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Friday, April 10, 2015

Invest In the Stock Market in 5 Simple Steps

I find it deplorable that many Americans are avoiding the stock market.  Investing in the stock market is one of the easiest ways of creating wealth over time.  When I say, “easy,” I mean it.  And I think this is where many people get held up, believing it requires intelligence and constant effort.  Yes, I get that in order to invest in the stock market one also needs money.  People may imagine it takes thousands of dollars to get started for it to be worthwhile.  Well it doesn’t.  After reading, Half of Americans Avoid the Stock Market, http://www.cnbc.com/id/102573866, I felt the need to demystify the act of investing in equities (stocks) to something so simplistic you could say an adolescent could do it, given a computer. But I’m going to do one better and even include investing in bonds into the mix, with no added confusion.  First, however, I want to share the rationale for investing in securities (stocks and bonds).
Inflation
If you don’t invest, the value of the money you have saved in your bank account falls over time.  This is the inflation effect.  You have all been very lucky this year as overall inflation has been non-existent so far.  So if you had $100 deposited in the bank on January 1st, 2015, today (4/10/15), that $100 could still buy you $100 worth of stuff as if it still were 1/1/15.  The Federal Reserve is begging for inflation to come back.  That way they can feel confident about raising short-term interest rates.  That’s good, isn’t it?  Yes and No.  If short-term interest rates rise, then you’ll be able to get a better CD (Certificate of Deposit), and Money-Market savings rate.  You’ll feel good that your money is “safe” in the bank and that you’re earning a better interest rate.  But…what if the rate of inflation is higher than your savings rate?  For example:  Your CD pays you 1.5% interest.  But the rate of inflation is 2.0%.  (Your net savings rate is -0.5%).  That’s bad, people.  Basically the money you have in savings is losing value.  You therefore need something that will always pay you more than the rate of inflation.  Hence, investing in securities.
You Will Work Longer
Would you like to retire someday?  Well, if you would rather retire sooner than later, putting your money in the bank and “saving” it is a bad strategy.  Like I mentioned above, inflation may eat up your money’s value over time, AND, you’ll be subjected to the whims of the Fed’s monetary policy; they’ve kept interest rates low for years to artificially boost the returns of the stock market, punishing savers in return.  Guess, what?  These people will always side in favor of Wall Street.  They don’t have the best interest of money saving folk in mind, so stop being one of them!  Invest.  There’s always working until you die, of course.  Some people actually want to do this.  I’m just not one of them.  
Investing in Securities in Five Simple Steps:
  1. Go to your bank’s website for investing account set-up.  Wells Fargo: https://www.wellsfargo.com/investing/wellstrade-online-brokerage/.  Bank of America: https://www.bankofamerica.com/planning/investment.go. If you don’t use these two major banks, then simply call your own and ask if they offer a self-directed investment account option or check online at their website.  If not, then you will need to open a self-directed investment account with an online bank or financial institution.  Go with Vanguard or Charles Schwab, though since I will be recommending Vanguard funds, you may as well go with a Vanguard account: https://personal.vanguard.com/us/literature/openaccountforms/brokerage. Click, “Opening a Non-Retirement Brokerage Account Kit (complete online).”

  2. Fund your new Brokerage/Self-Directed Investment Account.  This means that you are going to authorize your new investment account to withdraw funds from an existing checking or savings account.  Yes, there are minimums. They range between $500-$3000.  Maybe a bit more.  I doubt one will ask for more than $5K.  So now you’ll have money to invest in your new account.

  3. Select your retirement date.  Go here:  https://investor.vanguard.com/mutual-funds/target-retirement/#/ A Target-Date Fund is a mutual fund that holds several mutual funds.  You’ll have exposure to U.S. stocks, foreign stocks, U.S. bonds, foreign bonds, real estate, and commodities, basically everything you need in a portfolio.  (Note: If you have less than 10 years before retirement, just forget it.  Now is not the time to be investing in the stock market).  Everyone else, time is on your side.  The key to building long term wealth is time and patience.  The best part of a Target Date fund is that as you get closer to retirement, the fund shifts into more bonds and cash (low-risk).

  4. Buy shares of the Target Date you selected.  So you’ve never bought an investment from the stock market before.  It’s okay.  It’s not as hard as it seems.  All you need to know is the ticker or stock symbol and amount you are going to invest.  Say you selected Vanguard’s Target Date 2035 Fund: https://personal.vanguard.com/us/funds/snapshot?FundId=0305&FundIntExt=INT.  The ticker/symbol is VTTHX.  Log onto your new account platform.  What you are to embark in is called, placing an order.  You’ll see buttons that may say something like, “Action-Buy” or “Trade.”  Click the button.  You’ll see a box where you will need to enter the symbol.  Type in the symbol.  Sometimes this process is done in reverse.  You type the symbol in where it says “Quote.”  Then you’ll get the prompt to Buy.  Enter the number of shares you want to buy based on the quoted price OR the amount you want to invest (more than the minimum).  Here’s the great thing about buying a mutual fund.  The price isn’t changing on you every split second.  In the case of VTTHX, the minimum amount is $1000.  Once this is entered, click Submit.  You’re done!

    http://www.online-stock-trading-guide.com/learn-stock-trading.html
  5. Make it automatic.  Most investment companies have a form you can fill-out under the key words, “Automatic Investment Plan.”  Find it, fill it out, and submit it.  You will be essentially authorizing your new investing platform to withdraw funds (an amount you set) once a month at the same time from a specified account, like your standard checking or savings account.  The investing platform will then use the amount you designate to buy more shares of the same investment, your Target Date fund, e.g.  Can you spare $150 a month?  Of course you can!  Can you do this for the rest of your work life?  Of course you can!  Okay, if an emergency happens, you can always Sell your shares.  But, to do this the right way you need over a decade of time in the market, plus an automatic and periodic investment plan in place, and lots of apathy.  Apathy?  Yeah, like don’t look at it.  If the market tanks, don’t freak out and sell.  Remember that you will be buying shares of your TD fund when the market is low and when the market is high.  Over the course of time, you will come out alright.  As an example, see the performance history of VTTHX below.  If you sold in 2009, during the crash that led to the Great Recession, you’d have lost money.  But if you’d stayed invested, buying every month with your periodic investment plan, your return would be 7.59%.  Beats the pants out of inflation.
3/31/2015

1 Year
3 Year
5 Year
10 Year
Since Inception
10/27/2003
Target Retirement 2035
7.92%
11.85%
10.76%
6.96%
7.59%
Target Retirement 2035 Composite Ix**
8.13%
12.11%
11.02%
7.09%
7.72%


So is investing in stocks and bonds difficult?  Beyond a few hours of set-up time, the answer to that is, No!  Does it take a lot of money?  Well, the biggest one-time dollar amount you will shell out is at the beginning, to fund the account and to meet the minimum investment amount on your target date fund.  But after that, when you have it on automatic, you can designate as little as a $100 to invest each month.  Of course, the more the better.  But hey, investing any amount is better than not investing at all.
Don’t be like 52% of Americans, avoiding the stock market.  Be a participant.  Yes there are risks, but these risks are mitigated with time and patience.  Unless there’s an asteroid the size of Texas heading Earth’s way, you should be in the markets.
*Vanguard is not paying me to endorse their products.  I’m giving you the best in breed (low fees and a great company) in terms of target date mutual funds.  Why a target date mutual fund.  It’s simple…one choice.  Too many choices make people hesitant.
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