by For many, having a savings account is natural and a stock account is considered “too risky”. Afterall, for most opening a checking account is a right of passage and along with a checking account one is generally offered a savings account…which means you have likely had a savings account for quite some time. Even in today’s era of online banks dominating, whether that be the likes of Ally, Axos, Simple, or anyone of the myriad of new fintechs out there competing for your business, they lead with a checking account and inevitably try to offer a savings account. Of course we are proponents of savings accounts but it is tough to truly get ahead with a savings account. Growing your net worth isn’t going to come just because a bank is offering 1.1% on their savings account vs. the traditional .1% that the “big banks” are offering.
We believe many avoid investing in the stock market due to the perception of risk. Savings accounts eliminate the risk component by providing a guaranteed, FDIC insured, rate of return. Yes you are certainly guaranteed a return, but that return isn’t necessarily going to help you grow your resources in the manner that you might be thinking. While the stock market doesn’t provide the safety of a guaranteed return there are many companies in which you can invest that have such a long track record of returns you might even consider your yield guaranteed. If you haven’t yet got into the stock market, consider a few key strategies to help you start, grow your portfolio, and stay for the long haul.
Strategy 1: Invest What You are Prepared to Lose
You might be thinking, I thought they just said “it could nearly be considered guaranteed”? While there are companies with 100 years of dividend history most people don’t start because they fear losing the money; which is why we suggest starting with a nominal amount. For example if you have ever gone to Las Vegas and lost $100 gambling, start with a $100 in a stock account. Or maybe you have spent $200 on a night out of drinking (literally drinking your money away), so you could start with $200.
Most of us have some event where we spent a few hundred dollars trying something and it might not have gone how we planned; use that as your anchor point to start in the stock market. Once you start you will see it is incredibly unlikely your investment would go to $0 (more on that later) and you will have overcome the biggest hurdle…starting!
Strategy 2: Look for Companies with a Dividend
Much like a savings account provides an interest rate, a dividend is the rate of annualized return that a stock will provide its shareholders via quarterly payments (i.e. dividends). To help you overcome your fear of starting, consider stocks that have a dividend as those stocks will pay you, much like a savings account pays you. While a savings account will pay you interest monthly a publicly traded company will pay you quarterly. Each quarter you will see money deposited into your account or most platforms will even allow you to re-invest your dividends to additional shares (or fractional shares) of the same stock.
Investing in companies that have a dividend will help you to see that the market isn’t as risky as you might have imagined and the yields can be 4-7%+ where most savings accounts are .1-1%. To help you have confidence that the dividend will get paid, try investing in companies that have a long history of paying dividends (you can be uber conservative and see the list of companies that have paid dividends for 100 years to really get started with ease).
Strategy 3: Understand Why You Are Buying
We are not referring to your big financial goal, rather we are referring to what specific plan you have for the specific stock purchase you are making. Investing in individual stocks is different than investing in mutual funds. Individual stocks provide for greater volatility (both upside and downside) and with that volatility you can identify a goal for each purchase you make. We invite you to select one of the following principles of why you are investing in a particular stock:
- Investing for Growth – For stocks that don’t have a dividend (i.e think many of the tech stocks) what gain are you targeting? Are you looking for a 40% growth and then you will exit? Decide ahead of time what gain you are happy with and wait for that moment.
- Investing for Yield – For stocks with a history of dividends they can be as solid as a savings account. Buying them at the right price can give you a consistent strong yield and that generally means you will hold them for a period of time to have a consistent flow of dividends. With these stocks you can even choose to reinvest your dividends into additional shares.
Strategy 4: Avoid the Penny Stocks…to Start
Penny stocks don’t necessarily sell for a penny (but they can be close). Penny stocks are those stocks that trade <$1 and are characterized by having a high volatility. Those who are new to stock investing are often attracted to them because you could get 100 shares for your $100 and that appears to be a great opportunity but the high risk nature means that you also have a greater chance to go to $0 which could discourage you from investing in stocks for the long term.
Strategy 5: Buy in What You Know
The adage made famous by Warren Buffet still remains true today. With 1,000’s of companies to choose from, endless charts, countless hours of shows talking about stocks, the simple truth is you can truly buy in what you know and if you are prepared to hold the stock long enough (generally 3+ years) then you will be in good shape.
Don’t overcomplicate this rule, it really means “buy what you are familiar with”. That means if you have a passion for yoga and you purchase Lululemon clothes, then purchase shares of the stock (LULU). If you drive a Toyota then purchase their stock (TM) as you literally have already invested in the success of the company through your car purchase.
The best time to start investing in stocks is today. Don’t overthink your investment, just get started today to start seeing how you can grow your financial wealth through stocks.
Platforms to start investing in stocks:
- E*TRADE
- SOFI
- RobinHood
- TD Ameritrade
