Beginner Investing/how do I start investing?
I'm from India, 28, work in an ad agency and earn almost Rs.38,000 per month ($615.52). And I have savings of Rs. 300,000 ($4859.38). I want to start investing and I don't have much knowledge about investing. Can you please suggest me how do I start investing? Will share market be risky for me or I should buy mutual funds as my friends suggest.
Thank you for your question! Please keep in mind that all of the suggestions I provide below are for investors in the USA. I have no experience for investing in India. Many of the principles and ways to begin will be the same, but some things, such as where you can open an account, or what investments you have access to, will be different.
The earlier you begin to plan, the easier it will be. Investments take time to grow.
I believe that you should think of things in terms of three different categories, and I will offer further specifics on each: 1. Debt reduction to lead to debt elimination 2. Education 3. Action
1. Debt Reduction and elimination of debt:
Start immediately with this. It is key to the financial well being of everyone in the future. People in this country have a very bad habit of running high debt in the form of credit cards, car loans, and all sorts of credit for just about anything. Credit is so easy to get, it is difficult for many young people to resist. By the time most of us are adults, the terrible cycle of high debt is already established. The first key to a wonderful lifestyle in the second half of life is to resist this.
Most credit cards charge 15% or more in interest. It does not make sense to invest when folks are paying so much extra for each purchase! If you have credit cards and/or car loans, pay them off. This usually frees up hundreds and hundreds of extra dollars each month that normally goes to these bills. This can be used to both invest and improve your lifestyle. If you can't pay cash, you can't afford it! The exception is real estate, as that is 'appreciating asset' that increases in value. It is a good move to purchase and own a home if it is feasible.
There is nothing worse than paying high interest on a car, then having that car decline so rapidly in value as you use it, possibly the worst of ‘depreciating assets’ that exists. Of course we all need cars, but if the money is not there, don't buy an Acura when a Honda will do so to speak. Put as much down as possible, and see about a 3 year or less loan. The goal is to pay it off as quickly as possible, then drive it 'free and clear' for as long as possible. Cars are perhaps the largest things standing in the way of most people having a truly wonderful second half of life. We are conditioned to buy the most expensive car possible and this is a huge drain on our finances.
Good investors can double their money every five years. Take the $25,000 price tag of an average car these days, go out 40 years, and see how much that car actually costs!
Successful investing takes discipline, education, and patience. A plan should be established and strictly followed for decades. My suggestion is to spend the next six months researching. Start with "Investing for Dummies", available at amazon.com and most major bookstores. This will give you the basics on most major forms of investment, and you can do further research on what appeals to you. In general, the higher the possible return of an investment, the more risky it is. As an example, a money market account will earn you about 2% a year; this is a very low gain. But it is perfectly safe and you would get that 2% every year without fail. CD's (Certificate of Deposits) can earn perhaps 3% annual returns and are also perfectly safe, most banks offer CD's. No risk here, but your investments are locked up for one to two years depending on the CD. A portfolio of stocks can earn you on average 10% or more each year. But some years will be good, and others bad. Many investors lost half or more of their worth during the bad markets of 2001 and 2002. However, over a long period of time, the risk evens out and the returns are much more substantial. An average of 10% return each year would double your investment every eight years. (Not every ten, as you have to account for the growth in the portfolio for the next year returns). Another good resource here is any of the books written by William O’Neil, founder of Investment Business Daily. Keep in mind this is one approach, but he goes into depth on how he successfully selects stocks and builds a stock portfolio. Always read with a critical mind, no one has the holy grail when it comes to investing. If they claim that they do, it is a scam. There will always be failures, but the idea is find more successes than failures. This is very possible over time.
I believe that the ultimate solution is two fold. First, move slowly. While stocks and other investments can treat you well, they can also treat you very poorly if the wrong decisions are made. Start with a money market account, this is a great place to 'park' your savings while you learn more. Then I suggest mutual funds or ETF’s (exchange traded funds). Do your research. The book I mentioned above will help, and www.morningstar.com is perhaps the best-known source of mutual fund and ETF information available. Lipper is another. Yahoo finance and Google finance are two free sources. Start with index funds, but when you have more than $5,000 invested, branch out to several mutual funds or ETF’s that specialize in different areas such as real estate, technology, health care, utilities, or others. That way if a specific industry does poorly, you will not feel it too badly.
Only after a few years or whenever you feel confident should you venture into stocks. But start practicing right away. Begin researching possible stocks you would want to invest in (again the book I mentioned will help you learn what to look for). Track your ideas on a free service such as yahoo.finance.com and see what your stock picks do.
If you want to get started right away, consider an index mutual fund. These are funds that exactly copy the major stock market indexes. For example, the Vanguard S&P500 index fund is a good one, this one copies the Standard and Poors 500 Index. If you invest in this one fund, your performance will exactly match that index. You will never perform better, or worse, than the overall index. Over the years you could expect perhaps 10% returns on average, again some years will be much greater and some much worse. And that is based on history, the future can never really be predicted. The symbol is VFINX, and you can buy this on any major trading service website. It is a great way to get started while you learn more.
When you are finally ready, my suggestion would be to have 20% of your portfolio in safe investments such as CDs and money market accounts, 30% in stocks (this could be in the form of the Index Fund I mentioned earlier if you want something simple and easy) and 25% in ETF’s or mutual funds, and 25% in specifically in bond ETF’s or mutual funds. You will likely not have a large amount to start with, so begin with the funds. Continue to contribute every month, and it should grow further in addition to the returns you get. When you have enough, buy into a second, then a third fund. When you have at least 10 to 15 thousand in funds, begin to think about a stock portfolio. Always hold a basket of stocks, not a single stock, as it is too risky if you are wrong in your decision. For trading services I like www.FOLIOfn.com the best, www.ScotTrade.com is also good. These are discount brokerage firms that can make trades for you online for very low fees. You could establish an account with a major advisory firm such as Merrill Lynch, or Wells Fargo Advisors. I do not recommend this. They charge very high fees that come out of your returns, and they usually have minimum account size anyway. And their so-called ‘experts’ do not have your concerns as their number one priority. Instead they are looking for the fees, and often push stocks or investments according to their organizations best interests, not yours. You will be much better served if you do the research yourself. Of course if you are not interested finance as a topic and the time needed (a few hours a week should do it), working with a full service financial advisor may be more attractive and would be better than not spending the time and making bad decisions yourself.
To keep you motivated, here is a link to an investment calculator. You can enter how much you plan to invest each month, the likely returns you will get (5% for a risk free CD's, 10% for an index fund, perhaps 20% for a stock portfolio) and the time until you need the funds.
It would be very advisable to consider forming an IRA or ROTH IRA account. This is a overall account type, within which you can buy or sell stocks, mutual funds, or other investments. The advantage is that with a Roth IRA, you do not pay income tax when you begin to withdraw the funds at retirement. With a standard IRA, the contributions are usually deductible each year if you do not have an employer retirement plan, although when you retire your withdrawls will be taxed. Of the two, a ROTH IRA is superior, as long as your income is not greater than the maximum limit for this type of retirement account. If it is, then you could still create a standard IRA. These tax advantages are substantial and should not be ignored. Most major online trading services allow you to select either a ROTH IRA or IRA account as the structure when you open an account with them.
The most important thing is to STICK WITH IT!! Even with a minimal income everyone in this country would retire wealthy if they avoided debt and planned for the future with at least a small contribution to their investments each month. I congratulate you on your interest and sincerely wish you the best. It takes work, but your finances should become a hobby, learn every chance you get. If I can be of any further service, please do not hesitate to follow up with me!