One of the key features of a personal finance plan is the section aimed at building wealth. And investing in the stock market can be a great way to accumulate wealth over the long term. And there are plenty of options to help you get started. You don't need to go out and buy a heap of shares straight away. In this post I'll examine some of the ways you can go about investing in the stock market.
Get A Good Adviser:
First off, find yourself a good adviser. The adviser could be a financial planner or a stock broker or even your accountant. This person must be trusted and must know you current financial situation well and understand what you future financial goals are. Finding the right person is especially important when you're just starting out. A financial planner could be useful if you're looking generally at investments as part of your overall financial plan. A stock broker is more useful when you're looking at making specific stock market investments.
Mutual Funds:
But you don't need to jump straight in. Rather than holding stock of individual companies, you may like to invest via a mutual fund. The managers of these products pool investors' funds together and buy a range of different stocks. One advantage of this approach is that you can achieve a level of diversification even if you don't have much to invest. In fact an investment in one mutual fund may gain you exposure to the stock of 60 to 80 companies or even more.
One thing to be aware of however, is that even though you're spreading the risk across different businesses and industry sectors by using a mutual fund, you are taking on specific risk associated with that mutual fund. Make sure you do your research before choosing a fund and get professional advice if need be. Another way of mitigating the specific risk is to consider buying more than one fund. It's all about eggs and baskets.
Investment Clubs:
This is something I've not yet tried but I'm quite interested in. An investment club is a group of stock market investors (or any sort of investors I guess) who pool their resources - both financial resources and brain power. The idea is that each member of the group contributes funds to the club and the members meet on a regular basis to make investment decisions.
To my way of thinking this has a couple of advantages. By putting your money together with others, you'll collectively have more buying power. This means you can diversify your investments more broadly. Instead of being able to buy stock in one company every one or two months by yourself, you may be able to make two or three purchases each month as part of a club (or even more depending on the number of members).
The other advantage is that you'll be making joint decisions. This means there will be more ideas on what stock you could buy and more people to filter out the poor ideas. Collectively you should be able put together a good stock portfolio over time.
The main disadvantage I can see is that because it's a group thing, you'll need to make sure it's a group of like minded people. Do they all share your investment philosophy? Are they long term investors or short term traders? Will their preference be value stocks or growth investing? And the more people involved, the harder it will be to gain a consensus.
Invest Regularly:
Whatever method (or methods) you choose, my preference is to invest regularly. It's like a regular savings plan. And by spreading your investment activities out over time you can avoid putting all of your money into the market at the very top. Detractors of this approach would argue that you will also avoid buying at the bottom of the cycle as well - thereby not buying as cheaply as you may have. There is some merit in this argument, however, timing the market is notoriously difficult so I'll leave the decision to you.
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