Money Milestones – Next Steps in Investing: Playing the Long Game and Choosing the Best Options
During this past year, I finally started investing. Well, let me rephrase that — I started investing aside from a 401(k) or IRA. After dabbling a bit with Acorns, I started investing directly in individual stocks using Robinhood(and recently earning free stocks via Bumped). However, as 2019 gets underway, I’ve been thinking about upping my investment portfolio in a big way.
In preparing for this jump from stable savings accounts to a volatile market, I’ve been considering a number of different options — each with their pros and cons. On top of that, I’d be lying if I said the recent craziness in the market didn’t have me a bit spooked about what I might be getting myself into. If you’re in the same boat as I am and want to start taking the next steps into investing, join me for a look at why “staying the course” is so vital as well as some basic investment options and strategies you should consider.
Jumping into a Volatile Market as a Newbie
Perhaps you’ve noticed that the U.S. stock markets have gone a bit haywire recently. While massive point gains and losses can make for great headlines, they can also keep some volatility-adverse investors at bay. If the wild market has you worried, there are a couple of things to consider that might help you change your tune.
Staying the course
You may have heard the term “staying the course” a lot when it comes to investing but there’s good reason for that. Did you know that, over the past 90 years, the stock market has averaged an annual gain of 10%? It’s true — although that average is the result of several “up” years that far exceed 10% and “down” years that fall well below it.
This reality is why, as a beginning investor, it’s important to think in the long-term and not worry about the day-to-day shifts. While it’s natural to look at your falling investment and feel a visceral reaction to what you perceive as money lost, remember that you only lock in losses when you sell. In other words, as long as you hold your stocks and, yes, stay the course, you’ll likely come out ahead.
Securing yourself with liquid assets
Because resorting to selling stocks can lead to big losses, you’ll want to ensure that you have other funds you can tap in the event of a personal financial crisis. This of course starts with having an emergency fund. Experts suggest that you have enough cash on hand to cover three to six months worth of bills in the event you lose your job or have some other emergency emerge. Beyond that you may also wish to have additional savings you can tap, making selling your market portfolio an absolute last resort.
Buying benefits of a down market
With the markets ending 2018 on a down note and analysts suggesting that growth is slowing, you may be wondering if now is really a great time to start investing. As it turns out the answer is “yes.” See, thanks to that whole “stay the course,” long-term investing thing, buying in a down market can actually work to your benefit.
A classic cliche in stock investing is “buy low, sell high” — so why wouldn’t you want to begin your investment while the markets are low? You could almost think about it as if you’re getting a discount from last year’s highs. Although the market could always go lower, meaning that you may miss the chance to buy at an even better price, these regrets and “could’ves” won’t serve you well. Instead, continue to focus on your long term goals and investing what you can when you can.
Now that you’ve decided you’re not going to be a day trader (at least not yet, anyway), you may be wondering what some of the best options are for newbie investors. As you might expect, choosing the “best” investment product and strategy for you will depend on a great many factors, such as your risk tolerance, goals, etc. Moreover, it seems just about any option you choose will have both advantages and drawbacks that you’ll need to weigh and consider. With that, let’s look at a few basic investment options you should know about.
Prior to my recent research into different investment options, I was fairly familiar with the concept of a mutual fund. Of course, that’s only because my wife and I invest in one with our IRA. Even still, I’m not sure I could have told you how this option compared to others until now.
A mutual fund is a basically where a collection of investors pool their money to be placed into a diverse portfolio or stocks and sometimes bonds. Often times these portfolios are actively managed and may be tailored to meet certain risk tolerances or return goals. Because of this, you’ll likely want to look into different mutual fund options in order to find one that meets your needs.
For some, the managed aspect of mutual funds provides peace of mind as there’s a professional behind the wheel. The downside is that this comes at a cost — specifically when it comes to fees. Naturally, these fees can vary by fund so be sure to add that to your list of things to watch for as you’re doing your research.
Something you know about the stock market is that, more often than not, pundits and observers refer to market moves in terms of how specific indexes performed as opposed to the exchange itself. For example two often-cited indexes are the Dow Jones Industrial Average (or “the Dow”) and the Standard and Poor’s 500 (much more commonly known as the S&P 500). Each of these indexes are comprised of various company stocks — 30 in the case of the Dow and, well, 500 for the S&P 500 — meant to represent the overall market.
Just as these indexes reflect the overall stock market, index funds (which are actually mutual funds) mirror these indexes. Simply stated, investing in an S&P 500 index fund will mean you’re investing in the stocks that make up that index. As a result, when you hear the S&P 500 is up X%, you’ll know your investments are also up X%.
While that’s mostly a good thing, it does mean that you’ll only ever do as well as the market and never beat it. On the other hand, considering that average 10% annual gain, you should still see a healthy return over time. Plus, since index funds are fairly straightforward and not actively managed, fees for these types of investments tend to be much lower than regular mutual funds.
While mutual funds and index funds are both product types, dividend investing is more of a strategy. Established companies often pay out what’s known as dividends to investors that reflect how profitable the company was during that quarter. Personally, I actually received a dividend of $.88 a share from The Walt Disney Company this past week. These payouts can either be collected as cash or reinvested to purchase more stocks.
Dividend investing is often still a long-term play but some also look to it for passive income. The tradeoff is that, while some stocks have been known to offer larger dividend payments, returns from their stock growth tend to be more modest. Still, whether you end up reinvesting your earnings or utilizing these dividends to achieve other financial goals, you may consider seeking out dividend-rich stocks for your portfolio.
For more on the many aspects of dividend investing, I’d definitely recommend a post by Jim Wang over on WalletHacks. There he breaks down a monthly passive income strategy, highlights dividend stock and funds, and more. If you’re anything like me, I think you’ll find the whole concept fascinating.
Despite having dipped my toe into the world of investing via retirement accounts and a few straight stock purchases, it’s become clear to me that it’s time to up my game. As much as I like seeing my savings balance rise, knowing my money is “safe,” and even earning 2%+ on my funds, the truth is that that kind of return still often falls short of inflation — meaning that my money isn’t growing as much as I think. So, if you too are ready to set fear of volatility aside and take the next steps into investing, consider index funds, mutual funds, and/or looking into dividend stocks to further your investment journey.