By now you’ve likely heard that you should be investing toward big financial goals – like retirement. Great advice! But it can sometimes be a struggle figuring figuring out how to invest. Well, here’s how to invest when you know nothing about investing.
“Let me add a few thoughts about your own investments. Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.” – Warren Buffett
Thankfully there are modern-day services that make it very easy for average people to benefit from investing. Very little investing knowledge is required and there aren’t even minimum dollar amounts. You can open an investing account with as little as $50 or less!
What is investing?
Investing is putting money to work with the intention of a higher payback over time.
You might invest in starting a small business because you believe that the return you get (from profits and potentially setting the business later) will be a lot higher than what it costs for you to initially start the business.
Similarly, you can invest in the stock market, which consists of businesses other people already started. Large well-run businesses tend to increase in value over time. Think General Motors, Apple, Microsoft, and similar. Through the public stock market, you can purchase a small ownership stake in these companies (and many others).
Additionally, you can invest in bonds. With a bond, rather than owning part of a company, you are lending money to the company. The company pays an agreed interest rate but you don’t get to benefit from any profit growth.
Bonds tend to be more consistent in payout but provide a much small overall return than stocks.
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You don’t have to pick or research stocks
Rather than picking individual companies to invest in – which is generally considered not worth the effort – investors can purchase an index fund. That index fund then owns a group of companies. So you make one purchase – a share of the index – and wind up owning a small percentage of a whole bunch of companies.
The most popular index is called the S&P 500 Index. Click the link there if you want to learn more about it, but from a high level this is what is often called “The Market”. It’s 500 of the largest companies available for public investment.
“Consistently buy an S&P 500 low-cost index fund, I think it’s the thing that makes the most sense practically all of the time.” – Warren Buffett* in a CNBC interview
* Who is Warren Buffett? Here’s more about him and his million dollar bet.
What’s the easiest way to get started investing?
Thankfully there are low-cost and super-easy investment services available. My favorite – and one I often recommend – is called Betterment.
No minimum investment amount
Betterment doesn’t have any minimum investing requirements. Seriously. None at all.
Go for low-cost investing
Their service is also extremely low-cost. It doesn’t cost investors anything at all to make an initial purchase. This is important because traditional brokerages (people who sell stocks) charge money on every single investment purchase and sale. When you are investing consistently every month, which is the best way to invest, those trade fees can eat up your profits.
Instead of charging for purchasing investments, Betterment charges a low .25% (yes, one-quarter of one percent) annually on your account.
Make sure it is easy
Betterment is also very easy to use!
You can make investments of any dollar amount whenever you want. But, even better, you can set it up to automatically transfer a certain dollar amount each month into your investment account.
They’ll automatically diversify your account for you too. Diversification just means spreading your money around to balance risk to a level that is best for you personally. So you might own some bond indexes, some US company index, some international company indexes, etc. Don’t get overwhelmed with that idea though – they do it all for you! Send them $100 and they’ll split it up into the best mix of low-cost indexes for your goals.
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That’s all you need to get started!
That’s all you need to know. Really.
The most important thing is GO DO IT.
A lot of people think about investing but they never get around to it. Study after study shows that it is the best way to build wealth and reach big financial goals. The sooner you get started, the better returns you’ll see.
Not convinced? Consider the growth potential…
Consider that if you get a 10% return (about what the market has averaged over its history) your money will double every seven years. $1,000 becomes $2,000 then $4,000, then $8,000. That’s just a single investment over 21 years – an 8x growth of your money! If you get started now and put money in each month think just how much you’ll have available for your retirement.
Here’s an article showing how much you would need to invest each month to have a million dollars of investments at retirement. A lot less is needed if you start at 30 than 50!
Consider that long timeline available
What do you mean you don’t have enough time to grow serious wealth? You’re too close to retirement? So what?
Do you realize that the average American will still live 20 or more years after they retire?
That means if you are just ten years from retirement your investment timeline is actually about thirty years. Do you want all of your money earning a potential 10% each year in growth? Or do you prefer to have it earning 1% in a savings account and losing ground to inflation?
I’ll leave you with this thought so I don’t drag out this post too much… Here is an entire article I wrote a while back on the risk of NOT investing in stocks. It’s a great read if you need just a bit more information to convince you to get started.
I really do hope you’ll take action and get started with your investing. If you don’t, in five, ten, or twenty years you are going to regret it.
I’m a huge fan of the S&P 500 but I am curious to learn more about some of the robo advisors like Betterment. I think that more and more young people will gravitate towards them and continue to gobble up shares of the advisor market. Should be interesting to see. Great post!!!
Thanks for stopping by MSM! Yeah, I think for anyone – of any age – who doesn’t want to do “the work” (research, portfolio decisions, rebalancing, etc.) of investing, the robo solutions are a GREAT option. They’re low-cost and most are super-easy to use. Just need to determine which is exactly best for someone’s specific needs.