I am a recent college graduate with a B.S degree. I am wanting to know the right way and how to invest in proper stocks.
Congrats on the degree!
You’ve asked a great question. Getting this part of your financial life right early on will make a huge difference for you in the long run. Good news, I think the answer may surprise and relieve you at the same time.
If I were to answer the question as you asked it, we would need to discuss things like account type/registration, quantitative/technical/fundamental analysis, entry/exit strategies, smart use of options, and all sorts of other stuff. Depending on where you want to eventually fall on a spectrum of “I just want to know enough to be confident with my decisions” up to “Gordon Gekko ain’t got -ish on me”, some or all of these topics may or may not be appropriate. The fact is when someone wants to talk about buying individual stocks “correctly” there is no shortage of essential things to cover.
Hang on. Here is where the good news becomes accessible.
There is an easier way to begin investing while you figure out where you want to be on the investing spectrum.
I’m going to go out on a limb and guess you’re asking this question because you recently became eligible to participate in your employer’s retirement plan, most likely a 401(k) or 403(b). Most employer-sponsored retirement plans don’t offer individual stocks as part of their investment choices, but they do offer mutual funds. Mutual funds are a simple way to invest into a basket of multiple stocks (and bonds, typically) that are focused around a similar characteristic. For example, maybe all of the companies are the same size, or do the same type of business, or are located in the same country. Instead of picking individual companies, you choose sectors, categories, or characteristics and get exposure to tens to hundreds of companies.
“Great. I don’t know how to pick mutual funds, either.”
That’s fine. There’s a solution for that, too.
A growing trend over the last decade has been “Target Date Funds”, or TDFs. These funds pick a general year in the future, say 2050, and then create a portfolio of other mutual funds that would be appropriate for most people looking to retire around that year. As the target year gets closer, the aggressiveness inside the portfolio (the stock/bond ratio, generally) is adjusted automatically to the appropriate level. No muss, no fuss. The only thing you worry about is stuffing as much money as you can into your account. In fact, your employer-sponsored plan may use TDFs as their default investment choice for participants who don’t make investment selections for themselves. TDFs aren’t the perfect investment, but they usually represent a reasonable option for those that aren’t confident in their investment selection skills.
Occasionally, retirement plans will offer “allocation” funds in place of TDFs. For example, you could have an “aggressive”, “balanced”/“moderate”, or “conservative”/”income” allocation available to you. These funds work in a similar way to TDFs by using multiple other mutual funds and packaging them into one fund to accomplish an overall goal. Allocation funds will keep a more static ratio of stocks/bonds over their lifetime and won’t adjust the risk level as you get nearer to retirement.
“That’s great and all, but I’m not talking about my retirement plan options.”
TDFs and allocation funds are available outside of retirement accounts, too. I can’t think of an investment broker that doesn’t have them available to their retail customers. However, you have another, more technologically advanced, option to choose from, Robo-advisors. Many companies like Vanguard, Betterment, Schwab, Wealthfront, etc. now offer to manage your money for a small fee (usually in the 0.25 – 0.35% range). When you open an account they’ll ask you some questions, you’ll give them some answers, and then they’ll construct a portfolio for you using mutual funds and exchange-traded funds (similar to mutual funds). These robo-services are worth considering for the person who wants to know that someone (or a computer algorithm) is keeping an eye on their investments, and maybe even making advantageous transactions when appropriate. What I find particularly appealing about this option, especially for new investors, is that the chance of an investor’s emotions dictating investment decisions is nearly completely eliminated. The investor doesn’t worry about buying and selling anything, only about contributing as much money as they can.
The options I’ve presented here certainly aren’t the only ones available to you. They do represent some of the better ways to get started in investing by ensuring you have a proper allocation of investments, though. This allows you to participate in the stock market while you feel out your desire to learn and grow as an investor. If you can’t settle on the right approach to investment selection, or have questions that are specific to your situation, it’s a good idea to reach out to a local financial advisor or your employer’s retirement plan sponsor representative.
Good luck, and best wishes!
Damian is the lead Financial Concierge on Your Money Line, the financial help line serving all Pete the Planner® Financial Wellness clients. Damian is a CERTIFIED FINANCIAL PLANNER™ professional and loves answering your money questions. Despite sharing a last name and sense of humor, Damian and Pete are not related.