The Day Tradette

Master the Stock Market

How to Invest in Stocks in 6 Easy Steps.

The first and most important step is to know thyself. What does that mean?

That means you need to understand if you are risk averse. During the last downturn did you sell all your stocks? Did you panic? And if you did, then you need to know that before you create an investing plan for stocks for yourself. It is critical to know how you will respond to changes in the stock market to protect yourself from ahead of time from yourself. What kind of time commitment can you give to your stocks? It is important that you create a plan that synergizes with how much time you have because different levels of time commitment can send you down different paths. Do you have extra money? If you have extra money, it will make you more comfortable to take risks. Also, when do you need the money? This changes things a lot. The shorter the time horizon, the more conservative your investments should be and the lower the returns you should expect.

Pick a Vehicle

The second step is to pick a vehicle. What I mean by vehicle is to pick from 3 different classes of stock investments:

Individual Stocks — What most people think of when they think of investing in stocks. I think most people should not invest in individual stocks because of the time commitment needed. It takes so much time to research and invest properly in those stocks. Unfortunately, a lot of people don’t have the time, yet they still invest in individual stocks. They are not really investing, but they are speculating. So, you should definitely stay away from that. You might as well got to Vegas because you odds are probably better in Vegas than if you invest in stock hot tips. Mutual Funds Index Funds — Technically index funds are a subset of mutual funds, but they are so different in my mind that I’m including them as a seperate class.
My favorite of these 3 is index funds because I think this is the best option for 99% of the people out there because it takes very little time, has a very low cost, and long-term you will do better than most people. It also keeps you away from some of your worst instincts.
That is why I love index funds and put all my stock investments in index funds. It is so simple and takes so little time where I can actually get back to my life.
Now, if you have a lot of time and are not very risk averse, then you can actually do well with individual stocks. But, if you are a beginner, then you should definitely start with index funds.

Sharebuilder

Create a Plan

The third step is to create a plan. So, when you pick something from step 2 — let’s say index funds; which you should pick if you are one of the 99% of people out there — you want to create a plan for when and how much to invest. Again, this depends on when you need the money.
You also need to plan for adjustments. With a mutual or index fund this is called rebalancing. If you have 50% of one fund and 50% of another fund. Then one fund grows a bunch and now you have one fund at 60%, then you want to rebalance to 50% each to stick the plan.
There are also other adjustments you may want to do along the way. Let’s say you want to increase the amount of money you want to put into your plan every month or every quarter.
You basically need to a have a good plan and put regular, automatic investments into that plan. This comes back to time — it requires far less time. It also protects you from yourself by keeping you from investing in “hot” things and not enticing you into moving your money around too much. Automatic investments also remove the excuse of “oh, I didn’t have time this month.”

Choose a Broker

The fourth step is to choose a broker.
I think Vanguard is the best for index and mutual funds because their costs are so low and they are really easy to use. I’ve used them for a long time and they are so easy to invest with. They also have good support. You would think that with their low costs that their support would suffer, but it doesn’t. In fact, their support is just as good as the others out there and, in my mind, there’s no reason not go with them.
I also like Sharebuilder with individual stocks because they are one of the lowest cost ways to invest in individual stocks if you invest the proper way. If you setup automatic investments with them, then your price per purchase is very low. It also synergizes with the best way to invest — automatically invest on a regular basis — because they have it built in. This really helps you save money and invest the right way.

Get Started

The fifth step is to get started. Just get started today because the sooner you invest, the sooner you can make money on your money.

Stick to Your Plan

The final step is to stick to your plan. You don’t want to switch between different plans all the time. Having 1 good plan is better than having 10 great plans you switch between over and over again. There’s always going to be costs when switching between plans.
Usually what happens when people try to switch between differet plans is they switch to the “hot” plan when it is hot and move away from the plan when it is “cold.” Actually, this is the opposite of what you’re supposed to do. That is buying high and selling low. In the moment, when most people’s emotions get the best of them, they make the wrong decisions and they end up with lower stock returns than if they put all their money in a single index fund and just let the money sit there. So, it is important to stick to the plan you pick.
Thanks for listening.

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