When investing for your retirement, the single biggest risk is not making enough money by the time you retire.
Stocks are the key piece to getting our money growing fast enough. Without them, we’ll have a really hard time retiring comfortably.
So what’s the best way to buy them?
We can buy stocks directly. Or we can buy a “basket” of stocks through an index fund.
Our Approach on Investing in The Stock Market
For the majority of investors, index funds are the best way to go.
Index funds invest in a basket of US, international stocks, bonds, or other type of investment. You can pick and choose the type of investment that you want your index fund to focus on. For example, an index fund of the US stock market will invest broadly across all public US companies. The goal of the fund isn’t to beat market performance, the goal is to match the performance of the market as closely as possible. Since the market grows at an average of about 8% per year, the growth rate adds up nicely over time.
Index funds have several major advantages compared to building portfolios yourself:
- They help you save on costs, index funds charge very low fees compared to active funds that try to beat the market.
- Not only are they cheaper, they usually beat returns of actively managed funds. It’s one of the few cases where you get a better return while paying less.
- They are less risky since they’re diversified across an entire market instead of a handful of companies.
Nobody knows where the market is going. I recommend putting 90% of your investments in index funds or life-cycle funds. Only after doing that should you think about investing the remaining 10% of your money in individual stocks.
I fully support allocating up to 10% of your portfolio on individual stocks. I do it myself and it’s a great way to scratch that “investment itch.” Just keep it limited to a small portion of your portfolio that you can afford to lose.
Now let’s get into how to buy stocks.
Set Up a Stock Brokerage Account
You will be buying stocks through an online broker. There are dozens of them offering all kinds of services. You need someone dependable and low-cost.
We recommend TD Ameritrade. They are a self-serving broker and have a simple and intuitive interface, which is great for beginners. They are also commission-free.
Opening an account with TD Ameritrade is quick and easy, you can do it in just six steps.
Step 1: Go to TD Ameritrade’s website.
Step 2: Click on the ‘Open New Account’ button.
Step 3: You need an Individual Brokerage account to invest in stocks. So, start your application for it.
Step 4: Fill in the required information, which includes your personal, financial details, and your employer’s information.
Step 5: After filling the form, you need to review your application before submitting it. The folks at TD Ameritrade will then take a couple of days to go through your information.
Step 6: Once your account is approved, you can start investing in stocks. Unlike some other brokerages, TD Ameritrade does not require you to make a minimum deposit to begin.
Whether you’re buying index funds or individual stocks, the process is the same.
Now that you have set up a brokerage account, you are all set to buy your first stock. Which brings us to…
Consider The Stock You Want to Buy and Why
It’s easy to feel overwhelmed before buying your first stock. You may be thinking: There are so many stocks! Which one should I buy?
I’m not going to supercoat this, picking the right stock is brutally difficult.
Back in 2017, I bought a few shares of Tesla. I happened to buy it right at the top of $360. It then dropped, bouncing around and eventually going as low as $190. Finally, after 2.5 years, it’s up to $430. And it’s still not matching the performance of the overall market. My index funds have drastically outperformed my stock picks.
In all my reading on investment strategy, I’ve come across a few adages that I’ve found helpful:
- For an investment to succeed, the market needs to think you’re wrong today but end up agreeing with you in the future.
- Even with outperforming stocks, it’s incredibly difficult to hold on during the dips. Take my Tesla example, it would have been easy for me to bow out and sell when it dipped below $200. Periods like this happen to every stock. Even megawinners like Amazon and Netflix had periods where they looked awful.
- A cheap stock is not always good, and an expensive stock is not always bad. It’s whether the company is worth the price.
- As Warren Buffet teaches, you have an unlimited number of “at-bats.” You can wait as long as you want before finding a deal that’s truly in your sweet spot. Keep waiting until it comes along.
Right now, I’m still developing my own philosophy on investing. I’ve gone ahead and set a rule for myself: I can only invest $1000 into a company and I can’t add or sell beyond the initial purchase. This keeps me from making emotional decisions or overreacting to news. Instead, I make my bet and begin tracking the performance of the company to see how my analysis plays out.
Again, if you’re not sure which stock to buy, find a broad US index fund at your brokerage company. 90% of your portfolio should be in index funds anyway and there’s nothing wrong with making it 100%.
If you want to play things conservatively, do a simple 60/40 portfolio. This is a classic and it’s super simple.
