Getting started investing can be overwhelming. With so many options out there and so many people giving you advice it’s hard to know what is the “right” thing to do. The good news is, if you are reading this, you are already doing the right thing.
First and foremost, the key to making good investment decisions is making good life decisions that allow you set aside money to invest. Overcoming turbulent markets, bad investing decisions, and the other pitfalls of investing is made much easier by having a new supply of money coming in every month to invest. Also it helps take the emotion out of investing. Pay yourself first. That means every month put money aside. Dollar-cost-averaging is an investment approach that does just that.
When you invest by dollar-cost-averaging, you are making a set investment into a company every month. It doesn’t matter what is happening with the stock price, you are going to put the same amount of money into a particular company.
When you are first starting out and don’t necessarily have a lot of money to invest, it is really important to pay attention to fees. It’s hard to be successful if you are having to pay $7 a trade and are only investing $100 at a time. That’s 7% of your investment gone right away – or about 1 year of returns for the stock market on average. That’s why it’s important to find low-cost options for investing. Two of my favorite are ComputerShare and Robinhood.
ComputerShare runs DRIPs for many major corporations and allows you to accumulate positions in some of the biggest and most well known dividend paying stocks around. Exxon-Mobil, Coca-Cola, Walmart, AT&T, Verizon, IBM, McDonald, and Aqua America all run DRIPs via ComputerShare. The costs vary by plan, but a generally very low. The Exxon plan is completely free to set up, invest, and re-invest while the Coca-Cola plan will cost you $10 to set up initially and then $2 per investment and .03 per share. The minimum initial investment again varies by plan. For Exxon it is $250 and then at least $50 per month. For Coca-Cola it is $500 and then at least $50 per month. Once you set up your plan, ComputerShare can automatically withdraw the money from your bank account every month, so there is no extra though or effort from you.
Robinhood is a discount brokerage whose draw is providing no-fee trading. They don’t offer all the frills and tools most brokerages do, but it’s free to make trades. This makes it a great brokerage to use when you only have small amounts of money available to invest. Almost every stock listed on the major US exchanges is available to invest in on Robinhood.
The difference between Robinhood and ComputerShare is you will need to actually go in and place the buy orders every month for Robinhood, where ComputerShare takes care of that for you. Also ComputerShare allows fractional share purchases while Robinhood does not. Robinhood will allow you to set up recurring deposits from your bank account, so that part is the same.
Life happens. With both Robinhood and ComputerShare you always have the option to pause or stop your investment on any given month should something happen and you aren’t able to invest on any given month.
Okay, now you understand what dollar-cost-averaging and DRIPs and ready to get started, right? Yes. Except for that one pesky detail of what to buy. I can give a little guidance there, but picking out stocks to buy is a personal decision that you need to be comfortable with. I have written a little more about that and given a list of stocks that I would consider including as “foundation” stocks here.
Once you have picked out a stock or a few stocks that you have decided you want to invest in, the next thing you need to decide is how much should you start investing and into how many stocks. Over time you do want to get to the point where you have a balanced portfolio of somewhere around 20-30 stocks.
The exact number of individual stocks a person should own to be considered diversified is actually a topic of debate in personal finance circles and amongst investment advisors. There have been a number of studies done and a general rule of thumb has been set as “around 30”, but those studies tend to disagree on the definition of diversified. My personal feeling is as long as you are buying companies in non-correlated industries you can be fairly diversified with as few as 10 stocks.
Thankfully when we are starting out building our portfolios the number of stocks matters a lot less because likely we don’t have have enough money available to build positions in anywhere close to 30 stocks. My recommendation, so you are not spreading yourself too thin, is to spend no less than $100 per month on any individual stock you have decided you want to dollar-cost-average into. So if you have $400 a month available to invest I would say 4 should be the maximum number of stocks you should be investing in. And there’s nothing wrong with only choosing 1 or 2.
As far as time frame goes, once you start dollar-cost-averaging for a particular stock, I would continue to do so for at least 12 months. At that point you can step back and take a look at your portfolio and make a decision around whether you want to continue investing in that stock, or start the process of diversifying your portfolio by choosing another one.
This is where portfolio building becomes more of an art than a science. Some people prefer to spread out their investments more and diversify as soon as is reasonable. Others like to build up a few core positions to a certain level before starting new ones. It really comes down to personal preference.
The important thing is to just get started. Investing in individual stocks can seem overwhelming. If you can make a plan and put it into motion, it goes a long way into setting yourself up well for future financial independence.