New year. New resolutions. New winning habits. If it hasn’t been on your list, investing some of your money in the stock market should be. People all over the country are making real money in the stock market every day, and you can too.
Maybe you’re skeptical, having heard horror stories from others about large losses. Or maybe you think you need to know a lot or spend time or money you don’t have to be a successful investor. Don’t let these thoughts and feelings stop you. Here are three things to think about as you consider buying your first share.
Risk and Reward
Few investment options rival the stock market. Some people, wary about its risks, park their money in savings accounts or investment properties. However, over time, the stock market has returned approximately 7% (post-inflation) each year since 1940. Compare that to a 1.5% post-inflation return for real estate. You can earn more than that by parking your money in certain savings accounts, and without the headaches of property management.
Now, a 7% annualized return doesn’t mean you’ll necessarily get a 7% return this year if you invest now. In fact, your investment could lose nearly all of its value tomorrow. But if you invest for the long haul, say, ten, twenty, or thirty years, then your total average return each year may be in that ballpark. And if you’re looking to save for retirement or a similar big ticket item, that’s the kind of return you need.
Minimal Starting Investment
Many app-based investing platforms allow you to invest as little as $5 at a time. And while that may not seem like a lot, if you invest regularly over time you could amass a substantial portfolio. When you invest regularly, you take advantage of a strategy known as dollar-cost averaging. As stock prices fluctuate, your regular monthly purchase of shares of a specific stock will be bought at different prices each time. Some days, you’ll buy fewer shares when the stock price is high. Other times, when the price is low, you’ll obtain a lot of shares for the same price. Over time, your average price per share will decrease, and you’ll see a higher return on your investment. This can be a great way for you as a beginning investor to build real wealth. You just need to make the commitment to get started and the will to keep investing like clockwork each month over time.
If you’re like most people, without a lot of time on your hands, consider investing in index funds. Index funds are mutual funds designed to mirror a major stock market index (like the Dow Jones Industrial Average or the S&P 500). Historically, stock market indices have increased over time. For example, in 1990, the Dow was just under 2,700. Today, it stands at over 30,000.
Index fund investing is simple. You buy shares, and you hold them for long periods — five years or more. And you watch and wait for your money to appreciate. There’s still risk, but your risk is reduced substantially by the fact that the fund represents multiple stock. One stock price decrease is offset by another stock price increase. You get the upside of long-term gains with minimal risk.
There’s a lot more to investing and plenty of great resources out there to help you learn. But you’ll learn best by starting to invest. Resolve to open a brokerage account this week and put a few dollars to work for you today.