Another option is to use the age rule. Subtract your age from 100 and put that percentage into stocks, the rest into bonds. You will have to adjust your allocation year-to-year but it’s still a simple way to invest more heavily in stocks as you’re younger and then shift into bonds as you get closer to retirement.
Place Your Order
When you know which stocks you want to buy, head over to TD Ameritrade’s website, login to your account, and place an order using the following steps.
Step 1: Go to the “Trade” tab and then click on “Buy/Sell” under Stocks and ETFs. Here, you have to fill three things. First, under Action, select “Buy”. Second, under Symbol, type in the symbol of the stock you want to buy. If you don’t know it, you can use the symbol lookup option on the same page. Third, type in the number of shares you want to buy.
Step 2: Select “Market” under Order Type. By using this option, you will buy the stock at the available price when you confirm the order. A market order ensures your order gets executed. Alternatively, if you want to buy the stock at a specific price, use a “Limit” order and put in the price at which you want to buy it. Your order will get executed only if the stock reaches your price.
Step 3: Under “Time-in-force”, you can go with the Day option, which means that your order will be valid till the end of that day.
Step 4: Click on the Review Button.
Step 5: Check the details you have filled in and then click on “Place Order”.
Step 6: To confirm if your order went through, go to the “Trade” tab and select “Order Status”.
You Bought Your Stock: Now What?
The biggest one is looking at the stock price every day. It’s a recipe for needless anxiety. I don’t do it, and neither should you. Most of the time, everyday price movement is just noise. I’ve gone through periods of my life where I checked my investments on a weekly basis. For me, it was a sign that I wasn’t enjoying my job and used my investments as a distraction. Once I improved the quality of my day-to-day, the urge to check my investments disappeared. Now I check them once a quarter at most. If you’re checking your portfolio regularly, it could be a sign that there’s a larger issue in your life that needs to get resolved.
The second mistake is selling your stocks at the slightest fall. ALL stocks go down at some point. So, trust your judgment and don’t keep buying and selling. The easiest way to avoid this is to stop checking your stocks so often. The less you look, the less of a chance you’ll see a loss and be inclined to sell.
When To Sell A Stock?
There are four valid reasons for selling your stocks:
- You have achieved your personal finance goals. Once you hit the number that you need to retire, move the bulk of your portfolio into safer investments like bonds and CDs. Take the win and focus on capital preservation. Keeping capital is a very different skillset to growing capital. This becomes especially important if you get a large windfall and hit your retirement number earlier than normal.
- You need the money. I understand that things may go south and you need money for an emergency. First use the funds from your emergency savings. Sell your stocks ONLY if that doesn’t cover the expense. It should be your last resort and never do this for a purchase that can be delayed.
- Performance has been weak and it’s time to get out. This one is really difficult to judge accurately, all of us have a tendency to jump out at the worst possible moment. Even though we lose money, we all tend to buy high and sell low. Check your biases and ask yourself if weak performance in your picks is truly permanent. This shouldn’t be the case with index funds, every market goes through cycles. It’s only something to worry about with individual stocks. That said, sometimes we make a bad pick and it’s time to take the loss.
- It’s time for re-allocation. When a market has a fantastic set of gains in a year, it’ll become a larger portion of your portfolio than you intended. You might set a target to have 80% investments in stocks but it could become 90% through appreciation. You’ll get superior returns by selling some of your stock wins and re-investing that into bonds. This keeps your portfolio in line with your goals while helping you sell high and buy low.
To sell a stock, follow the same procedure as you did when you bought it, but instead of “Buy”, select “Sell” under action.
What You Need To Know About Taxes On Stocks
You will have to pay taxes on the profits you make with stocks. This is called a capital gains tax. If you sell a stock within a year of buying it, you will have to pay a short-term capital gains tax. It is equal to your normal income tax rate.
If you sell a stock after having held it for more than a year, you will have to pay a long-term capital gains tax. It is 0% if your individual annual income is less than $39,375, 15% of your profits if your income is under $434,550, and 20% if its more than that. These tax brackets go up by a bit if you are married and file joint taxes of if you’re the head of household.
Keep in mind that these are marginal tax rates. The higher tax rates only apply to income in that bracket, not the entire taxable amount. So you pay 0% in taxes on your first $39,375 regardless of how much you earned, then 15% after that until $434,550. Then 20% on anything above that.
How to Buy Stocks is a post from: I Will Teach You To Be Rich.
