There has been a revolution around the stock market in recent years where pretty much anyone with a dollar to their name can invest. Investing in the stock market has never been easier, yet when you first start it can be incredibly daunting. There is just an overload of information pointing you this way and that on how to invest your money and you can be left in total confusion. You see all of these people offering insider information on what to invest in and what to avoid but you aren’t sure if you can trust any of them. It’s hard to know how to invest because there is just so much information. There are countless blogs and social media accounts dedicated to keeping people in the know about the current trends of the stock market. I researched how to invest in the stock market for over a year before I finally felt comfortable getting into the market. I am now approaching two years invested in the market and I am by no means an expert, but in a lot of ways, it’s because I am no expert that you can trust me. My blog isn’t dedicated to getting people to invest in something and I don’t care what brokerage you go through to invest or what you decide to invest in. I am not trying to sell anything here. I just want you to read my blog. I don’t know all the crazy ins and outs of economics but I know the basics and that’s what I want to share here. Interestingly I am finding that just following the basics of investing pays off way better than any advanced method you can find. That’s why this simple method of investing might be the only one you need to know. Here are the basics for investing in the stock market:
Find a Brokerage
You can’t invest unless you go through a brokerage that handles investments. It’s similar to going to a grocery store to get food. Sure there are other ways to find food but a grocery store is mainly how everyone gets their food. Most everyone goes through a brokerage. My favorite is Vanguard. My next favorite is Robinhood. Both of them have apps. I just do all my investing on my phone because it’s easier for me. I use both of these brokerages. I like Robinhood because its user interface is easier and more prompt. It also lets me have a checking account that pays me an APY (annual percentage yield) of 0.3%. It’s higher than your average checking account but it’s also kind of pointless. for $1,000 I get about 0.25 cents a month. It’s a checking account and I don’t have to have a certain amount of money in it or anything and there aren’t any fees so it works for me. The problem with Robinhood is that you can’t invest in an IRA (individual retirement account). I use vanguard because they let me invest in a Roth IRA. I don’t know why but Robinhood doesn’t do this.
What’s an IRA and Why You Should Use One
Okay, so you got your brokerage account. Now you have to figure out the vehicle in which you want to invest. The most basic way to invest is just through a regular brokerage account. That’s all Robinhood does. The only other way that I will talk about here is through retirement accounts. There are also other account types like education such as a 529. There are three main types of retirement accounts: a 401k, a traditional IRA, and a Roth IRA. How I understand it is if the company you work for offers a 401k and especially if they offer to match what you put in your 401k then use it. Otherwise, if you’re on your own use an IRA. Preferably you can do both an IRA and a 401k. If you make a lot of money and pay high taxes you might want to consider a traditional IRA. Otherwise, do a Roth IRA. Roth IRA’s have you pay taxes on what you invest now and then you don’t have to later. Traditional IRA’s are the opposite. They put an income limit on a Roth IRA somewhere in the $100,000 range (the exact amount changes every year). I feel like if you reach the income limit where you can’t invest in a Roth IRA then do a traditional IRA, otherwise do a Roth IRA. Also, they put a cap on the amount you can put in an IRA every tax year; currently, in 2021, it’s $6000. I don’t make even close to the income cap of a Roth IRA, so I max out my Roth IRA, and then I just invest the rest in a regular brokerage account. A big note with IRAs is that you pay a penalty and tax on investments that you take out before 59.5 years of age. I worried about that at first until I realized that the money you put into an IRA can be taken out whenever penalty-free. It’s just the actual investment part that can’t be taken out. If you take money out just keep in mind that you can’t take the money out and then put it back in the next year. the following year you would only be able to put in $6000. (There is a 60 day grace period where you can put the money back in called a rollover.) Now you should have a brokerage with a regular account and a retirement account.
What do I Invest in?
The answer to this question can get complicated. The trick with this one is to stay humble. Don’t start thinking that you are going to go out there read some company investment reports online and know what companies are going to grow like crazy in the future any better than anyone else does. Like seriously! Unless you have a crazy high IQ and are an expert in economics don’t think you are going to go out there and crush the market. Even if you were a genius I would still be doubtful of your ability to beat the market. Big-time investors are known to beat the market from time to time but most don’t and I don’t know of anyone that does it consistently. About 89% of fund managers fail to beat the market over ten years. How do you invest in the market as a whole then? I feel like the consensus is to invest in the S&P 500 (standard and poor). Warren Buffet agrees. The S&P 500 is simply a weighted average of the top 500 companies in America. Most feel that it does the best job of covering the total market. I invest all my money into VOO (Vanguard 500 index fund). It’s Vanguard’s index for investing in the S&P 500. Some might recommend that I diversify more but I think it’s worth the risk. I am young enough (24) to weather any huge crashes in the market. Plus if the market collapses I feel like my money would be worthless anyway. When I get older I will start to diversify into more conservative funds as I would be at greater risk for an untimely turn in the market.
Stay The Course
That is pretty much all there is to investing. You are now officially prepared to do better than the majority of fund managers and all you have to do is periodically transfer money from your banking account to your investment accounts. I think the hardest thing is that it is so simple. Sometimes I watch my money and I just want to do something but the best approach is to just do nothing and let the money go to work for you. I watched my money tank last year with the Covid-19 pandemic only to see it rise right back up soon after. I wanted to take my money out or do something but if I did it could have been disastrous. I am super glad that I didn’t. Did you know that the worst days in the market tend to happen around the same time as the best days in the market? The chances of you being able to get out at the perfect moments and get back in at just the right times are next to none. The best course is to buy and hold while investing consistently over time regardless of how the market is doing.
I think some people like investing because it can be fun, but the way I invest is pretty boring. There are probably a lot of people that know full well that their methods of investing aren’t statistically sound but it’s just how they like to invest. There is nothing wrong with that. Who knows maybe you get some insider information, take a risky investment, and become a millionaire overnight. That would be awesome! You hear about those stories all the time. Just remember that they got lucky. Be happy for their success but also don’t beat yourself up for not doing what they did! Hindsight can make you feel like an idiot but don’t fall for that emotional trap. If you ever do get lucky speculating I would recommend pulling out ASAP and playing it safe. Otherwise, you risk losing it all and being an average investor who actually loses money in the market. Maybe you decide to just do it with a little side cash that you are okay with losing. Maybe you want to take a stab at cryptocurrencies. If you just want to have fun with it and you know the risk then go for it! As for me, I prefer investing in the S&P 500 and spending my time doing other stuff.