Before investing in the stock market, take stock of your overall finances. For starters, you should seed an emergency fund that will eventually cover at least three to six months’ worth of your expenses. Stash that money in a safe place, such as a bank account or money market fund, where you can get your hands on it in a hurry if necessary. The same goes for money you’re saving for short-term goals, such as next year’s vacation or a down payment on a house. You don’t want to risk money that you’re going to need in fewer than five years.
And getting rid of high-interest-rate debt should be a top priority. Paying off the balance on a credit card that charges you, say, 20 percent is the equivalent of earning 20 percent on your money.
But for longer-term goals—notably retirement—the stock market is the place to be. And the younger you are, the more you should tilt toward stocks to take advantage of your greatest asset: time. The time-tested route to investing success is to follow these four steps: Start soon, start small, invest steadily and keep it simple.
Start with your workplace retirement plan, which gives you a triple leg up on investing. First, you can take advantage of automatic enrollment, which allows your employer to deduct money from your paycheck before you even see it and before it has a chance to burn a hole in your pocket.
Second, if your employer matches your contribution, that’s free money that you don’t have to come up with yourself.
Third, you can adjust your contribution to an amount you can afford. You should try to contribute enough to capture the full free-money match, but you can always start with less—especially if you are paying off debt or saving for a short-term goal—and increase the amount over time. Don’t be afraid to start small, even if it’s $50 or $100 per month.
Finally, once you get into the automatic-savings habit, you can invest steadily over time without even thinking about it. (Note: If you don’t have a workplace retirement plan, you can accomplish the same goals by opening an IRA.)
Your retirement plan also simplifies the investments themselves. The best strategy for novice investors is to spread your risk by owning shares in the entire U.S. stock market, which also gives you a shot at the market’s historical 10 percent annual return. You can do that by investing in an index fund, such as Vanguard Total Stock Market Index Fund (symbol VTSMX).
In a retirement account, you will probably also have access to a target-date retirement fund, which automatically allocates your money to the appropriate mix of investments based on your age and years until retirement.
Once you have a broad market base, you can, if you wish, use a portion of your money to branch out into other investments or open an account outside your retirement plan. In any case, don’t get carried away by the latest market trend or investment du jour. Your ultimate goal should be to provide for your own financial security, which gives you the luxury of using your money however you choose.
