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Suggestions to get started buying stocks

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Link+Zelda
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Re: Suggestions to get started buying stocks

Post by Link+Zelda »

MiddleMan wrote: Fri Sep 10, 2021 12:31 pm I've thought about buying stocks for a long time, but have never been sure how to go about getting started. With interest rates so low, I heard someone say, I am losing money sitting in a savings account. Any suggestions for a complete newbie? I do have retirement accounts that invest in stock. Should I just add to those? Those are managed funds but I'd kind of like to buy into certain companies and keep the money there for about 15 years or more.
First, the someone you "heard" is absolutely right--with the current low interest rates, you absolutely are losing money in a savings account relative to inflation. I shopped around, and my FDIC-insured (i.e. no risk) savings account is at a higher rate than almost any other savings and is only a 0.5% APR. That's small relative to the roughly 2% target inflation rate, and it pales in comparison to the ~5% current yearly inflation rate. 2020 had similar interest rates and a ~1.2% inflation, and that's probably the closest rates have been to matching inflation since the Great Financial Crisis except for 2015 (where inflation was reported at only 0.12%).

I think the next things to consider: Why do you want to buy stocks? Why "certain companies"? Investing, whether in stocks, bonds, real estate, or alternatives, should always be for a purpose and follow a plan in order to minimize the likelihood of your emotions getting involved. Emotional investing is often a recipe for disaster. Some examples of "why" include: saving for retirement, not losing to inflation when building a downpayment for a house (or car, etc), building an estate for your children, or to provide supplemental income currently.

That said, it's hard to give recommendations without knowing more about your situation. I gather from your profile that you're mid-50's, and you said in the OP that you're a newbie investor. From that, I'd start by saying you need to be very wary of individual stocks and taxes.

Individual stock picking is not an efficient way to invest. It very rarely is capable of beating the market (the "average" of all publicly traded stocks), and many people have squandered away their money this way. Even people that do stocks as their job and have for years/decades usually fail this way. Without insider information (which is illegal to use), the expected return from today for any publicly traded company is essentially the long-term average of the market--about 10.2%. For every big winner with Tesla, GameStop, Apple, or Amazon, there are several more people who lost big time with Enron, Kodak, or Gamestop (yes, on both sides) that you never hear about. Instead of individual stocks, buying a mutual fund or ETF that follows an index of stocks is much more efficient--same expected return with vastly lower risk. Think of it this way: buying VTSAX or VTI (Vanguard's entire-US-market Mutual Fund and ETF, respectively) will give you tiny ownership of over 3900 companies in one purchase. Likewise, buying VTIAX or VXUS (the international equivalents) gets you almost 7,600 companies. There is even the all-world equivalents (VTWAX and VT) that get one over 9000 companies in one go. It might be easier to describe this approach from a real-estate perspective: if one had $10 million to invest in real estate, would it be safer to invest in a single, really expensive house or spread out that money in ~25 places that varied in geography, size, style, and local/state taxes?

Speaking of taxes... Taxes on stocks can get tricky, especially on optimization. You have to deal with short- vs. long-term capital gains, qualified vs. unqualified dividends, wash sales, and likely more. I'm guessing quite a few Gamestop and AMC "winners" from several months ago are going to get a huge tax shock early next year... But there's a really easy way for newbie US investors to not have to worry about this--utilizing their tax-advantaged space. There are two main types of these in the U.S., traditional and Roth. Here's a little diagram for them:

Traditional: Untaxed InputUntaxed GrowthTaxed Withdrawal
Roth: Taxed InputUntaxed Growth Untaxed Withdrawal


Essentially, neither Roth nor Traditional will EVER lose to a taxable account, as taxable accounts are "red" across the entire path. As long as you and/or your spouse have earned income in a given year, you can contribute to one or both of these with an IRA (even extremely high earners can effectively take advantage of Roth through a backdoor approach). Now which is better can be complicated (and actually unknowable since we can only guess at future tax rates), but either way is "winning" over doing neither. IRA contribution limits for 2021 are $6000 (for those 50 and older, it's $7000). Many people also have access to 401k's (or equivalents) through their employer (or a solo 401k if self-employed), and these work similarly but with higher limits. The issues with tax-advantaged accounts are the penalties for early withdrawal, but they're great if you're wanting to invest for retirement or for building an estate.

