If you’ve been pondering how to invest in stocks, you’re not alone. Some of the largest online brokers saw new accounts increase by up to 170% in the first three months of the year, as new investors saw lower stock prices as an opportunity to get involved. 

But opening an account is not the first step you should take in your investment journey. Before you begin, it’s worth spending the time putting together an overall strategy that fits your particular circumstances. 

Once you’ve done that, you can plan what you’ll do when the market changes — which it always does. It’s a universal truth that the price of stocks will go up and down, and if you decide in advance how you’ll react to those fluctuations, you’ll be comfortable weathering any downturn and taking advantage of any upturn. 

So, grab a notebook and let’s figure out your unique investing strategy.

The Speed Read

1. Investing in the stock market is a good way of growing your money if your financial goal is more than five years in the future.

2. By investing in a company you’re investing in their success, so your investments should match your values.

3. Automating your investments and keeping hold of your stock is the easiest way to regularly invest, and means you can grow your financial portfolio with minimal effort.

Hollywood makes the stock market look pretty glamorous — with dizzy highs and crashing lows, with a closing scene where the hero gets that big payday he was chasing all along. 

But the real world is somewhat different. 

In reality, the stock market is not the place to go if you need a quick influx of cash. The risks involved means that it’s not somewhere to gamble money that you are heavily relying on, whether that’s next month’s rent or the deposit for a new car.

Before considering investing, financial advisors recommend that you have an emergency cash fund of between three and six months of your normal expenditure. That means that if you lose your job or get ill, you know your rent or mortgage, travel and food are covered. 

You should also pay off any debt credit cards, store cards or loans — since these tend to have high interest rates, which means you’ll be paying more in interest than you’re likely to get back on your investments. 

Finally, investing isn’t a get-rich-quick scheme. Short-term goals of under five years should be saved for in cash rather than through stock market investing. It’s less exciting, but a bank savings account will give you the more predictable and safer investment that you need. 

So bearing that in mind, when should you invest in stocks? 

The answer lies in what you need the money for, because different goals require different wealth-building strategies. 

Over the course of your life, you’ll have many financial goals.

You might want to redecorate your home, and eventually move somewhere bigger. Maybe you need to save for your child’s education, or want to travel the world in the height of luxury. Perhaps both! And of course, you’ll probably need to save for retirement, so you need to think about the kind of retirement lifestyle you want. 

Here’s what your ideal financial portfolio might look like, with each element fulfilling a different goal over your lifetime:

an ideal financial portfolio when investing in stocks

Once you know the reasons you're investing, you can proceed to the next step.

By looking at your financial goals, you can see when you’re going to need money, and roughly how much. From here, you can start to think about your appetite for risk.

Appetite for risk

How much you’re willing to gamble or risk you’re willing to take in pursuing your financial goals.

For each of your goals, it’s worth considering the following:

How long do you want to invest for?

A longer time frame means that you’ll have the chance to save more and benefit from compound interest. It also means that if your investment falls in value, you’ll have more time to recover.

Compound interest

The interest you earn on the interest you earn. If your €10 investment earns you 20% interest a year, the following year you’ll earn 20% interest on €12, and the year after that you’ll earn 20% interest on €14,40.

How much can you afford to lose?

While losing money isn’t ideal, it’s less of a big deal if you lose the money you were saving to go on holiday compared to the money you were saving to buy your first home.

How comfortable are you with losing money?

This is a very personal decision, and it can change over time. Those that are risk-averse will want to see consistent returns and low fluctuations. Risk-neutral people will accept a certain amount of rising and falling of their investments in exchange for higher returns. And then there’s the risk-seeking people, who are happy to see substantial fluctuations in return for the highest returns. 

Once you’ve determined your appetite for risk, you can match it against the right investment.

Different types of investment have different risks. The higher the chance that you’ll lose money, the more of a return you will get if the investment pays off.

Stocks, for instance, are high risk, high reward. You buy a share of a company, and when the company is doing well, you’ll receive regular income in the form of dividends. If the value of the company increases, you’ll be able to get more than you paid for your share when you come to sell. The quicker the return, the higher risk that stock will be.

Similarly, ETFs are high risk, high reward as well. These allow you to invest in a collection of assets, such as stocks, bonds and gold, pooling your money with other investors. They’re listed themselves on exchanges with their own symbols (just like stocks), and traded over the course of the day.

Mutual funds are also considered to be high risk, high reward. These are similar to ETFs, in that you pool your money to invest in a collection of assets, but they’re only traded at the end of the day, so there are fewer fluctuations.  Bonds, on the other hand, are more medium risk, medium reward; a loan of money that you give to a company, municipality or government, so they can finance a new project or investment. You receive the money you invested back when the bond matures, and make more money if the interest rate has increased since you bought it. 

Likewise, investing in gold implies medium risk, medium reward. Gold is used by investors to keep a proportion of their money safe, protecting against stock market fluctuations. It holds its value, and isn’t supposed to be subject to market fluctuations in the same way stocks are.

Finally, if you choose to invest in cash, expect low risk and a low reward. Cash means simply keeping your money in its original form, such as in a bank savings account. You don’t earn much interest, but your money is safe against stock market moves. 

For each of your financial goals, you can plot your point on the matrix to see what the most suitable investment is for you.

