Investing in Stocks: It’s time to get started
Eileen St. Pierre, The Everyday Financial Planner
Recently my husband and I were watching the late night news and we heard an interesting stat – less than half of all Americans have absolutely no exposure to the stock market. The LA Times reported on a study recently conducted by Bankrate.com to explain the unevenness of the recovery since the Great Recession. The biggest reason given for not investing is lack of money (53%), while 42% cited lack of knowledge about stocks.
I’ve been a financial educator for over twenty years so I was not surprised to hear this. But I still found it deeply troubling. Here are three moves you can make to get started investing in the stock market.
You do not need a lot of money to invest in stocks.
Use mutual funds. They allow you to invest indirectly in a portfolio of stocks for a low initial investment. I personally like the company Vanguard (they are not paying me to say this by the way). Most of their funds only have a $3,000 minimum investment. You can open an individual retirement account (IRA) or investment account.
- They have expense ratios that are 82% less than the industry average and do not charge you to buy, sell, or exchange your shares.
- To open an account with Vanguard, you can open it online at www.vanguard.com or call them at 1-800-252-9578.
Don’t have the $3,000 needed to open an investment account?
You can accumulate this in one year, but it will require some discipline on your part. Here is what you do:
- Open a savings account.
- If you get paid monthly, automatically have $250 transferred from your checking account to your savings account when you get paid. If you get paid bi-weekly, transfer $125 each pay period. If you get paid weekly, transfer $62.50 each week. You get the picture.
- After one year, you will have accumulated $3,000 plus interest. You now have enough money to open an investment account.
- My column Ten ways to save at least $10 a week offers some good tips on how to free up some extra money each month to put away in savings.
- Keep on adding to your investment account after you have opened it. Contact your bank and now have them automatically transfer your contributions each pay period to your new investment account.
Invest your $3,000 in a broad stock index fund.
You do not need to pick individual stocks. You can simply choose a mutual fund that tracks a broad stock market index.
- The Vanguard Total Stock Market Index Fund holds more than 3,000 domestic stocks, covering the entire U.S. stock market.
- The Vanguard 500 Index Fund holds the 500 companies that make up the S&P 500, which represents about 75% of the total value of the U.S. stock market.
In order to invest in stocks, you need to accept some risk. The funds mentioned above will fluctuate in value. What you are doing is accepting the risk associated with the overall stock market, but you are diversifying away the company-specific risk. The key is to stay invested for the long-term. Don’t panic if the market drops and sell – that’s the worst thing you can do. Stay patient and the market will bounce back.
For more information on Investing Basics, visit my Basic Financial Management page.