So without knowing any other details of your needs, but knowing you're a newbie investor, I think a good suggestion would be a target-date fund. These funds are designed with your retirement year in mind and combine domestic and international stocks and bonds to target an appropriate risk for your intended retirement...and the mix of them changes as retirement gets closer. For instance, Vanguard has a 2030 target-date fund that goes by the ticker VTHRX. That fund started in 2007, right before it got obliterated by the Great Financial Crisis, and yet a $10,000 investment in it in January 2007 would have been worth $27,420 at the end of August this year. That's the equivalent of a 7.12% interest rate. (See here for the plot.) These types of funds were absolutely intended for "newbies", and one really can't go wrong with them.

Wow, that was really long. Maybe next time I should just find a good intro article and link it. :lol:
-Link+Zelda
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Re: Suggestions to get started buying stocks

Post by Graypoet »

There has been good advice offered in several posts. I agree with the suggestion of a target date mutual fund. I know from experience that Vanguard funds offer these and I’m certain that Fidelity and other firms offer these as well.
Beloved, I wish above all things that thou mayest prosper and be in health, even as thy soul prospereth. 3 John 2
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SamanthaRose
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Re: Suggestions to get started buying stocks

Post by SamanthaRose »

We diversify our savings. Stocks, ETFs, a few mutual funds, and other investments. One thing that is kind of fun and offers very high returns is Prosper.com

We buy notes (loans people apply for) and get to pick and choose the terms. We do maninly 3 year notes, and focus on the higher interest rates, which of could come with higher risk. In the past 2 years we have been getting 19% return.
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MiddleMan
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Re: Suggestions to get started buying stocks

Post by MiddleMan »

Wow, lots of great advice here! I'd like to thank everyone. Yes, I'm mid 50s and looking to retire in 10-15 years. I have a retirement account (TIAA-CREF) through work (10.65% so far this year) and 403(b) that I rolled into from my previous job (14.10% YTD). I did look through the options those offer and have made changes once or twice.

I'm not interested in day-trading (i.e. emotional trading), but putting some money in and letting it ride. And yes, I do finally have some money to invest.

I think about wealth and how that gets passed down, and most wealthy people invest in stock and that helps the kids. I've been trying to think about how to keep my kids and grand-kids out of the "one disaster away from ruin." I come from working-class near-poverty and see some of my siblings struggle with paycheck to paycheck living and unable to deal with a health or even an automotive crisis. Of myself and my siblings, two out of five have improved our lot in life. I'd like to help my kids avoid that kind of mentality if I can. Show by example, I guess.

But I like the idea of a Target Date Fund. Or a mutual fund. I will certainly consider the advice here. I like the idea of real estate, but I live in a small town and right now it all seems over-priced. It is a college town so there is a lot of rentals, but I'm not sure I want to go down that road.
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Re: Suggestions to get started buying stocks

Post by David »

I've not heard of prosper.com but I had a quick look and it looks like being "peer-to-peer" lending. That's a bubble that's pretty much burst in the UK - essentially, if people are borrowing money that way it's because they can't borrow money from a bank. If people can't borrow money from a bank, it's because the bank doesn't think they can afford the repayments. Turns out the default rate is high, and people have lost money on these loans.

Personally, I'd stay out of real estate unless you know what you're doing.
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Link+Zelda
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Re: Suggestions to get started buying stocks

Post by Link+Zelda »

MiddleMan wrote: Sat Sep 11, 2021 8:35 am ...I'm mid 50s and looking to retire in 10-15 years. I have a retirement account (TIAA-CREF) through work (10.65% so far this year) and 403(b) that I rolled into from my previous job (14.10% YTD). I did look through the options those offer and have made changes once or twice.

