This weekend I met someone that asked the following: “I have $5,000. How should I invest it?” He’s an electrician with a young family, some savings, and he’s new to investing. He probably expected me to steer him towards angel investing or venture capital, but those are completely wrong for a new investor. If you’ve got some extra savings and want to get into investing, below is exactly what you should do:
- Download an app called Robinhood. It’s very popular and free to trade.
- Every month for 12 months, purchase a few ETF’s or index funds that are highly diversified and tied to the S&P500. I would recommend SPY and QQQ. Both are highly diversified and well established. The reason I would recommend buying over 12 months versus all at once is so you can dollar cost average into your position. That way, you’re not fixated on any one price at which you bought your positions. It also creates the habit of investing on a monthly basis – you want this to become muscle memory so that you don’t over think your investing.
- After 12 months, your $5,000 will be invested. Hopefully though, you’ve been saving a little money every month so that you now have another $5,000 to invest. Do the same thing: take the new money you’ve saved and invest into the market every month over the next 12 months. Don’t deviate.
- Don’t sell. The only time you sell any of your positions is if you need the cash for a life event: you’re getting married, buying a house, paying for your daughter’s college, etc. Think of it this way: if you sell today, every dollar you reap is probably $2 or $3 dollars down the road. Selling is expensive.
- As you get comfortable owning ETF’s and index funds, feel free to explore other diversified ETF’s and funds. Do not purchase any of the following: individual stocks, options, bonds, or other derivatives. Especially avoid anything new, avoid anything you’ve read about in magazines and blogs, and especially avoid anything that someone told you about. No bitcoin, no Tesla, no pink sheet stocks. As for angel investing and startups, avoid these until you have accumulated a material level of wealth in the stock market. Even then, your angel investing money should be treated as your Vegas money: never expect to see it again because it’s so speculative.
Would this work during The Great Depression? Absolutely. According to Mohammed El-Erian’s book When Markets Collide, “by July1932 when the carnage was finally over, the market value of the world’s greatest companies declined an incredible 89 percent.” However “had you started investing a regular amount each month at the end of the 1920s bull market and just ahead of the next 34 months that saw the most devastating decline in share value in US history, you would have made more money than investing in risk free Treasury bills in less than 4 years. If you held the positions for 30 years, your wealth would have grown by an average of 13 percent per year.”
That’s it. Follow the steps above and you’ll avoid major losses, your portfolio will survive recessions, and most importantly you’ll preserve and ultimately build wealth.
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