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I’m in my 20’s… How do I get started in Investing?

21 April 2008 No Comment

A friend recently asked me for advice. He wanted to know the best approach to take as a beginning investor. What a loaded question. The world of investing is such a complex and intimidating arena. For most people not working in a financial industry, words like rate cut, futures, derivatives, and even nasdaq can sound confusing. The reality is that learning enough to make successful investments and secure your financial future is not impossible.

It is the goal of this post and of this blog to cut through the high finance jargon and emphasize sound and straight-forward investing strategies.

Get in the game

The first step to learning how to invest is to participate. Have you ever played poker without real money on the line? It’s awful because it’s not realistic; it doesn’t follow the normal poker patterns. People go “all in” just for the hell of it and the game loses all of its true characteristics.

Similarly, if you want to learn how stocks move and how the markets work then it is going to take putting your real, hard-earned money on the line. The reason for this is, with your money at risk, you will actually follow the markets. It is my opinion that it takes about 2 years of investing your money to have a basic understanding of the stock market and how to invest (you are never done learning and successful investors hone their strategies over a lifetime). Having a 401(k), while it may provide you with some basic investing experience, does not count towards your 2 years.

By becoming an active investor, you will learn the fundamentals of investing. You will learn what “the markets” actually means. You will learn about individual companies that people recommend investing in. You will learn what earnings reports are.

Only when you put your money on the line, will you begin to learn how to invest. While you should begin learning as much as you can about investing, you should be careful to not attempt to learn everything (which is impossible anyways). While there are plenty of fundamental investment strategies that you should become familiar with, there are also plenty which you should ignore.

Selective Ignorance

A major reason I started this blog is the maddeningly high availability of crappy information regarding investing and regarding retirement planning. As a new investor it is important for you not to attempt to absorb too much. Early in your investing career, stick to investing in large, well known companies. Ignore any other advice at investment vehicles. Stay away from any penny stocks or other companies without a proven track record. Also avoid attempting to trade anything other than stocks or ETFs, such as currencies or any type of futures.

Your First Investments

So you setup a brokerage account and you deposit your money. Now what? Where do you begin? I would recommend you look into buying an index ETF. ETF stands for Exchange Traded Fund. An exchange traded fund is an investment vehicle that holds a collection of assets (in our case, stocks).

An Index ETF is an ETF that mirrors the market performance. For example, an index ETF mirroring the S&P 500 will follow the index known as the S&P 500 which tracks the performance of 500 large corporations. It’s a great way to begin following the movements in the stock market. It’s very low risk since it follows the broad market. With the stock market well off its highs, now is a good time to acquire a position in an index ETF. The historic stock market return suggests that with a long term perspective, you’ll enjoy a nice return with an index ETF.

Some examples of index ETFs are: iShares S&P 500 Index ETF (IVV) and iShares Dow Jones Index ETF (IYY)

Add Some Risk

As you begin to see the stock market movement and the factors that influence such movement, you may decide to begin purchasing shares in individual companies. Stick with large cap companies until you are comfortable with higher risk, volatile stocks.

We will release many individual stock recommendations here at 20’s Money with an emphasis on solid companies with great long term return potential. Just remember, no matter who recommends a stock to you, it is a must that you do your own research. After all, it’s YOUR money you are investing.

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