If You’re Starting Out In The Stock Market And Have No Idea What To Do With Your Money (Or If You Don’t Have Any Money To Start With), Read This
By Michael Koh
Marketwatch says that millennials are too scared to put money in the stock market. Okay, fine, they got that data from Bankrate, where it was revealed that just 26% of people under 30 own stocks, versus 58% of 50- and 60-somethings.
I’ll admit it. I was scared too. I was scared — I still am — of losing money that could have gone towards something else (like food, paying bills, and the like). Then I jumped into the pool head first (or is it feet first?) and from there, I had to read and understand as much as I could about the market. (Jay Sun made a list of why you should start investing now, versus, say when you’re in your late 30s. Check it out here.)
I started with $50 in a Kapitall account, which I increased to $100 by mid-January in 2014. I’ve sold almost all of the stocks I’ve purchased (which I’ve made zero money on), and I’m holding on to two right now, both in oil: SARA and PDS. (In my defense, rumor mill spun SARA as a company that would take off, but no one foresaw oil dropping 50% in value. With PDS, I purchased at $5.11, and now, as of this writing, they are at $7.30.)
Even though I was buying and selling in miniscule amounts, I learned two things from this.
- Daytrading will bankrupt you. You see, brokerages charge fees for you to purchase and sell stocks. It can be anywhere from $7.95 to as high as $9.99.
- No one can time the market. You can read as much as you want about the stock, but you won’t be able to say when it will spike, or when it will bottom. I tried to time the bottom on Helmerich and Payne, only to miss it (it was $54.00) and lose out on what some have called it, “the chance of a lifetime.”
For people who are genuinely curious and want to enter the market, simply create a brokerage account. I have mine with Schwab. But I understand why you hesitate. The minimum amount required to create a brokerage account is intimidating. For example, Vanguard asks that you have a minimum of $3,000 to trade their funds (and $10,000 for their admiral shares). I think Schwab requires you to have at least $1,000 in deposit to start out your account, although the minimum required to trade their funds is $100 and at least $1 thereafter.
To get started, what you can do is get a high-yield savings account like Barclays, or GE Capital (but I’m pretty sure GE is getting rid of their financial arm). Look for something with at least 1% interest. The nice thing about Barclays is that there is no minimum and no fees involved. Save your cash there until you meet the minimum for a brokerage account of your choosing.
Let’s say you have $1,000 and you’ve decided to go with Schwab. Okay, that’s cool. There’s no rule to what brokerage firm you should go with. How do you go about using said money in the most efficient way? Two words: Index funds. These passively managed portfolios are the key to you cruising to your retirement. They aren’t the be-all-end-all saviors, no way, as they’re still at the mercy of the market, but all-in-all, index investing, for people like us, is the best way to manage your money.
Jack Bogle, the founder of Vanguard, writes and talks a lot about distributing wealth — asset allocation, as Bogleheads call it, is something I’ve been thinking about recently. You see, having money in all US stocks can come and bite you in the ass. This would be a case of “putting all eggs into one basket.” By putting money into different asset classes, you’re protecting yourself from losing all of your money. That means investing in US Stocks, International Stocks, Bonds, and maybe even REITs (if you decide on a Core-Four Portfolio).
So, hypothetically, with your $1,000, you can distribute it into these three asset classes. Let’s say you’re in your mid 20s. You can afford to take on some risk. So you might be able to do this:
- Bond: SWLBX (Intermediate-Term), at 30%
- Stocks: SWTSX (Large Blend, Total US), at 40%
- International: SWISX (Foreign Large Blend), at 30%
So that would mean you’d place $300 into SWLBX, $400 into SWTSX, and $300 into SWISX. You don’t have to worry about purchasing entire stock, because you’re allowed to purchase fractions of funds, which means you can own 3.81 shares of an index fund.
This isn’t a get-rich-quick scheme. This is all about maintaining your money and working towards your retirement. And you want to preserve as much money as you can, which leads me to expense ratios. You want to put money into a fund with the least amount (Vanguard is very good at this, when you get enough money to start a fund with them, go do that). It looks like SWISX charges 0.23% (gross expense ratio), SWTSX charges 0.10% (gross expense ratio), and SWLBX hits you with a 0.55% (gross expense ratio). Figure out just how much expense ratios carve out of your portfolio before you go and put money in! Here’s a calculator to help you find that out.
From there, add your allotted amount each month (or however many times you’d like to contribute to your portfolio in a given time), and maintain that ratio. This allows you to maintain the same allocation for a long period of time before you have to go off and re-balance it.
Of course, before doing anything, ask yourself this: How much risk can you tolerate? How much can you afford to lose? Will you be able to continue contributing to your portfolio even through the darkest of times?
There’s something inside me screaming, BUY MORE OIL, BUY MORE OIL NOW, BUY DEFENSE! And I’m sure it’ll happen to you, too! But don’t listen to what the greedy voice tells you to do. You’ve plotted your course, so stick to it.