I Wish I Knew This Before I Started Investing
Here are 6 steps I wish I knew before I started investing.
Before we start, imagine you began investing in 1985, and for a while, your investments were on a steady rise until...
Black Monday occurred.
Black Monday refers to the global, severe and largely unexpected stock market crash in 1987.
People were scared it could be the start of a repeat of the Great Depression!
The repercussions of the decline impacted millions of investors around the world.
Worldwide losses were estimated at $1.71 trillion.
Until then, your friends likely considered you a financial genius.
However, when they urged you to sell during the crash, you resisted.
Eventually, the market recovered, until...
The Dot Com Bubble in 1995.
The Dot Com Bubble was fueled by technology and the internet which left traders and investors in shock.
Again, your friends pleaded with you to withdraw your money, fearing potential losses.
Yet, you held your ground, and things rebounded until...
The Global Financial Crisis struck in 2007.
This makes it one of the most impactful events in generations with huge consequences.
Little did you realize you were in for an extraordinary ride until...
The Covid Crash hit.
It shut down the global economy, and it is marked as the worst downturn since the Great Depression.
Surely, this is the end of the stock market, but with the reopening, it surged by 27% from its low, achieving new records.
What an impressive comeback.
Even with the various market crashes, the average return throughout this period stood at 11.23% per year.
If you had consistently invested $250 monthly during this span, your total earnings would have been $1,841,521.08, resulting in a remarkable return of over 6000%.
Now, you understand the transformative power of investing.
Let's delve into the specifics.
It's quite fascinating how many people discuss investing without demonstrating the practical steps.
So, I'll swiftly guide you on six steps I wish I knew on how to invest in stocks when I first started.
Keep in mind, I'm not a financial advisor; this is simply my approach.
And before embarking on any investment journey, ensure you have an emergency fund equivalent to six months of living expenses.
Step 1
The first step on our checklist is to set up an account.
Many individuals find this stage challenging due to the plethora of investment platforms and various account types that are available.
However, I assure you, it's more straightforward than it initially appears, especially with the convenience of online processes.
Opt for a tax-advantaged account to avoid unnecessary taxes.
In the US, these are known as Roth IRAs, while in the UK, they're termed stocks and shares ISAs.
With an ISA in the UK, you can invest up to £20,000 annually without incurring capital gains tax on your profits, and you have the flexibility to withdraw your funds whenever needed.
In contrast, Americans need to wait until they reach the age of 59.5, and they face a lower annual limit of $6,500.
Step 2
Next, it's time to fund your investment.
Most brokerage apps simplify the deposit process, offering various options like instant bank transfer, regular bank transfer, and debit/credit card.
Invest an amount you feel comfortable with.
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Step 3
Alright, let's sketch out a winning strategy.
The key thing to remember is that the market fluctuates, making it challenging to consistently pick winning individual stocks.
That's why I opt for a different approach—I invest in the entire spectrum.
It might sound unconventional, but bear with me.
Think about music charts; whether you're a Maroon 5 fan or into other genres, the concept is the same.
The songs that perform well climb the charts, while those losing popularity drop out.
Now, apply this to investing in an index fund, where instead of songs, you have companies.
Consider the S&P 500, a compilation of around 500 major public companies in the USA, including giants like Apple, Microsoft, Nvidia, and Tesla.
Similar to the music charts, companies that underperform risk being removed.
The beauty of an index fund lies in a single click—you're not just investing in one or two companies but in every entity on the list.
So if one company doesn't perform very well, your money's okay, as you are spread across all of them.
Step 4
How can we implement this strategy?
The key is to automate our long-term investments.
This approach is fantastic because it allows you to set it up and then let it run without constant monitoring.
Essentially, you set it and forget it!
Let me illustrate with a quick example.
Imagine Ivan invests five dollars in the S&P 500 every day.
Why five dollars?
Well, that's roughly the average price of a Starbucks coffee.
With this routine, his portfolio would perform admirably.
After a year, he would see a return of $100.54, amounting to a 10.47% gain.
Not too shabby for a daily investment of just $5!
To set up a system like this, navigate to your brokerage app and choose the stocks you wish to include in your portfolio.
Once configured, you can even examine the anticipated future value of your portfolio based on historical averages.
Of course, when you invest, you can get back less than you invested, as investment returns can fluctuate, but this approach still provides a solid estimate of potential earnings backed by data-driven projections.
Let’s just say, you are buying the Vanguard S&P 500 with a 12.47% average annual return.
If you invested $250 per month for 31 years, you would have only invested $93,000 of your own money, yet your portfolio could reach $1.1 million.
Extending this to 40 years could result in a portfolio of $3.45 million, when you have only contributed $120,000 of your own money.
Experimenting with these numbers can be quite motivating, revealing the substantial returns achievable with a modest monthly investment.
And for those people saying, "Well, what about inflation? It will make your money worth far less in the future."
As long as you're investing and not just keeping your money in a bank account, then inflation is not something you need to be extremely worried about.
Additionally, I increased the amount I was investing to keep pace with inflation.
Step 5
Now, let's move into selecting individual stocks.
While I wouldn't particularly recommend beginners to engage in stock picking, I understand many of you might attempt it, especially after witnessing individuals amass fortunes from meme stocks like GameStop.
There are essentially two approaches to deciphering the stock market: technical and fundamental analysis.
Those swift day traders lean heavily towards technical analysis, scrutinizing price charts and patterns, believing they can predict stock movements merely by observing the fluctuations.
Personally, I'm more of a long-term investor.
I delve into the details of a company's fundamentals — the financials, leadership, and brand recognition.
I believe this is where you find the real insights for anticipating a stock's enduring success.
I meticulously examine income statements, balance sheets, and cash flow statements.
When I invest in a stock, I commit for the long term, at least a minimum of two to five years.
Step 6
Now, let's go ahead and buy a stock.
There are a couple of options available.
The first one is a market order, akin to going to a supermarket and paying whatever the price tag indicates.
On the other hand, a limit order is comparable to negotiating for the best price at a flea market.
You can specify a price you're willing to pay, and if the stock's price reaches that level, the app will execute the purchase for you.
For beginners, that's essentially all you need to be aware of; delving into the other options might be unnecessary.
But Isn’t Investing Risky?
So now you know all the steps.
What's holding you back?
Well, it all sounds great, but isn't investing a bit risky?
Well take a look at this.
If you consistently invest $500 every month starting at the age of 25, you could potentially accumulate around $1.1 million if you invested for over 30 years.
However, if you delay by 10 years, the impact is significant, and your portfolio might only be worth $380,000.
The difference is remarkable.
So, the key is to start early.
As long as you have a diversified portfolio of index funds and you keep investing at a gradual rate each and every year, then even if there's a stock market crash, historical data indicates that you can weather stock market downturns.
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- Ivan