Advice for a stock market first-timer

By Walter Updegrave, senior editor


(Money Magazine) -- Question: I'm a hard-working 23-year-old who wants to invest in stocks, but I have no clue where to start. So where do I begin? --Duane, Alachua, Florida

Answer: I like it. No nonsense. No bull. Just a hard-working 23-year-old who wants his money work hard too.

walter_updegrave__2009b.03.jpg
Walter Updegrave is a senior editor with Money Magazine and is the author of "How to Retire Rich in a Totally Changed World: Why You're Not in Kansas Anymore" (Three Rivers Press 2005).

But as much as I appreciate the straightforward attitude, I hope you're willing to temper it enough to allow for the possibility of including some bonds in your plan.

Yeah, I know stocks are where the action has been, especially lately. Since their ignominious 17-month slide that bottomed out in March 2009, stock prices are up more than 75%. Stocks have swagger again -- so much so that if the market could talk, it would probably be taunting the naysayers who wrote it off two years ago with that brash phrase from the James Brown-like song in the Kia commercial: "How you like me now? How you like me now? How you like me now?"

But even though a youngster like you probably does want to focus mostly on stocks (at least for the money you're investing for the long-term), I still think it makes sense to mix it up a bit by throwing in some bonds too.

Putting your eggs in more than one basket, or asset class as the case may be, is always a good idea. You never know when some unexpected shock (like, say, a lawsuit against a pillar of the investment community a la Goldman Sachs) might take some of the strut out of stocks, if only temporarily.

Besides, as you get older and want more protection for your portfolio, diversifying will become even more essential to your financial success. So you might as well start learning the ins and outs of that core principle now.

One more thing before we start. You shouldn't even think of investing until you have a reserve cushion of three to six months' worth of living expenses set aside in a safe place like a savings account, short-term CDs or a high-quality money market fund. You don't want to have to sell off pieces of your fledgling investment portfolio every time an emergency comes up.

So, how do you go from a clueless to clued-in investor?

You begin by learning how the investment world works. A good starting point for educating yourself is the Money 101 section of our web site. There, you'll find easy-to-read guides on virtually all aspects of investing, including lessons on Investing Basics, stocks, bonds and mutual funds. Pay special attention to the lesson on asset allocation, as that's where you'll get the lowdown on how to meld different investments into a well-balanced portfolio.

While you're at it, be sure to take the interactive quiz that comes with each lesson. That way you'll know whether you really understand the material.

Once you're confident you're up to speed, you can move on to actually investing your money. I know you've asked about stocks, but I'd recommend that you start out with stock and bond mutual funds instead.

Why? Well, investing in individual stocks and bonds the correct way requires time and the willingness to do some substantial research. And unless you want to subject your money to some pretty big risks, you also need to know not just how to choose individual stocks, but how to assemble them into a coherent portfolio.

One can argue about how many stocks you need to do that. Some say as few as a dozen, others as many as 100. I think this Schwab article makes good case for at least 40.

But whether the right number is 12, 20, 40, 50 or 100, the fact is that sifting through the financial information on each stock so you're sure you really understand the opportunities and risk and then monitoring the companies on a regular basis requires a level of commitment I doubt most people are willing to make.

When you invest in a fund, on the other hand, you instantly you own a share of a pool of investments (usually 100 or more securities) that's overseen by a professional money manager. And since you can usually get into funds with just a few hundred to a few thousand bucks, it's easier to build a diversified portfolio than it is with individual issues. It's also relatively easy to find funds that don't whack you with high fees or sales charges. You can start your fund search by checking out our Money 70 list of recommended funds or, if you want to expand your search, by going to Morningstar's Fund Screener.

One final piece of advice: If you really want to increase your odds for success, I recommend that you make index funds -- portfolios that buy and hold the securities of a specific benchmark, such as the Standard & Poor's 500 index -- the core of your portfolio. No fund can guarantee superior performance, but with their low fees, disciplined investment approach and tax advantages, index funds come pretty damn close. You'll find all the index fund choices you need to get started in the Money 70.

I think you've got all you need to get started. The key now is putting in enough effort upfront so you understand what you're doing before you invest your money. But that shouldn't be a problem for a hard-working guy like you. To top of page

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