I'm not interested in day-trading (i.e. emotional trading), but putting some money in and letting it ride. And yes, I do finally have some money to invest.
...
But I like the idea of a Target Date Fund. Or a mutual fund. I will certainly consider the advice here. I like the idea of real estate, but I live in a small town and right now it all seems over-priced. It is a college town so there is a lot of rentals, but I'm not sure I want to go down that road.
TIAA-CREF is somewhat different from many retirement-account providers. Their offerings heavily depend on the contract with your institution. However, most TIAA-CREF contracts offer individuals the option to invest in the TIAA Real Estate Account (sometimes abbreviated as TREA, but the ticker symbol is QREARX). This rather unique offering can be viewed as a type of Real Estate mutual fund. It directly invests in real estate, unlike REITs, which are a hybrid of stocks and real estate. In a few weeks, the QREARX fund will hit its 26th anniversary, so it's stood the test of time. You can read its fact sheet here. I encourage you to look into this investment option for you if you'd like to diversify with real estate but without the headache and issues of owning/managing it on your own (full disclosure: about 9% of our retirement funds are in QREARX).
MiddleMan wrote: Sat Sep 11, 2021 8:35 am I think about wealth and how that gets passed down, and most wealthy people invest in stock and that helps the kids. I've been trying to think about how to keep my kids and grand-kids out of the "one disaster away from ruin." I come from working-class near-poverty and see some of my siblings struggle with paycheck to paycheck living and unable to deal with a health or even an automotive crisis. Of myself and my siblings, two out of five have improved our lot in life. I'd like to help my kids avoid that kind of mentality if I can. Show by example, I guess.
I came from meager means also, so I fully understand where you're coming from. I suggest you read the book The Millionaire Next Door (by Stanley and Danko) to get some insights on this. I believe Chapter 6 is the one that covers relatives/descendants. And yes, stocks are a major way to build AND preserve wealth over long periods of time. It's all about beating inflation to do this, and stocks, bonds, and real estate are historically good choices for doing this.
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MiddleMan
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Re: Suggestions to get started buying stocks

Post by MiddleMan »

I read The Millionaire Next Door, and I'm ready to be one. :D
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Re: Suggestions to get started buying stocks

Post by MrEden »

If you want to invest in real estate but don't personally want to buy and sell property, check out Real Estate Investment Trusts or REIT. It is basically a mutual fund of real estate investments. Read the book The Single Best Investment.

Now is not a good time to buy, but if you have enough money to buy a house for rental income, it requires very little hassle or expertise. Professional management companies handle everything and charge only around 10%. I prefer a local company. Many local real estate brokerages also handle rentals.

A fairly safe alternative to a long term savings account with better returns is power company stocks. They are regulated monopoly, and are pretty much guaranteed to make a modest profit. You can purchase stocks directly at a very low cost. If I recall correctly, you can purchase fractional shares -- you can buy any dollar amount you want.

Profits are paid in dividends so are taxed as ordinary income.
Last edited by MrEden on Mon Sep 13, 2021 1:35 pm, edited 1 time in total.
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Re: Suggestions to get started buying stocks

Post by newwifenewlife »

Personally, I'm not a big fan of Target Funds as they can try eliminate a lot of risk which may put one's funds at risk of lasting on the back end of things. As I previously mentioned, asking questions to understand the "what" AND "the why" is important so one can know whether to apply it to their personal situation. Understanding one's personal "risk factor" is critical too.

This is personal finance so it's personal for each of us. For my wife and I, we have a significant age difference with her predicted life expectancy based on SSA data is that she's currently predicted to live 15.6 years beyond my passing (by natural causes) or earlier (by her own hand :lol: ) if can't learn to control my face :roll: or stop "stepping on her air hose" on occasion. :D With that said, we're trying to make sure that we don't short change the growth and ROI so that she'll run out of money if she, or even we, live longer that predicted by remaining more aggressive in stock MFs in mine since she'll inherit mine as well as have her accounts. As I pass 60 in a few years, we will also be working to build 2-4 yrs of expenses in the bank for market downturns AND trying to make it so we can live on her income for several years when I retire, allowing my accounts to grow more and delay SS benefits to grow longer. We also hope that in planning, saving and investing well, DW will be able to retire early or slow down in her career and move to part-time to finish things out and after I finally start to draw SS at 70.
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Re: Suggestions to get started buying stocks

Post by 4strongmarriage »

Picking the right stock is riskier than a mutual fund (basket of stocks). I started by advice from my dad and reading magazines such as Money and others. Start by getting old copies of magazines at the library. check out books as well. Everyone's Money Book provides a good overview. Its like anything else, you have to put research into it. Start by savings for retirement. check into resources at work and what is available. Remember this is not short term gambling but a long term vehicle for financial success.
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