We live in the Information Age, and there are obviously massive advantages to instant access to vast amounts of knowledge, but in some cases, the sheer volume of analysis and opinion that is readily available can become debilitating. Getting started with investing is one such case. When I was in my 20s, getting started was harder in terms of access and was more expensive than it is today, but it was at least simpler. You met with an advisor who sold you some shares in a mutual fund or two, then you set up regular payments and forgot about it, assessing performance based only on an annual statement.
That wasn’t a strategy. You had no choice.
There was no internet that you could use to track the progress of your investments daily or every time the market moved, and there were no articles advising you what to do with every twist and turn in the economy, or what to buy or sell and when. In some ways, it was a much less stressful way of doing things than if faced with the overwhelming wealth of information and opinion that greets the modern investing newbie. And, curiously, it was often more successful. Attempting to time the market is impossible, leaving you to benefit from the one incontrovertible truth of equity investing: while some companies will rise and others will fall or even fail completely, stocks overall gain in value over time.
How does a young person today, faced with a flood of information and thousands of opinions, get started? The answer is to simplify things by following three simple rules:
1. The Best Time to Start is Always Now
If you are young, with an investing time horizon measured in decades, the actual point at which you invest your first few hundred dollars is irrelevant. In forty years, a five or ten percent difference either way in where you got started won’t really matter at all. When you started, however, will.
If you delay getting involved based on perceived market conditions and vulnerabilities, then you always face some daunting questions. If now isn’t a good time, when is? If the market moves higher, how long do you wait for a pullback? If it moves lower, what level constitutes low enough? The result is often paralysis by analysis. Unless you avoid a historic market collapse, the kind of thing that comes along once in a lifetime, compounded returns over long periods mean that you will almost certainly be better off starting straight away even if you do hit a temporary top by doing so. So if you buy now and your stocks go down a bit from here, remember, you're not aiming to be in the green today, but in 30 or 40 years' time. By getting in sooner, the sooner your compounded returns can start to accrue, and that is where the real difference lies.
2. Invest Little and Often
If you are going to follow rule 1 and start immediately regardless of where the market is, then investing on a regular basis, what investment professionals call “dollar cost averaging,” is an important concept. If you commit to investing, say, $200 a month, then should the market go down, you will have the opportunity to buy lower. Should it go up, you will have bought at least some at the lowest level available to you. Dollar cost averaging creates a win/win for yourself that makes it easier to stay committed to investing, especially if you automate that process.
The easiest way for those with traditional employment to do this is by taking advantage of a 401K match offered by your employer. If that is an option for you, do it. Why would you not take free money offered by your employer? If you put in 6% and your company matches, say, 3%, consider that extra 3% a free raise, essentially. If that is not an option for you, then you can still create for yourself some of the advantages of a 401K such as tax deferment by setting up an IRA account. Professional advice as to which suits you better is definitely advisable here, but the most important things are to start straight away and to contribute regularly.
3. Diversify
If you do follow financial media, you will no doubt have heard stories of people who invested a small amount in Bitcoin or some stock that has massively outperformed the market and turned it into millions. Think stories like “How much would you have if you invested $1000 in Tesla 12 year ago!” or whatever. Attempting to do that is not an investing strategy -- it is a gamble. Sure, you could have bought Tesla stock for a song a decade ago, but that wasn’t the only stock available back then, and if you had put everything into one of the thousands of others, your results would be very different.
Long-term investing is about playing the averages, and that is best done by covering a wide range of investments. Diversification isn’t just about owning both stocks and bonds as some might have you believe. In fact, if you are young and starting out, the better long-term returns available from stocks mean that you would be better off putting most, if not all, of your money there. What it does mean, though, is not having too much exposure to one company, or even one sector or industry in your stock holdings. For example, commercial real estate might have been a good investment...before the pandemic. But now, nobody knows what the future holds for that thanks to the remote work trend.
You cannot predict what will be dominating the economy and the market ten years from now, let alone forty, but if you own enough different things, there is a good chance one of them will fit that description, and that one will have a significant impact on overall returns even if it makes up only a small percentage of your portfolio.
Final thoughts
As you mature as an investor, investing can be as simple or complicated as you want it to be. When starting out, however, the simpler the better. Getting started now, dollar cost averaging over time, and diversifying your investments are really all you need to focus on. There will be time in the future to pay attention to all the conflicting advice available to you, but these three rules will put you on your way to long-term success.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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