In the previous two articles in this series, we’ve talked about how to save money and the short-term security you should save for. Now, we’ll continue with the first step in the wealth-building strategy: stocks.
We’ll go through the most frequent questions and provide our answers.
Why are the stocks the first thing to invest in?
Unlike real estate or most other investment opportunities, stocks are very gralunar, allowing you to buy a whole share for $100 or even fractions of a share on various trading platforms.
Each month, you can take the money you saved, buy stocks for the whole amount, and start accruing value immediately.
What stocks should I buy?
The most frequent resistance we hear when recommending investing in the stock market is “I know nothing about the stock market,” which is, in fact, great news since this will allow you actually to make money.
88% of managed funds run by professional investors underperform the stock market, so by not knowing anything about stocks, you can easily beat their performance by investing in the stock market index.
S&P 500 is the index of the top 500 companies on the US stock market, and several ETFs (Exchange-Traded Funds) track this index. If you buy 1 share of an ETF like this, you essentially have a small slice of all the top 500 companies on the stock market they are indexing.
Over the long term, investing in the stock market through ETFs is guaranteed to increase wealth. Even if over a 1-2 year period, the stock market might decrease on average, but over 10 years, it returns an average of 10% per year.
When should I buy the stocks?
Buying at the right time compared to the wrong time can make a massive difference in the returns, but it’s impossible to perfectly time the market.
The best thing you can do is steadily buy stocks every month; this way, you’ll sometimes buy at the worst time, but equally, you’ll also buy at the best times. On average, you’ll always be ok and avoid the worst mistakes.
How should I buy stocks?
We don’t want to recommend a platform, but you can research the best platforms or ask friends for advice and find a platform with good credibility and low commissions.
As for the ETF you should buy, look up the biggest ETFs for the index you want to trade (S&P 500, for example) and find the one with the lowest commissions. A 0.20% commission, compared to 0.03%, adds up to a lot over time.
Although the S&P 500 is generally the most popular option, other index funds can index the whole market, not just the top 500 companies, or index a specific sector like tech or pharma. We don’t recommend them when starting out, as certain events can impact an entire industry, and you should avoid being exposed to that sector risk.
When should you sell?
The goal is long-term savings, so you shouldn’t sell and shouldn’t try to time the market, as you’ll probably miss the mark more often than not.
As you approach retirement or a point where you want to diversify or buy your own house, you can sell stocks and buy bonds or real estate. You should aim to sell while the market has been growing and perhaps employ the same strategy of selling a bit every month.
But what if I want to pick my own stocks?
We mentioned that just 12% of professional investors outperform the market. Still, if you’re convinced you would be in this 12%, you can allocate part of your monthly investments into specific stocks. We’ll discuss strategies in a future article, but we recommend you allocate only a minor portion of your monthly investment into individual stocks.
Are there taxes?
Every time you make money, the government will want a slice of that.
Generally, the taxes are owed when selling stocks and realizing returns, and depending on your country, this might be simple or quite complex. If your country has complex taxation, research the subject and speak to a tax specialist to ensure you don’t lose too much of your gains on taxes.
Conclusions
Investing in the stock market is easy if you pick an ETF instead of individual stocks, buy them steadily without trying to time the market, and look at their performance rarely, if ever.