A First-Timer’s Guide to Investing in the Stock Market
The stock market rises slowly over time, but short contractions can be costly if you do not have time to recover. Additionally, if you panic and pull your remaining funds out immediately, you will never get your money back.
Keep Things Simple
To start, consider investing in index funds. Another option is to look for large funds with a history of steady growth, even if it is slow. If you want to invest in smaller stocks or crypto, do not put more money in those funds than you can afford to lose.
Avoid Over Managing Your Investments
If you check your investments once a day and start making transactions when you notice losses, you will
- quickly lose your initial investment
- burn a lot of money in brokerage fees
- get frustrated and give up
Anyone who has done their homework knows that stock values bounce around. If you trust the company or the fund, consider a contraction or a drop in value to be a sale. If you are going to engage in a knee jerk investment option, run in and buy more when stocks go on sale.
Go Ahead and Experiment
If you want to put some post tax dollars into a stock brokerage account and do not want to worry about setting up a Roth IRA, go ahead and learn by doing. Set up a brokerage account and set up a monthly deposit. Review the stocks for sale in your price range and check their history. If you notice a steadily growing fund that has a slight drop, buy in the drop and hold on.
Go For the Free Money
If your job offers a 401(k), sign up as soon as you qualify. Do your best to contribute enough that you get the full match from your employer. Consider putting your contribution into steady, slow growing funds, then go ahead and play with the employer match.
If you have an emergency fund, a 401(k), and the chance to save more, consider setting up a Traditional IRA. Traditional IRAS have contribution limits and income limits, so make sure you follow those rules. However, if you need a tax break, a traditional IRA is a good way to reduce your taxable income and the income tax you pay now.
When you take money out of these accounts, it will be taxed. However, you should be aware that there are states that tax pensions, social security and retirement payouts at lower rates than regular W2 income. Make sure that you include location in your retirement planning.
Do Not Freak Out
Money is extremely personal and emotional reactions to a possible loss are perfectly understandable. However, these reactions are not necessarily logical. We know that most indexes grow over time. If you can buy a slice of an index, such as the S&P 500, you have a very good chance of earning money on it over time. Unless you really cannot handle the heartburn of investing, stick with a buy and hold strategy.
The stock market tends to fall on rumor and rise on fact. You may notice a drop in valuation that makes no sense whatsoever. Hang in there. If you have to, ignore it until things settle down.