First of all, let me begin by saying I am not a licensed broker and the advice I am about to give you is based on lots of research as well as my experience dealing with the stock market over the past 20 years.
Over time, the best investment you will make will be in stocks. People will argue that real estate investing is equally as good, if not better than stock market investing, but consider this. To invest in real estate, you need to have a large amount of money available for not only a down payment but also to pay the monthly mortgage, taxes and expenses of owning a home. Do I think home ownership is a bad investment? No, absolutely not. What I am saying is that there are a lot of barriers prohibiting people from investing in real estate that don’t exist in stock market investing.
You can purchase a share of stock today and all it will cost you is the value of that particular stock or mutual fund you are investing in. You don’t need to wait to save up $20,000 for a down payment in order to invest in stocks or bonds. You do need to do your research though to determine your risk tolerance and exactly which type of financial vehicle you would like to invest in.
The answer to this question lies in your age. How many years do you have until retirement? If the answer is less than 10 years, your investment strategy will be extremely different than a person who has 30 years. The most important lesson I have learned is that given time and consistency, you can be rich.
Determine how much money you can invest each month and add it to your holdings every single month. If you are new to this, don’t buy one specific stock, as it is almost impossible to pick a winner with 100% accuracy. When Beyond Meat went public, everyone and their mother rushed into the stock, which shot up to almost $240/share in the first 4 months of trading, only to fall to $82 in October. Those who bought the stock towards the top are now kicking themselves for diving into a ‘momentum’ stock.
Instead of stock picking, I advise either investing in a diversified mutual fund or selecting an Exchange-Traded Fund (ETF). According to Investopedia, an ETF is a type of security that involves a collection of securities—such as stocks—that often tracks an underlying index, although they can invest in any number of industry sectors or use various strategies.
The next thing to do is add to your investment every month until you retire. I know it sounds tedious, but trust me, at the end of 30 years you will thank me. Let’s look an example.
- Initial Investment: $5,000
- Monthly Contribution: $200
- Years Until Retirement: 30
- Average Rate of Return: 10% (12% is the historical average of the S&P 500 over the last 30 years)
- Total at the End of 30 Years: $521,111
Look at that! Adding just $200 each month over time will net you a ton of money at the end of 30 years. Of course, this amount can be adjusted based on your income. Most people begin earning more in their 40s and 50s, so if you have an extra $500 to contribute during those years, that would be even better.
One more piece of advice. Do not panic. The market WILL go up and it WILL go down. Just keep investing and enjoy the ride. You may need a glass (or bottle) of wine along the way, but it will be worth it.