Whether you're new to investing in the stock market or are just at the thinking-about-it stage, you may not yet have a sizable nest egg -- but at least you've stepped onto the path toward a more secure financial life and a more comfortable retirement. Here are three key things to know about investing for beginners as you move forward.
Investing for beginners: It's rarely too late or too early
It's easy to think you've missed the retirement-planning bus -- that if you really wanted to secure a comfortable retirement, you should have started investing a decade or two ago. Sure, the earlier the better -- which is why even teenagers would do well to start investing -- but even in only a few years, you can make a meaningful difference.
Let's assume your investments grew at the stock market's average annual long-term rate of roughly 10%. (Note that that's an average over many decades. During your investment period, you will likely average more or less than that.) If you invested just $5,000 now, it would more than double in a decade, approaching $13,000. Over 25 years, that $5,000 would top $54,000. And, of course, if you added more along the way, you'd end up with much more.
This online calculator is one of many that can help you visualize your possibilities. It's meant to estimate savings, but you can use it for investing, too, if you apply a conservative expected rate of return instead of an interest rate. Entering an initial balance of $0, a 10% rate of return, and 15 years' worth of annual $5,000 investments, you'll see that you end up with close to $175,000 -- a rather meaningful result from investing. That's what a 52-year-old might amass before retiring at age 67.
Investing for beginners doesn't require a lot of money
The idea of investing for beginners is often dismissed when one doesn't have a lot of money. But you don't need a lot to start. If all you have is $500, you can start with that. If you can save and invest more, all the better. Remember that the earliest dollars you invest will have the longest time to grow. Know that some brokerages have very low minimum initial deposits for opening accounts, too. One might require $3,000, but another might require $500 or less.
You can even invest in stocks through small installments in the neighborhood of $25 or $50 via "DRIP" investing, where you bypass traditional brokerages and can buy partial shares of stock.
If you're smart and lucky enough to invest in a stock that turns out to be an outstanding long-term performer, a little money can go a long way. Consider, for example, that shares of Netflix traded for around $44 per share only five years ago and are now near $430. Many investors have seen a tenfold return in just a few years. Even familiar blue-chip stocks can grow your money well: Coca-Cola shares have nearly doubled during the past five years.
Investing for beginners can be simple
The likelihood of doing well investing might seem slim, but that's not the case. One of the simplest and easiest methods of investing regularly outperforms the majority of mutual funds managed by pros on Wall Street. Meet the index fund.
An index fund is a mutual fund that tracks, or mimics, an established index of stocks, such as the S&P 500 (which contains 500 of America's biggest companies). There are all kinds of index funds covering parts or all of the U.S. or world market, bonds, and much more.
There are also exchange-traded funds, or ETFs, which are essentially index funds that trade like stocks, making it especially easy and fast to get in or out of them if you have a brokerage account. The SPDR S&P 500 ETF (NYSEMKT:SPY), for example, tracks the S&P 500, while the Vanguard Total Stock Market ETF (NYSEMKT:VTI) tracks the overall U.S. market, and the Vanguard FTSE All-World ex-US ETF (NYSEMKT:VEU) plunks you into thousands of international companies.
Index funds are great for beginners because they remove the stress and difficulty of selecting individual stocks on your own. After all, not every stock will perform as hoped, doubling or quintupling your money in short order. They're also usually quite inexpensive, with some charging annual fees of less than 0.1%. And they're even available in many 401(k) plans.