I recently heard from a young reader in Wisconsin. He asked me a few questions that I suspect many young (and even not-so-young) investors must have. He said: "As a young graduate (with minimal student loans and zero credit card debt) looking to get in the market, what amount of money should I be willing/able to invest if I want to put together a diversified stock portfolio instead of investing in mutual funds?"
Let me address his questions now -- and before I go any further, I invite you to forward this article to any young people you know. (To do that, click on the "Email" link in the box to the right of this article's headline.)
Small numbers are OK
First of all, I commend Matt for having no credit card debt. Student-loan debt is nothing to be ashamed of, and it's often at a relatively low interest rate. But credit card debt is often commanding more than 25% per year in interest, which can increase your debt exponentially, in short order. (Dig out of debt if you need to -- it can be done.)
Once you're free of high-interest debt and you're ready to invest, you don't need much to start. Let's say you aim to own 10 or 12 different individual stocks. You needn't buy them all at once. Start with one and add more as you're able.
You can invest in each stock with as little as $50 or even less, sometimes, via "direct investing." Dividend reinvestment plans (often referred to as "Drips") and direct stock purchase plans (referred to as "DSPs" and "SPPs," among other things) let you invest in thousands of companies with small amounts of money. Your contributions buy small numbers of shares, or even fractions of shares. With traditional Drips, you need to own one share of stock in your own name before you can add to that. With direct plans, you can buy your first share directly from the company. Both plans permit you to bypass brokerages and their commission fees. (However, these days many brokerages charge very little in fees, and offer many excellent resources. Learn more in our Broker Center.)
Here are just some of many companies you can invest in directly:
- ExxonMobil (NYSE: XOM )
- Merck (NYSE: MRK )
- Motorola (NYSE: MOT )
- McDonald's (NYSE: MCD )
- Walt Disney (NYSE: DIS )
- Wal-Mart (NYSE: WMT )
- Eli Lilly (NYSE: LLY )
So even $50 or $100 could get you started! You can put a small sum into a dozen companies for perhaps just $750 or less, and then, month by month or quarter by quarter, you can add $100 or more to that, buying more shares regularly.
But maybe you're sitting on, say, $3,000 or $5,000. Well, you could open a regular, traditional brokerage account and invest in stocks that way, without signing up for dividend reinvestment. (Reinvestment is often a powerful way to keep building your wealth, but it can add some bookkeeping headaches when you want to sell some or all of your shares -- you'll have to have good records of the purchase price of each.)
Consider also setting up an IRA account with a brokerage. You'll be able to invest in the same stocks (and funds) as you can with a regular account, but you'll get some tax breaks with an IRA and you'll be socking away valuable retirement dollars. Since you're young, they'll have an extra-long time to grow. If, for example, you're 25 right now and plan to retire at age 65, you have 40 years for your money to grow! That's enough to make most older people salivate ... or cry. Just $1,000 in an IRA today would grow to more than $45,000 at an average annual rate of 10%.
It might seem early to think about retirement now, but if you sock away as much as you can in your 20s and 30s, you'll fall on your knees thanking yourself for that in your 50s and 60s. Let us help you -- visit our Retirement Center and also consider giving our Rule Your Retirement newsletter service a whirl. A free trial will give you access to all past issues, and they're not as boring as you might assume! (They even offer recommendations of stocks and funds.)
Funds are good
You seem a little prejudiced against mutual funds. Don't be. They can be more powerful than most stocks, and can take a lot of the legwork out of investing for you. So do consider both funds and stocks -- funds can save you from ... uh ... losing $200,000, as someone I know did.
Keep reading and learning. After all, the more you know, the better you're likely to do. Here are a few articles that can help you: