Investing for Beginners
avoid the classic mistakes of playing the stock market.
By Michael Brush
Feed It Early and Often If there is any one single thing you can do to boost your profits in stocks, it’s to start early in a tax-deferred account like an Individual Retirement Account or a company 401(k). This way, you let the magic of compounding work for you — meaning you earn money on your reinvested earnings. If you put $100 a month in a taxdeferred account starting at age 35, you will have $280,000 at age 65, assuming 11 percent annual gains. Start at 25, and you will have $860,000. Get the point? One exception: If you carry credit card debt, pay that off first because your market gains will be no match for enormous interest-rate charges. Have reasonable Expectations One of my favorite stock pundits, the author Martin Pring, likes to say that the market exists to exploit the character flaws of investors. If you bring a sense of greed to the market — say you dream of hitting it big to buy a new flat screen TV — your judgment will be clouded, and you will make some expensive mistakes. On average, the stock market returns about 12 percent annually over the long term. This is your goal. Put Your Eggs in Many Baskets Another common mistake is loading up on a single stock because you are wowed by a story or because you accumulate a lot of your company stock in your 401(k). This is a sure path to disaster. Just ask anyone who worked at Enron. To diversify, buy mutual funds, especially broad market index funds that hold hundreds of stocks. Be Cheap With mutual funds, keep expenses low. Studies show you don’t need to pay extra fees to get better performance. Avoid “load” funds that charge you money for getting in or out, and with managed funds, look for an expense ratio of 2 percent or less.
Don’t be Your Own Worst Enemy The best time to buy stocks is when everyone is so scared it seems like the worst thing to do. This is when they are the cheapest. But this advice is impossible to follow, because your gut will be screaming to stay away from stocks. To solve this problem, follow a neat little trick called “dollar cost averaging.” Put the same amount of money in the market on the same day of each month, every year, no matter what. This robot-like approach means that at least some of the time you will be buying stocks when they are dirt cheap — and boosting your returns. Take the Free Money If your company matches your 401(k) contribution, always kick in the max. That company match represents an instant 30 percent to 50 percent gain — returns that would be the envy of even the best market pros.
if you bring a sense of greed to the market — say you dream of hitting it big to buy a new flat screen tV — your judgment will be clouded.
Be in for the Long Term You “save” money for near-term goals like buying a new car. “Invest” money you won’t need to touch for five years or more. That way, you won’t be forced to pull out of stocks at the worst time to fund some short-term need. I may not have instructed you on how to “strike it rich” in the stock market, but by following these rules, in the long run, you will do better than the desperate gamblers who inevitably wind up making all the classic mistakes.
Michael Brush is an award-winning New York–based financial writer who has covered business and investing for The New York Times, Money, and the Economist Group. He is the author of Lessons from the Front Line, a book offering insights on investing and the markets based on the experiences of professional money managers.
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ho hasn’t turned green with envy as some market braggadocio at a party spins out a tale of spectacular gains in a stock? Now let me tell you a little secret I’ve learned in my 20 years of writing about the stock market: The overnight success typically gives the money back with a string of losses
sooner or later. But you won’t hear that part of the story. Instead of trying to strike it rich on a single stock, the smart way to win with stocks is to avoid the classic mistakes by following seven basic rules. They won’t make you an instant millionaire, but slow and steady will win the race.
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