In the previous stock post a few months ago found here, I talked about what a stock is and why you should consider investing in them. The post today will talk about how to pick stocks and the "hot tips" on stocks that I personally invest in.
A stock is a piece of a company, so you can choose to use your dollars to buy pieces of companies that you believe in. So the age old question is....What companies should you trust with your money? The truth is that people SUCK at picking stocks because no one knows the future. The talking heads on CNBC don't know...that's why they say things like, "Oh well this company is very strong, but we could see a turning point soon", and then when the company takes off they say, "Just as I predicted! Super strong!". And when the company goes down they say, "Ah see, it's just like I said- they're taking a bit of a dive." These talking heads don't have a flippin' clue. Turn off the TV and don't listen to them anymore.
That's why I don't recommend picking individual stocks. For every Google, there's an AOL. For every American Airlines, there's a Pan Am. Instead of taking a chance of picking the winners from the losers, you should own pieces of everything. Some go up, and some go down. But as a whole, the market increases in value (7% on average per year), which is how you make money. This approach is called diversification.
The absolute easiest way to diversify in the stock market is through index funds. An index fund simply tracks the performance of a group of stocks. These types of funds have the lowest fees in the industry, and their returns beat professional stock pickers about 80% of the time. And it's dead simple to invest, I've been doing it myself since I was 18. So if a teenager can do it, you can too!
I use Vanguard as my platform, but I have also heard that Fidelity is a good company, as well as Betterment. I'm going to talk about vanguard funds since that's my bread and butter.
- VTSAX is the total stock market index fund. If you have money in this index, you own a little bit of EVERY publicly traded company in America.
- VTIAX is the total international stock market index fund...so you probably figured out that if you invest here, you will own a little bit of EVERY publicly traded company based outside the US.
- My 401k does not offer Vanguard funds, so I just chose a simple S&P500 index fund through the brokerage offered. The S&P 500 in an index that tracks the biggest 500 companies in the US, also known as the Fortune 500. Coca Cola, Google, Amazon, Apple, etc. If you own this fund, all those companies will be working to make YOU money.
That's it. I am young so I have time on my side and am not scared of the volatility so I am in almost 100% stocks. As I get older, I will transition some money out of these stocks and over to bonds which are less volatile and less likely to take a nose dive during a crash. Many people much smarter than me recommend 80% stocks to 20% bonds so that's probably what I will do. VBTLX is the bond fund I like for my IRA. It's the total bond market fund...once again having a little piece of every high quality corporate US bond. I'm all about that diversification.
There is one even easier way to get a little piece of everything in ONE single fund, if those funds are too complicated for you to be bothered with. It's called a Target Retirement Fund (I would put this in a retirement IRA through vanguard). You can pick the year you want to retire and choose the corresponding fund that holds a little bit of everything, and the cool thing about this fund is that it will re-balance you into more bonds as you age. It's literally a set it and forget it type of investing. Most of this one fund is made up of the other 3 funds (VTSAX, VTIAX, and VBTLX) I already mentioned, so it's a sexy little thing.
The next part on this blog is here and is about what type of account to open. 401ks, IRAs, and HSAs...What they are, why I have them, how much I invest, and where I find the extra money to even invest in the first place.
For further reading on Stocks in way more detail, I highly recommend the JL Collins Stock Series, found here.
*Disclaimer, I'm not an investment adviser or financial professional and you invest at your own risk. Past stock market performance is not an indicator of future performance*