There are a lot of myths about investing, but one of the most dangerous is that it has to be complicated. It can sometimes seem that way, especially if you're trying to choose your own stocks. But you don't need to be a finance expert to invest successfully. In fact, there's one simple strategy common to beginning and expert investors alike that could make you a fortune.
You don't have to know how to pick stocks
Investing in individual stocks is always an option, but doing this requires a lot of effort and often more risk, especially if you've never invested before. You want to start by building a strong, diverse base of investments that will form the backbone of your portfolio.
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Index funds are a great way to do this. These are bundles of stocks you purchase together, and they're designed to mimic the performance of a stock market index. For example, if you invest in an S&P 500 index fund, you'll get part ownership in all 500 companies that appear in the index. When the index itself goes up, so will the value of your index fund.
Spreading your money around like this reduces your risk of loss. Every company has its ups and downs. That can be a big deal if you have all your money in a single stock, but when you have dozens or hundreds of stocks, a handful of them taking a dip doesn't affect your portfolio as much.
Index funds are also one of the cheapest investments out there. Some of the best have expense ratios -- annual fees listed as a percentage of your assets -- as low as 0.03%. That means you only pay about $3 a year for every $10,000 you have invested in the fund.
There are plenty of index funds out there to choose from. Most have the index they're based on in the name, so they're not too difficult to find. Compare a few before deciding which one you'd like to invest in, or you can spread your money across various funds with different focuses such as international companies, dividend stocks, etc.
And you don't have to time the market either
Once you know what you're going to invest in, the next question becomes how you're going to invest. Some people treat the stock market like a lottery, trying to bet big when they think share prices are low and sell when they think they're high, but this approach usually doesn't work out.
There's a slow-and-steady approach known as dollar-cost averaging that you might already be using if you're saving in a retirement account. This is where you invest a certain dollar amount on a regular schedule. For example, with a retirement account, you're probably investing a certain percentage of each paycheck every two weeks. But if you're investing in an IRA or taxable brokerage account, you can make up your own schedule.
Dollar-cost averaging helps you avoid the drawbacks of trying to time the market. Sometimes, you'll buy when share prices are high and other times when prices are low. Over time, this balances out, giving you an average cost basis for all your shares.
This hands-off approach can also save you time and prevent emotional decision making. Once you've got your contribution schedule set up, there isn't much more for you to do. You'll want to check your portfolio once or twice per year and adjust your investment strategy as necessary. But you don't need to check it every day. And when you're not seeing the daily fluctuations, you'll be less likely to buy or sell impulsively.
But it won't make you rich overnight
Using dollar-cost averaging with an index fund is a great way for investors of all skill levels to grow their wealth, but it's not going to make you a millionaire in a day, a week, or even a year. It takes time to grow your wealth this way, and you could even lose money temporarily -- but you should see strong growth potential over a decade or more.
It's important to keep this long-term view as you begin investing and only set aside money you won't need anytime soon. Keep your emergency fund and money you plan to spend in the next few years in a savings account where you can withdraw it as needed. This way, you won't have to worry about having to sell your investments at an inopportune time.
