Investing experience is not a prerequisite for investing success. If you have time and the discipline to follow a plan, you can build wealth -- and even double your money -- as a newbie investor. Read on for an easy, two-step program to guide you.
1. Invest in a large-cap index fund
To start, find yourself a suitable security. For many novice investors, an S&P 500 index exchange-traded fund (ETF) with a low expense ratio is a good choice. The characteristics that make these funds attractive are:
- Diversification. S&P 500 funds invest in stocks of 500 different companies.
- Moderate risk. The companies in the S&P 500 are large and mature. Apple, Google, Microsoft, and all their S&P 500 peers offer growth potential without excessive risk.
- Exchange traded. ETF stands for exchange-traded funds. These trade on the stock exchange throughout the day. Mutual funds, on the other hand, settle trades at the end of the day. Many mutual funds have minimum purchase requirements, but ETFs don't. If you want to buy a single share of an ETF, you can.
- Market-level returns. The S&P 500 is referenced as a benchmark for the entire stock market. When someone says, "the market was up 3% today," that often means specifically that the S&P 500 was up 3%.
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You'll see a small performance difference between an S&P 500 fund and the S&P 500 index because funds have costs and timing issues to manage, while the index doesn't. The main component of this difference is the fund's expense ratio. That's why funds with low expense ratios (below 0.10%) are better choices than funds with high expense ratios.
The table below shows three popular, low-cost S&P 500 funds. Each would make an appropriate core holding for your first investment portfolio.
|
Fund Name and Ticker |
Fund Size |
Fund Expense Ratio |
|---|---|---|
|
Vanguard S&P 500 ETF (VOO +2.86%) |
$805 billion |
0.03% |
|
iShares Core S&P 500 ETF (IVV +2.88%) |
$289 billion |
0.03% |
|
SPDR Portfolio S&P 500 ETF (SPLG +2.90%) |
$12 billion |
0.03% |
Table data source: Vanguard, iShares, SSGA.
Pick a fund and start investing in it. Ideally, you'll carve out a monthly amount you can invest in your fund habitually.
2. Wait
If you stick with your monthly investment, you'll double your money eventually -- just by staying invested long enough. How long that takes depends on your fund's performance.
The long-term average annual growth of the stock market is about 10%, or 7% after inflation. If your portfolio matches that growth rate, you can double your money roughly every 10 or 11 years. In reality, you might double your invested wealth faster or slower than 10 years -- depending on how the market behaves.
What's important is that you increase your chances of achieving that 7% average growth rate by staying invested longer. The market can be volatile in shorter time frames, but in durations of 10 years or more, growth is the more likely outcome.
Managing market volatility
The invest-and-wait formula for doubling your money requires that you stay invested through market volatility. This can be hard, even for experienced investors. If share prices are falling, you naturally want to cut your losses by moving into cash.
Unfortunately, moving into cash creates a different problem. You then must decide when you'll reinvest. By the time you're certain the market has recovered, the price of the shares you sold may be much higher. That will cut into your long-term returns.
The takeaway is to stay focused on the long term. Stock market crashes and corrections will happen. Unless you can predict the timing of these cycles exactly -- and no one can -- you're better off staying invested and waiting for the recovery.
As a hedge against market volatility, you might consider increasing your cash savings as you build your investment portfolio. The comfort of having extra cash on hand can help you resist the urge to react to unstable markets. If panic sets in, you can remind yourself you don't need the money so there's no reason to sell.
Double your money
You can double your money with an index fund. The plan doesn't require investing experience, but it does require discipline. You have to keep investing regularly and stay invested for the long haul.
If you can manage that for 10 or 20 years, you'll look back and realize that investing isn't that hard after all.
