Let’s Talk About Stocks, Baby
This post is from wifeish, who believes “More money = better wine.” Check out her blog at Wifeish Money.
Let’s talk about the stock market. Don’t worry! I have GOOD news! First bit of good news? Investing in the stock market can be very simple. In fact, for the average Jane or Joe there are only a few types of funds your money should be parked in.
Where to start? If your company offers a 401k contribution program sign up! You can choose an amount to be deducted from every paycheck which is then placed into an investment fund. How much to put in? If your employer offers a match, put in the minimum amount to get that free money. My company matches my contributions up to four percent. Since we are trying to build up our emergency cash fund, we only contribute that four percent. Once we have a big fat piggy bank full of emergency money we will probably up that amount. Did I mention that your 401k money is taken out before taxes? Bonus!
Ready for more good news? Stocks are on sale! Now is a great time to start investing in the stock market. Right now you can buy a share of an S&P 500 ETF for about 115 dollars. In 2007 that same piece of the same fund went for about 150 dollars per share. Now remember, this is for the long haul, people. Who knows what price that fund is going to be at in two years? Could be higher… but it could be lower. So the money you put into this fund is money you will not need to touch for a minimum of twenty years. LONG TERM. You should not use your 401k or Roth IRA as an emergency savings account.
For the average person, investing should be simple. Start early. Go slow. Gradually build your portfolio with a variety of funds. The rule of thumb is be a turtle, not a rabbit.
One way to think of the stock market is like a mall. The mall has a lot of stuff you need, a lot of stuff you want and a bunch of stuff you would never ever in a million years need to buy. So what do you need from the stock market? You need mutual funds. Mutual funds are stocks from lots and lots of different companies all pooled together. Mutual funds come in all kinds of flavors from “blue chip” which are made of companies with a long history of stable growth (think: McDonalds, Wal-mart, Apple, etc.) There are energy funds which are made up mostly of oil and utilities stocks and there are real estate funds which invest in…duh…real estate from lots of different companies. There are too many different kinds of mutual funds to name. However, there is really only ONE type that is crucial to the beginning investor.
I believe that every new investor should begin with a mutual fund that mirrors the index. These funds are referred to as index funds. For some reason I just love the S&P 500, which is the index upon which our entire stock market is valued. The S&P 500 contains stocks from hundreds of American companies. It is suuper diversified, meaning if one company from the fund went under, it wouldn’t ruin the whole portfolio. Diversity is good, really good.
I am not here to tell you what to do with your portfolio down to every last fund. I am here to to give you a few tips to help you get started.
Don’t put all of your eggs in one basket, choose general and diversified funds. When going shopping you look in more than one store for the best deal, right? Same thing with mutual funds. Each one has something different to offer, and the more funds you invest in, the more your money is spread around in case one company or set of companies doesn’t do so well. I have 75% of my 401k dollars going to one type of mutual fund and 25% going to a different type. I only use two funds, but they are both low risk and very diverse.
Know where your money is going! I cannot stress that enough. Not every mutual fund carries the same level of risk. The S&P 500 fund is low risk over the long term as are the blue chip funds. Energy and real estate funds, however, carry more risk. Also, know how diverse your funds are. Some contain a lot more companies than others. Fidelity is the company in which my 401k is housed. Fidelity gives me a list of mutual funds and asks me how much money I want to put into each one. I picked two after doing research on what types of funds they were and how to gauge how well they are doing. Know the long term history of your funds. I also know what factors go into their performance. For example, my energy fund contains a lot of stock in oil companies. What the price of oil shoots up, my fund makes money.
Don’t ever, ever buy stocks. Remember how I said the stock market is like a mall? Stocks are like the 500 dollar Ferragamo pumps you will only wear once. Money out the window! Unless you have that money to throw away, don’t do it. Trading stocks is the same as going to Vegas and hitting the poker tables as far as you and I are concerned.
Don’t be afraid! You have the power to invest for your future wisely!
What’s your favorite avenue of investing money?