After digging myself out of a financial meltdown, I realized I needed to start investing for the long term in order to secure a good life for myself in the future. I read a few books on stock investing, but they really didn’t click for me at first; I needed something tangible to wrap my hands around for me to really get it. Here’s what I did.
First, I looked for a stock investment that would minimize my risk. This basically meant a mutual fund that invested in a lot of different sectors and had only minimal costs involved. By doing this, a downturn in one sector (like the 2000-2002 downturn in tech stocks and the 2006-? downturn in housing) won’t be disastrous for my investment. It also means that a strong upturn in one sector won’t cause me to skyrocket, but given that I knew little about stocks, I didn’t think I would be great at picking the right sector to be in.
Second, I found a list of solid mutual funds with a long history. I actually used the Money 70 list to start with (it was the Money 65 when I used it). I looked at the index funds on the list and tried to find one that matched what I could invest (a relatively low minimum investment) and that stuck in areas that I wanted to learn more about (domestic stocks, not international stocks, bonds, or real estate). That left me with four funds from Vanguard: the Vanguard 500, the Vanguard Total Stock Market Index, the Vanguard Mid Capitalization Index, and the Vanguard Small Cap Index.
At that point, I spent some time studying each of the funds. I looked at their histories and, since I didn’t want much risk at all for my first investment, I basically looked for how badly they weathered overall market downturns over their history. It turns out that I had some very good choices here, as they were all very good in terms of not collapsing during downturns.
However, I wanted to use these funds as a starting point for education, and so I decided to start with large companies and invested in the Vanguard 500. It had a very long history of positive growth and also had a ton of diversity.
I wasn’t done, though. After I invested, I started spending some time studying some of the individual stocks that make up the Vanguard 500 to see how they worked. I started going through the index and investigating the individual stocks that make it up, trying to learn more about how these stocks move. I looked at companies whose products I used daily and companies I’d never heard of.
What happened? I began to learn how stocks worked via the mutual fund: I was paid dividends and learned about capital gains tax and the like. I also began to learn a lot about individual stocks, as I put in the time to research the individual stocks I owned. Because of my ownership experience, I gave myself a reason to study individual stocks: I already owned them in a risk-protected way. This gave me motivation to understand individual stocks, and now I’m beginning to dabble my toes into individual stock investments.
If you want to get started in stock investing, index funds are a great way to go: minimized risk along with the excitement and self-motivation that comes with owning individual stocks.