A risk matrix for finding the correct financial investments

Your values are as important in your financial decisions as they are in any other part of your life (perhaps more even more so!). When you’re investing in stocks you’re investing in companies, helping them grow and become more successful. 

This means you have some decisions to make. 

Are you willing to invest in any company, as long as it grows, and your investment with it? Or do you hold certain values that mean you wouldn’t want to invest in certain companies? 

If you’re vegan, you’re probably going to be uncomfortable with investing in companies that test on animals. Your religion might prevent you from investing in companies that trade in alcohol. Or, if you’re a climate activist, you might want to invest in companies that are tackling their carbon emissions. 

These are all values that can be reflected in your investment choices.

ESG, SRI, and Impact investing

ESG investments give ratings to companies in relation to their environmental, social and governance behaviour. 

SRI investing also tackles one particular issue, but is binary e.g. it excludes any company that, for instance, tests on animals. 

Impact investing carefully assesses companies on one particular issue, such as emissions or equality.

Each of these investment methods can be used to invest in the stock market, so that your portfolio matches your own ethics and values. 

Some people feel very uncomfortable not being in complete control of their money, while others would rather rely on an expert or simply don’t have the time to devote to monitoring their investments. 

Consider which of these feels most comfortable:

Total control

If you’re taking a DIY approach to investing in the stock market, and want to make your own stock orders and trades, you have a number of options. You can go to your bank, who will probably be able to do this for you. You can go online, and use a platform such as E*TRADE or Robinhood. Or you can go to an execution-only brokerage, who will make any trades you instruct them to on your behalf. 

+ Low fees, so almost all of your investment return is yours to keep.

- You’re responsible for doing the researching, picking and monitoring stocks.

Some control

Companies like Betterment and Wealthfront are robo-advisor platforms that are making investing money in stocks more accessible for the inexperienced. With these, you sign up, answer some detailed questions about your investment needs, and receive tailored algorithm-based investment recommendations.

+ Easy to get started

+ Low fees and you can start with a small initial investment amount.

- Algorithms have limits, so it’s impossible to get truly personalised advice.

No control

Using a financial advisor or full-service brokerage means you can speak to an actual human, and discuss your goals, circumstances and attitude to risk. They can then make recommendations, make the trades, and monitor your investments on your behalf.

+ Tailored advice from an expert.

- Can be expensive, often asking for a percentage of your investment on a regular basis.

Regardless of how you invest or what you invest in, you’ll need to decide whether this is a one-off or an ongoing investment. 

If you’ve received a financial windfall, such as an inheritance or redundancy payment, it might need to be a one-off (at least for now). Investing it all in one go will mean that you buy all of your stocks at the same price — great news if they’re low and on the rise, but bad news if they’re heading in the opposite direction. 

Making smaller investments regularly is often the preferred approach. Investing little and often can really pay off, while automating those investments is the ultimate in wise investing.

By setting up a direct debit that automatically takes the same amount of money each month, you’ve got a low stress way of building your wealth over time. Check back in a couple of years, and you’ll be amazed at how much you’ve managed to invest!

If you’ve chosen an auto-invest plan and you’ve instructed either a robo-advisor or a financial expert to invest in the stock market on your behalf, there’s very little you need to do. 

Remember, the stock market isn’t designed to reward those who pull out their money at the first hint of trouble. It’s those that keep a steady course that triumph; continuing to invest during downturns (taking advantage of the lower prices) and not selling when prices reach a new high. 

This graph shows someone who invested €200 a month in the S&P 500 for 40 years — every month and every year. You can see that there were two significant downturns, as well as several moments that must have felt like market peaks when they were tempted to sell, but the investor did nothing. And today, they’ve got €1.3 million to sit back and enjoy.

savings vs investments

The graph above shows that panicking and withdrawing your money from the stock market is seldom the answer — if this investor had done that in one of the two downturns, they’d have missed out on that sweet €1.3 million! 

But there are people who make money in the stock market by buying and selling their stocks rather than just letting them accrue in value. 

If you want to trade, you’ll need to be more aware of what the market is doing. Some people watch this on a month-by-month, week-by-week or even hour-by hour basis. As you can imagine, the more closely you monitor things, the more work it is. 

You can take some of the headache out of this by pre-setting your warning levels by asking your robo-advisor platform to alert you if the stock falls below a certain price. And if you’ve got a financial advisor, it’s part of their job to do this for you.

The key is to have a plan in place in advance, so that you know what you’re going to do in any given situation.

It’s old Abe Lincoln who once said: “Give me six hours to chop down a tree and I will spend the first four sharpening the axe”.

By thoroughly preparing a financial plan, you can now relax, safe in the knowledge that your financial axe is super-sharp and ready for action. 

Conclusion

When you’re first considering how to invest in stocks, it can feel overwhelming at the beginning. But breaking it down step-by-step shows just how methodical you should be.

You don’t need to be an expert, you just need to be clear on what you need, and what the best method of getting that is. Investing money in stocks should make up a part of your portfolio, helping you to secure your financial future over the years to come.

And of course, the earlier the better — if you’re going to take advantage of compound interest and give yourself the chance to invest regularly over many years, starting today is the very best strategy you can have.

Susi Weaser
Susi is a content specialist at Cooler Future, with a love of all things eco.

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