3 Ways to Invest if You Don't Know How to Pick the Best Stocks
More than one-third of Americans have indicated they need help investing. That's not a surprise, as figuring out how to buy stocks can be confusing.
The good news is, once you decide on a strategy and implement it, putting your money into the market can be the best way to build wealth. And it's not that hard to jump in. If you're looking to get started but don't know how to pick the best stocks and aren't sure how to figure it out, here are a few of your options.
1. Buy ETFs
ETFs, or exchange-traded funds, make it easy to invest even when you know next to nothing about picking stocks. Exchange-traded funds trade like stocks, which means they can be bought and sold during the day and you can buy as many or as few shares as you want. But they work in a similar way to mutual funds in that buying into an ETF gives you exposure to a whole bunch of different assets that your fund holds.
ETFs often track financial indexes such as a stock or bond index. So, for example, if you invest in an S&P 500 index fund, your fund would aim to mimic the performance of that market index by investing in the 500 companies on it. But there are also tons of thematic or niche ETFs that invest in particular industries or small areas of the market. That means ETFs enable you to get instant and easy diversification if you invest in one that tracks the performance of the market as a whole, but you could also use them if you know that you want to buy, say, healthcare stocks or marijuana stocks as well. You won't have to figure out which particular companies in a specific industry are likely to perform well if you just opt for an ETF that gives you exposure to many businesses within a field you feel is poised for growth.
ETFs often come with low fees, and thanks to fractional shares, you can buy them with just a few dollars -- so you can spend, say, $10 to buy around 0.06 of a share of Vanguard Total Stock Market ETF (NYSEMKT:VTI) and gain exposure to the approximately 3,500 stocks it owns. Your investment would track the performance of the U.S. stock market as a whole, so when companies flourish in this country, your money would grow.
2. Use a robo-advisor
While ETFs make investing really easy even for those without any knowledge of investing, robo-advisors aim to simplify the process of getting your money into the market even further.
Robo-advisors use algorithms to choose an appropriate mix of investments for you. By doing so, they free you of the burden of picking your own stocks to buy without the high fees that go along with hiring a professional investment advisor. Some robo-advisors also use automated processes to engage in more advanced investing techniques, such as tax loss harvesting that minimizes the tax consequences of your investments.
When you invest with a robo-advisor, you deposit money with the company you've chosen (there are many of them) and answer a few simple questions about your investing timeline and risk tolerance. The robo-advisor then puts your money into a mix of different assets (often, into exchange-traded funds). The upside is that you don't have to do anything to find funds to invest in, and you don't have to watch to make sure your portfolio remains balanced or reallocate your investment dollars as you get closer to the time you'll need money. But the downside is that you pay a fee to have the robo-advisor manage your money for you. It's a lot lower than the fee for human advice, but it still eats into your returns.
If you really don't want to think about your investments at all, then it may be worth paying the fee. But if you're willing to do about half an hour of work to pick ETFs (or less if you use a model portfolio) and another half-hour of work once a year to make sure your portfolio is still in good shape, you can just pick your own funds to invest in and avoid having to pay an advisory fee for your entire investing career.
3. Learn how to research companies
Finally, you have one last option -- learn to be an active investor, research companies, and buy shares of individual companies.
This approach is not for everyone. It can be challenging to beat the performance of the market and it ups your risk of losses. But with the major market indexes earning around a 9% to 10% average annual return over time (when adding in reinvested dividends), you aren't going to make eye-popping gains by investing in index funds. If you are willing to put in the time to do it right and become a disciplined long-term investor, buying individual stocks could help you get a far better ROI.
If you decide to take this approach, there are plenty of resources out there, from our guide on how to pick stocks to advice from particular investors who've done exceptionally well, such as Warren Buffett. You can start with a few small investments (fractional shares have made that easier) and then as you refine your strategy and gain confidence, you can up the stakes and hopefully start to see some substantial gains.
Which approach is right for you?
There's no one right way to start investing. If you're hoping to beat the market, learning to pick individual stocks is your best bet. But if you want a simple hands-off approach without incurring extra fees, ETFs may be the right option for you. The key is to decide on a technique you think will work given your level of interest and your risk tolerance, and then get started ASAP, as the sooner you get your money into the market, the faster it can start working for you.
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