There are one too many posts on how to invest. Keep it simple.
- Never traded anything before? You need open a brokerage account (i.e. Charles Schwab, Fidelity, Sharebuilder, and etc…). Do some research first and start with Step #2 below before deciding on your brokerage account to ensure your brokerage company carries the ETF you want.
- Tip: Do not rely on stocks alone. This means do not choose one company at a time to invest, because that company can quickly spiral down at any time and you have a lot more to lose.
- Key strategy: Choose 3 ETFs that are well diversified: 1 domestic, 1 foreign, and 1 of your choice (i.e. high dividend payment, emerging markets, industry based, and etc…).
- ETFs (exchange-traded fund) are baskets of stocks within a type or “theme.” For example, the ETF “IVV” or “iShares Core S&P 500” top 10 holdings are companies such as Apple, Amazon, JP Morgan, and ExxonMobil. The common denomination is that they are all part of the S&P 500.
- Basically instead of choosing 1 stock, you are choosing 1 basket of stocks that help quickly diversify for you instead of relying on 1 stock at a time and having to figure out which stocks to buy. A fund manager is actively managing the ETF for you.
- Check the expense ratio on each ETF. The expense ratio represents how much you are paying the fund manager for his work. Going back to the IVV ETF, the expense ratio is 0.04% or $0.04 per every $100 invested ($0.40 per every $1000 invested). ETF expense ratios are usually cost less than mutual funds, which is why I suggest working with ETFs. So, ensure that the expense ratio is low. The average fund costs 0.74%.
- Assets should be larger than $10 million. Any less than that means the fund doesn’t carry enough stocks for diversification or the stocks in there are very weak.
Bottom Line: Invest in 3 different ETFs with low expense ratios that have assets over $10 million and you should be fine. The market has its ups and downs and so will the ETFs, but as long as you continue to invest on a regular basis and ignore the downturns, you will have an overall gain in the portfolio. The idea is to ensure your money beats inflation by a few additional percentages and let compounding generate your passive income.
*Note: I am not a financial adviser and this material is for informational purposes only. This is just based on the last few years of experience that I wanted to share what my strategy was.