I won’t beat around the bush on this one. If you’re like many young Americans, you might be mulling (or procrastinating) a dive into the stock market right now, but need a little push. These three simple steps will help you take that dive — and figure out what to do once you’re in the water.
#1: Get Over Your Fear
On my last article about Generation Y and retirement, Charles Sizemore — an InvestorPlace contributor and the founder and editor of the Sizemore Investment Letter — weighed in on the issue with this comment:
“The Echo Boomer generation (a.k.a Gen Y and the Millennials) tends to be a little cynical towards stock market investing, and it’s hard to blame them. They were children when the dot com bubble went bust in 2000 and most were still in college when the 2008 meltdown hit. This generation has NEVER seen a real bull market, and they question the received wisdom that stocks ‘always go up’ over time. Don’t underestimate the effects of watching their Baby Boomer parents take a beating on Gen Y’s reluctance to invest.”
I’ve mentioned this before (referring to the “The Hot Stove Syndrome,” along with examples of a general distrust for Wall Street), and it brings us to the first most important step for getting in the market: getting over your fears — whether it’s a fear of a crash, the complexity of the market or something else.
In the end, risk is everywhere. You’re probably concerned about the risk of being in the market … but have you thought about the risks of not being in it?
For example: A money market account comes with a 0.47% interest rate right now, while inflation is sitting at 1.6% — which actually is low, considering the average rate since America started keeping track is well north of 3%. Still, that means at this rate, everything will cost 1.6% more per year … and if your money is growing slower than that (and it will be at 0.47%), it will have less spending power as time rolls on.
Meanwhile, the S&P 500 — the broad index of U.S. stocks — has far outpaced inflation by growing more than 11% annually over the past three decades, including a 13% gain last year.
In other words, sack up and buy some stocks.
#2: Invest In What You Know
If you’ve been following this column, we’ve already talked about opening a brokerage account. So you’ll have to do that first. Once you have, though … how do you figure out what to buy?
Well, Warren Buffett — renowned value investor and CEO of Berkshire Hathaway (NYSE:BRK.B) — has always been a strong believer in the “invest in what you know” mind-set. It works for the world’s third-richest person … and it’s an especially good starting point for young investors.
So, buy companies with businesses that you understand. My first purchase, for example, was McDonald’s (NYSE:MCD) — a stock whose business is well within my paygrade. My next plan is to snatch up a simple ETF for diversification, and it likely will be in retail — another business I can wrap my head around.
Conversely, you should avoid starting with more complex stocks. For instance, big financials like JPMorgan Chase (NYSE:JPM) might be too big to fail, sure, but they also have businesses that are too big and elaborate for novice investors to understand.
#3: Know Your Numbers
So, you want to invest in what you know … but you have to know what you’re investing in, too. That means if you’re going to buying a retailer’s stock, it has to be for more than the fact that the company sells cute shirts. You’ll need to know some simple math and metrics to start with. A few you should become familiar with:
- Price-to-earnings and price-to-sales ratios: These are metrics that can help you determine whether a stock is considered “cheap” or “expensive.”
- Revenues, margins and earnings (often measured as earnings per share): These give you insight into the company’s basic business. Apple (NASDAQ:AAPL) and its high-end devices, or upscale retailers, are all about high margins. Grocery stores, on the other hand, squeeze by on slim ones.
- Dividends, dividend yields and payout ratios: These tell you how much money the company returns to shareholders, how much of your investment you will get back via these payouts based on the stock’s price, and the company’s ability to sustain its payments and potentially grow them in the future.
There are countless more metrics you can use to analyze stocks, but these are some of the most basic, core ones used by investors. To get a better grasp of how to use these metrics, take a look at InvestorPlace Editor Jeff Reeves’ simple 11-step investors’ guide, which covers much of what you’ll need.
Bottom line: Keep things simple to get the ball rolling.
As of this writing, Alyssa Oursler was long MCD.