What is the best way to invest in stocks? How can I do it?

By | May 11, 2022

Let’s start with the how, because that is the easier part of the equation.

To invest in stocks, you just need to:

  1. Open up a do it yourself (DIY) account online or use an advisor if you need advice
  2. Usually you need to supply your proof of address, ID, tax number and other information.
  3. Fund the account

The only time this process is difficult is if you live in a country which is sanctioned, and most providers will refuse to accept for.

In terms of the how, there are some basic principles you need to follow.

Firstly, it is best to invest every month, regardless of the economic conditions.

When you start to try to be too cute, and time the market, this is where you get into problems.

It partly explains these results:

I have ran out of the number of investors who stopped investing fresh money, or even panic sold, during 2008–2009, Brexit, Trump, coronavirus etc.

I would go further. Anybody who thinks they can time markets, and will watch the news like a nervous puppy, shouldn’t even invest.

They should either not invest or use an advisor, as somebody like that will always do silly things with their money.

I was reading a recent study which showed that up to 35% of Fidelity DIY clients sold between March and May!

A Vanguard study showed that more people invest during bull markets (the 1990s for example) and sell during crashes.

So avoid buying high and selling low, or trying to time when you think markets will push higher.

Second, unless you are a professional investor, avoid having all your portfolio in stocks and individual stocks.

As a DIY investor you won’t beat the market long-term, almost for sure, by stock picking.

So own both stock and bond indexes. If you really can’t resist individual stock picks, use 5%-10% of your portfolio like that.

The main difference is age. When you are young, 90% in stocks is good, and 10% in bonds. As you approach retirement, increase your allocation to bonds.

Reinvest dividends and rebalance from one to the other. Two simple examples. Let’s say you are 80% in stocks and 20% in bonds.

You invest $100,000, with $80,000 in stocks and $20,000 in bonds. In 1 year, your stocks have increased to $120,000, and bonds are at $21,000.

Now you have only 17.5% in bonds. So sell a small amount of your stocks to buy 2.5% worth of bonds, or use fresh money to buy bonds.

Likewise, let’s say your stocks go down to $50,000 (let’s say in March when markets crashed) and bonds $22,500, stocks are now just 68.9% of your total portfolio.

So sell some bonds, and buy some stocks, to retain the 80%-20% portfolio. The same if you have a 90%-10% or 60%-40% portfolio.

The great thing about this is you can benefit from market crashes, and indeed bull markets, without having to have cash in the bank earning 0%.

If a crash comes, just login and rebalance, add more money and reinvest dividends. If markets keep going higher, rebalance as well.

If you can deal with a lot of volatility, there is nothing wrong with being 100% in stocks when you are young, but few people can deal with this in reality.

Remember if you invest monthly, you can also benefit from any market conditions if you invest for decades.

If markets have a “lost decade” (like in 2000–2010) again, you are just buying units at cheaper prices for longer. That will benefit you long-term.

As a final aside, be just as motivated by gains, as you are by “not losing”.

This is one of the biggest reasons why people fail in investing and one of my previous answers on here was picked up by Business Insider speaking about this topic – 11 reasons why it’s taking you so long to succeed in life

The ironic thing is, people who are too cautious, end up losing in the end, compared to somebody who takes calculated risks.

Pained by financial indecision? Reach out today.

http://adamfayed.com

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