I talk with so many people that seem to be afraid of investing. They see it as gambling or are otherwise scared that they will lose all their hard earned money. To me NOT investing is a huge mistake. Think of it this way, if average inflation in the U.S. has been about 2% and interest rates on savings accounts has been less than 1%, you are technically losing money year after year. That’s not to say that you shouldn’t have money in savings, you absolutely should, but extra money you have that is not booked marked for other important uses can be invested. 

No doubt there is risk involved when investing, but over longer time periods, 5 -10 years or more, it is very rare for the broader stock market (S&P 500) to lose money. According to Goldman Sachs average 10 year returns are 9.2% annualized over the last 140 years. For reference, this means taking a hypothetical $10,000 and turning it into about $25,000, just by letting it sit there for 10 years. Not bad.

Key takeaways

• Get a brokerage account that aligns with your investing style and needs.

• Figure out how much investment you are able to afford. Starting small is ok.

• Automation is your friend. Small weekly or monthly deposits work great.

• Keep speculating to a minimum and don’t risk more than you are willing to lose.

How to start?

There are a lot of options nowadays Robinhood, Fidelity, M1, Axos Invest etc. If you already have a brokerage you like, great. Different brokerages have different strengths and using more than one brokerage may be useful. You will need to determine what your investing goals are. How much time are you willing to dedicate per week or per month? If you prefer to be rather hands off, a robo-advisor like Axos Invest or Betterment is likely your best bet. If you want the ability for more customization, but still lots of automation M1 Finance is a good choice. Want to be able to trade stocks, ETFs and cryptocurrencies? Robinhood is a one stop shop.

Some important questions to help you plan are:

• What is my investment timeframe? Longer timeframes typically mean you can assume more investment risk.

• What is my risk tolerance? Does stock market volatility make you very anxious or are you ready to ride the waves?

• What are you investing for? Is it for retirement, saving for a down payment on a house or maybe a rainy day fund? (You will likely have multiple milestones, so prioritize). Different milestones may have different investing styles and timeframes. Making milestones is a great way to set goals and expectations.

How much to invest?

This obviously will vary depending on your personal circumstances and financial goals etc. The short answer is how much can you afford after your monthly expenses are taken care of? Have you created an emergency fund? If not, start there. The good news is that even small amounts of money can add up over time. If you can only spare $10 or $20 per month, that's still a great start. It can seem insignificant, but look at it a year or two later and you’ll be surprised (in a good way). To make it even easier many of the brokerages (especially the robo-advisors) have made it so you can set up automated recurring deposits/ investments on a consistent basis, weekly, monthly etc. This takes the brain drain out of it by automating it. Pick an amount that fits within your budget and goals, set it and (mostly) forget it.

When to invest?

Early and often, that’s it. But seriously, timing is always an interesting conversation when talking about investing. Are current stocks prices expensive? Are people expecting a stock market crash? There is never a shortage of opinions on this and nobody has a crystal ball that will predict the future. However, the good news is that as an investor focused on the long term, you don’t need to spend a lot of time worrying about this. In my humble opinion the best approach is to set an amount each week or each month that works with your budget and automate deposits to your account(s). People often refer to this as dollar cost averaging. Basically, instead of trying to time the markets perfectly and investing bigger chunks of money at one time, you split them up in smaller amounts on a consistent basis. This means you buy the lows, the mids and the highs and they average themselves out (if you do have a crystal ball that predicts the future, let me know, I have some questions). 

What about speculating?

We might as well talk about it, speculating v.s investing. Think of it as the get rich quick scheme compared to the long game or reasonable returns in a reasonable amount of time compared to high risk high reward. You read some articles talking about the next stock that will 10X your money or the success stories of someone who turned $1k into $100k. The problem is that if it was that easy or common we’d all be making money hand over fist. The key takeaway here is if you have the itch to speculate, keep the amounts manageable, do your research and be ready to stomach some serious volatility. Who knows, maybe you will get lucky, but remember by definition, speculating means a low chance of success.

Here is a useful rule of thumb I found for more speculative investing.

Rule of Three

• No more than three percent of your investment portfolio.

• Dollar cost average with three percent of your income.

• Have a three year time horizon.

The exact number (3) is not that significant, it may be slightly more or less depending on your risk tolerance. The main idea is don’t play with more money than you are willing to lose.

Final Thoughts

Starting to invest can seem daunting, but it's the first step in getting your money to work for you, not the other way around. Investing has become so much easier and much more affordable to the average person over the last several years. 

One last takeaway I really want to convey to people:

Always keep your goals/ milestones and timelines in the back of your mind. Stock markets go up and down (mostly up in the longer term). I talk with too many people that when the markets are down they talk about pulling their money out, this is often a mistake. Remember what your goals are. If you are investing for something way off in the future 5,10, 20 years or more, think of the market dips like discounts for your investments. With shorter term investments like a rainy day fund, you should be more conservative (think a mix of cash, bonds and low volatility stocks) since you don’t want to see wild fluctuations in something like this. Shorter time frames mean less time to recover from big market drops. In short, if the volatility gives you too much anxiety, make sure your investments are aligned with your risk tolerance. I can show you that markets have historically gone up and it is very rare over longer periods of time to lose money, but ultimately you need to be comfortable.