It’s all happening. You’ve got the job. You’ve got a place to live. Now you’ve got some expendable cash and you’re ready to play the stock market and invest some of your hard-earned money.
Then you open up a finance news site or search for a hot inside tip and numbers start whizzing by and someone is talking about yields and market caps and short sales and a whole lot of other stuff. Maybe you text a friend for advice, but they seem to know about as much as you do or way too much.
You might feel like you need another degree in finance and the stock market just to understand what’s going on, what might be a good stock to buy and just how you could get started. And you may be asking yourself a few questions: How many stocks should I own? How do I diversify?
There are lots of other people out there trying to navigate the world of stocks too, because there’s so much information and a lot of us don’t learn it along the way.
Only 17 states require high school students to take a course in personal financial literacy according to a 2018 study by the Council for Economic Education.
The trend seems to continue beyond high school as well, with just 55% of Americans owning stock, either in the form of an individual stock, a stock market fund, IRA, or 401(k), per a 2019 Gallup poll on stock ownership.
Tips from some of Wall Street’s luminary figures might help a new investor figure out how to take on the market in a way that makes sense for them, and there might be some easy ideas to start investing for someone not quite ready to purchase a stock outright just yet.
How many stocks should I buy?
Warren Buffett is called the Oracle of Omaha for a few reasons. One of them is that he was born in, and still lives in, Omaha, Nebraska.
The other, and probably more important one, is that he’s been pretty successful at investing professionally in the stock market since 1956 and has become the closest thing to a rock star in the world of investing.
Buffett runs Berkshire Hathaway, the number four company on the 2019 Fortune 500 list. Berkshire Hathaway is a holding company that invests in and buys stock in other companies you’ve probably heard of.
It might seem like Buffett is loaded with some sort of mystical wisdom about what stocks to buy and lots and lots of complicated tips and ideas about how to invest. There’s no doubt that Buffett knows what he’s doing, but his approach to buying stock is actually quite simple.
Buffett is an advocate of holding onto stocks for a long time and buying a slice of the company. He doesn’t think of buying stock like throwing some money into a brokerage account and hoping for the best.
He really considers it investing in the companies that he’s buying stock in. So he sticks to companies he can understand. If a potential investor isn’t sure what that fancy new tech startup does, they might want to think about Buffett’s advice and research stocks from a company they already know. Investors might consider asking themselves these questions: Are there companies you regularly patronize?
Are there companies you’ve known about for a while and seem successful? Is there a company that all your friends are talking about? These can be starting points for research because an investor might have a fundamental understanding of them.
Buffett’s investing advice is a study in simplicity. He thinks most investors should be prepared to hold stocks for a while and buy stuff they understand. Following this approach could mean sticking to a few core investments for a while and potentially not having to worry about spreading investments too thin or trying to time the market (buy low, sell high).
Buffett is not a fan of trying to time the market and actually advocates for buying more when things might seem a bit rocky and prices drop (remember, his tips are for long-term investing) so his advice to be greedy when others are being cautious would make sense over an extended period of time.
John “Jack” Bogle.
Bogle, who died in January 2019, was the founder of the Vanguard Group, the largest mutual fund organization in the world.
Bogle also advocated for holding investments for the long term and to keep things simple. But his take was a little different than owning a few key stocks — he actually advocated for buying the whole market. Yep, the whole market in the form of an index fund.
Index funds for the win
Bogle said in a 2018 interview with the Wall Street Journal that he hadn’t bought an individual stock in about 25 years. And yet he’s viewed as a legend in the investing world (seriously, diehard Bogle fans call themselves Bogleheads, and they hang out on a forum with over 80,000 members).
They’ve even published a book about their own strategies to following Bogle’s advice, with a forward written by the man himself, naturally.)
So, how does a guy who hasn’t made an individual stock purchase in a quarter of a century rise to such prominence in a world built around him? Easy, he just invented the index fund in the ’70s, and the rest is history.
Ok, it’s a little more complicated than that.
Bogle was working at Wellington Management Co. in the 1960s. The company ran a traditional fund. These were big combinations of stocks and bonds that were managed by people who made big salaries and passed on fees to investors, to try to make the funds make the most money possible.
In addition to the fees, these funds could have to deal with the whims of the market and the advisors managing the fund, instead of riding out fluctuations over the long term and steady growth of the market as a whole.
Bogle’s innovation was to track the entire S&P 500 and to do it with low fees. The S&P 500 is a collection of 500 large-cap stocks and is used as a general barometer for the health of the market. These companies are distributed across lots of industries, like information technology, finance, healthcare and energy.
In 1976, Bogle created the first index fund the Vanguard 500 Index Fund. He said the fund sought to put investors in the driver’s seat by offering them a low-cost way to invest in the entire market.
And while it didn’t go over well with experts and pundits in the world of investing, it has since become a standard investing vehicle and even gets some pretty vocal support from Buffett.
Index funds were a big new idea because they made it easy for the average investor to buy into the market. They were affordable, too, with lower fees thanks to taking expensive fund managers out of the equation.
And, they gave investors instant diversification, meaning all their eggs weren’t in one basket when they bought an index fund.
Index funds or ETFs?
There couldn’t possibly be something easier and lower cost than an index fund, right? Well, exchange-traded funds (ETFs) would like to have a word.
The first ETF was launched in 1993, and since then they’ve grown to over $1 trillion (yes, a trillion) in managed assets and have become one of the most popular vehicles for investors.
They also come with a lot of the same benefits that were so new with the creation of index funds, like low fees and instant diversification.
ETFs might be the closest thing possible to automatic investing or investing in easy mode.
While they share a lot, there are some key differences between ETFs and index funds that make them so attractive to such a wide swath of investors.
Some of the advantages of an ETF include:
- Low minimum investment – ETFs are easy to get into at a lower price point. They often can be bought without the minimums that can sometimes be a feature of traditional mutual funds or traditional stocks.
- Easy to trade – Some index funds and mutual funds can only be traded once the market has closed for the day. ETF shares can be traded any time the market is open.
- Diversification – ETFs are usually spread out across industries, making it easy to diversify your portfolio.
Index funds and ETFs are both passive investments. This means that nobody is trying to time the market or find the next hot stock with the money that’s invested. Instead, the fund manager is sticking to a theme like the S&P 500 or the Dow Jones Industrial Average. They can even track against certain sectors of the market like energy or technology.
This gives investors lots of diversification and takes the guessing game out of trying to buy stocks. And investors can probably find an ETF that is just right for them. Remember Buffett’s advice about buying what you understand? Chances are if there’s something an investor is passionate about, there’s an ETF for that.
There are funds for clean energy, ETFs with a focus on machine learning and artificial intelligence. You can even invest in organic food and farming with an ETF. All investments, including investing in ETFs, come with risks that include the potential for loss.
Why not both?
Maybe you’ve done your research and found a company that you’re super passionate about, but you still want the ease and low barrier to entry of an ETF. There’s no reason an investor can’t have some good from both worlds. The key is to find the approach that works for each individual.
Once an investor has done the research, figured out what kind of diversification makes sense and decided just how many stocks they should own, they might be ready to take the first steps to build a portfolio that’s just right.
Original source: Mediafeed.org