed investors||Major investors||New or passive investors|
Using stocks to beat inflation
Historically, stocks have outperformed fixed income investments slightly over the long term. According to New York University’s Stern School of Business, stocks have returned an average of at least 10% since 1926.
With that kind of return it would be worth $ 500,000 – sit down? – – 14,051,215 USD!
Not only would they outperform inflation, but they would be at least ten times richer than they are today in real numbers.
This way stocks can get used faster than inflation and every investor needs to be aware of and take advantage of it.
Make stocks your primary investment
You don’t have to invest all of your money in stocks, but it goes without saying that stocks should be the main investment in your portfolio.
A good rule of thumb that you can use to determine what percentage of your portfolio should be in stocks 120 minus your age.
For example, if you are 30 years old, 90% of your portfolio should be invested in stocks (120-30 = 90%).
120 minus your age adjusts your portfolio more conservatively as you get older. For example, when you turn 40, your equity position should be reduced to 80% (120-40 = 80%).
By 50 it should be reduced to 70% (120 – 50 = 70%). But even at 65, 55% should still be invested in stocks (120 – 65 = 55%). Regardless of your age, you still need a healthy stock allocation for your portfolio to outperform inflation.
And of course, your bond / cash position will gradually increase as you age and your equity allocation decreases. This will serve to reduce the volatility in your portfolio. This is necessary because you have less time to recover from market declines.
The best stocks to invest in
Given the caveat that investing in individual stocks is usually not the best course of action for new investors, what are the best stocks to invest in if you choose?
Many sources of financial advice focus on specific individual stocks. However, for a new investor, the best strategy is to get a bigger picture and focus primarily on stock categories.
The best approach is to hold a few stocks in each of the following categories:
Here’s how you can invest like Warren Buffett. He has used this strategy since his first investment in the 1950s.
Value stocks are stocks that trade at low prices for a number of reasons. Sometimes a company recovers from a difficult period. Others may have had legal or regulatory issues in the past. Once these companies recover, they have been the best investments on Wall Street historically.
Investors like Buffett have literally made a fortune investing in the stocks of these companies. They tend to outperform the general market over the long term.
High dividend stocks
These are stocks that pay dividend yields in excess of the average yield on S&P stocks, which is currently around 1.9%.
Historically, nearly half of stock returns came from dividends. Because of this, stocks with high dividends tend to perform better over the long term.
There are mutliple reasons for this:
- As explained above, a high dividend yield indicates a company with strong fundamentals.
- Many investors look for the combination of growth and income that high dividend stocks offer.
- High dividend stocks usually offer at least some downside protection in the event of market declines. Then investors begin to see the benefits of stocks that also bring income.
High dividend stocks have become so popular that there is even a special category of 50+ stocks that are considered dividend aristocrats.
While they’re not always top performers in the short term, they are some of the best stocks to own over the long term. And when you are young this has to be your focus.
These are stocks of companies that are growing faster than companies on the general stock market and even faster than their competitors.
Most don’t pay dividends at all and prefer to invest profits for more growth. The long-term return on growth stocks lies in their rising stock price.
These are too owning very risky stocksand are best found in funds (which we will cover shortly). While they have strong potential for price growth, they can also be very volatile. While they typically lead the market during bull runs, they often get the biggest hits on market declines.
Still, growth stocks are among the best types that can be held for long-term return.
Investing in stocks for beginners
Before investing in stocks, you must first establish a stable financial foundation. This consists of three parts:
- You should have a stable income sufficient to support your lifestyle and room for extras.
- You should have an emergency fund securely held in high-yield savings to cover unexpected events. A good rule of thumb is to have three to six months of living expenses in your account.
- You have got used to saving regularly. Investing is not a one-time event, but a long-term process. It is a combination of increasing your investment through regular contributions and investment returns.
You should also work on educating yourself about investing.
Never invest in something you don’t understand, especially individual stocks. When you buy stocks, you are investing in a company. You need to know as much about this business as you can including the industry it is in.
Different types of equity investments
There are three main ways to hold stocks:
This is the easiest way to invest. A share represents a share of a company’s ownership and income. One of the benefits of investing in individual stocks is the potential to hit a home run. That would be like buying a share for $ 20 today and selling it for $ 100 in five years. If you buy 100 shares, your investment increases from $ 2,000 to $ 10,000.
However, this type of performance is notoriously difficult to come by. Because of this, it’s important to diversify across several different stocks. Most investment advisors recommend holding at least 10 or 15 individual stocks.
A mutual fund, or any type of equity fund, is basically a stock portfolio. What sets mutual funds apart from ETFs is that they are usually actively managed.
This means that the fund manager holds certain stocks that he believes will outperform the general market. It also means stocks are bought and sold to maximize returns.
Unfortunately, only a small percentage of mutual funds outperform the market. To make matters worse, mutual funds typically have loading fees of 1% to 3% of the fund’s value, either at the time of purchase, sale, or split between the two. That reduced the investment performance.
Exchange Traded Funds (ETFs)
Similar to mutual funds, ETFs are a portfolio of stocks. However, unlike mutual funds, ETFs are not actively managed. They are often referred to as Index fundsbecause they invest in market indices like the S&P 500, the Russell 2000, or even indices based on industries or countries.
Additionally, ETFs do not charge any loading fees, which improves the funds’ long-term returns. For this reason, they are widely used by professional investment managers and robo-advisors to create investor portfolios.
This should be taken as a strong indication that they are a preferred investment vehicle for new investors.
Unique tips for new stock investors
We’ve talked a lot about how to invest in stocks. However, there are a few specific tips that are important to new stock investors:
- Start with a managed investment option like an ETF or a robo-advisor. A robo-advisor is a better choice as it spreads your money across several different ETFs and then provides you with comprehensive portfolio management. All you have to do is top up your account.
- Once you’ve built a mutual fund base with a robo-advisor, open an account with an online broker. The idea is to use the robo-advisor as your primary investment vehicle and gradually move into self-directed investing.
- Split your investments between a taxable brokerage account and a tax-protected retirement savings account. The taxable account can be used to invest for intermediate goals like buying a home. The retirement savings account offers tax-deferred investment income with which your portfolio can grow faster.
- Keep your debt to a minimum. This is not direct investment advice, but the interest you pay on debt is often higher than what you can get on your investments. There is little use investing 10% money while paying 20% or more with credit cards.
Don’t let the whole idea of investing intimidate you. Everyone has to start somewhere – even today’s millionaire investors did it once.
Following basic advice, put your fears aside and move forward boldly. Yes, you take risks by investing. However, if you properly set up both your personal finances and your portfolio, you will minimize these risks and offer generous returns for a better future.