Investment for this Dummy.
August 21, 2010 12:55 PM   Subscribe

I have $1000 to invest and I'd like to do it wisely. One problem: I have never invested any amount of money in anything. Ever. Where should I start?

My husband recently came into a small inheritance from his grandmother a few months ago. I had the keen idea for each of us to take a $1000 each and invest in stocks or what have you. (He readily agreed to it because we've already paid off all our debt with the rest.)
Only there's a problem. I have no idea what to do with my thousand bucks. Reading about stocks, investments, etc., online only confuses me further.

What I am looking for, ideally: how to purchase stock for a company, something with not immediate payout, but something I won't have to wait 20 years to see results on.

Am I pipe dreaming? Am I mad? I think, mostly, I am just bewildered, naive and uninformed.

posted by Kitteh to Work & Money (21 answers total) 47 users marked this as a favorite
You have a lot of ground to cover! Do you have a Roth IRA? They're great because you can take out your contributions anytime with no penalty, and you can take out up to $10,000 in earnings without penalty if you're using it to buy your first home. Your earnings grow tax-free.

That being said, stocks are volatile and you have no real way of picking a company that will give you a decent return in less than 20 years. Factor in any up-front or trading costs (a topic I know nothing about, sorry), and you may find that a stock market investment is not what you want.

Who's your bank? I belong to ING Direct, and they occasionally send out promotional offers for their ShareBuilder service, offering something like a $25-50 bonus for anyone who invests X amount of money.

My final two cents: With my Roth IRA maxed out for this year, if someone gave me $1000 right now, I'd throw it into my (already healthy) savings.
posted by lizzicide at 1:13 PM on August 21, 2010 [1 favorite]

It's not what you asked but I think you would be wiser to invest your money in something like an index fund - a mutual fund tied to the Dow. Most of us (emphatically including myself) are not sophisticated investors. Historically a mutual fund that tracks along with the stock market is a pretty safe reliable investment. You won't make a killing but you should do decently and it's not likely to tank the way an individual stock can. You can set up such an investment to automatically reinvest dividends, growing your investment without putting more in. If you were already investing in such funds buying an individual stock would be a decent addition to a portfolio but if it's your only investment something that's diversified by its nature makes sense to me.

I am not a financial professional - just pointing out what we've gleaned from other, more experienced folks.
posted by leslies at 1:18 PM on August 21, 2010 [2 favorites]

Whether you got the Roth IRA route that lizzicide recommended or not, I would suggest that if you want to invest, put your money in a mutual fund, specifically something like an S&P 500 index fund. This is a basket of stocks, so it gets your money diversified, and they will sell you fractional shares, so you can buy "$1000 worth"; with stocks, you have to buy entire shares, so you'll end up with something oddball like 8 shares of something with $63 left over. If you have a bank account, your bank likely has a brokerage as part of its services and you can just go to your bank, ask them to set up an account for you, transfer the $1000, make the purchase, and then just monitor it after that.
posted by kovacs at 1:18 PM on August 21, 2010 [1 favorite]

For what it's worth, I agree with what leslies and kovacs are saying about index funds.
posted by lizzicide at 1:33 PM on August 21, 2010

At 1.75% now; I-bonds are not ripe fruite; but they are brainless and safe. Historical stuff shines all over bonds still held purchased in 98-03. Not an asset like a CD, nor makes instant money like the stock marked is; but cashable after 12 months and portable.
I think the governent sells them, they can always use the loan.
posted by buzzman at 1:56 PM on August 21, 2010

The advice given so far is very good: funding an IRA is usually a good choice, and broad mutual funds (which are called "index funds" when they attempt to track the performance of the entire market) are not only a good introduction to finance but more or less the most prudent choice any investor can make.

1) Know that when money is within an IRA account, it can (and should) still be invested into assets like stocks or mutual funds, just like money outside an IRA account.

2) Insist on a "no-load" mutual fund: a "load" is an expensive commission you pay to a fund manager for his pointless efforts to beat the market, but a general consensus is that even the most brilliant fund manager cannot expect to beat the market in the long run.

3) This and this (scroll down to "Schwab Funds Funds") are lists of mutual funds that you may find useful -- look especially at the funds called "stock" (rather than bond), which are very slightly riskier investments with considerably higher expected returns (bonds tend to be a bad choice unless a loss would be devastating to you).
posted by foursentences at 2:11 PM on August 21, 2010

I'd choose a roth IRA- go with someone like fidelity. Once you have your money in a roth, choose the vanguard growth or vanguard 500 fund. It has a pretty good rate of return.
posted by TheBones at 2:21 PM on August 21, 2010

If you like the idea of mutual funds and/or an IRA, this previous question might help you.
posted by Houstonian at 2:25 PM on August 21, 2010

You've received a lot of safe advice. However, how important is this $1000 in the overall scheme of things? If it's really important, stick with the safe advice. Just realize the earnings from an index fund might be enough for a night at the movies after taxes.

Veering from safe, you could invest in a couple of promising stocks and see a huge return -- or you could lose it. The stock market, after all, is nothing but legalized gambling. If you can afford to gamble, and can take the time to do a little research, this approach is a lot more fun and offers the possibility of far greater returns than any index fund with $1000 invested.

I've lost money in the market -- lots of it. Who hasn't at this point? But, I can also tell you that I spent all of $500 on a stock in the summer of 1997 and experienced great thrills. It was a gamble on a small company stock that had been identified as a great opportunity by a couple of analysts I respect. I took the plunge with this small outfit and bought $500 worth of stock. By 1999, my $500 was worth close to $25,000. So, it does happen.

Safe and steady with $1000 is a good bet for safety and getting your thousand bucks back plus change.

The other (if you can afford it) can be mighty fun to 'play' with.

Whatever you do --- good luck!
posted by Gerard Sorme at 2:53 PM on August 21, 2010 [1 favorite]

Much has been said already about tax sheltering your money, so I won't repeat it.

My suggestion is to start with the least risky investments and learn them well before moving into riskier ones. Because the most important rule of investing for the long term is diversification, and you're already demonstrating neglect for it. (The most important rule for just trading? Have information before the rest of the market does.) By starting with the least risky assets, you'll be more prepared when you get to the riskier stuff. And have earned a bit of interest to boot.

Shop around for Certificates of Deposit. They're insured by FDIC (or the Credit Union alternative), and can be found for a variety of terms. Most banks I've been in have a sign with interest rates and duration of deposit. Go to a couple of banks and record all of this data. If you like, make a pretty graph in excel showing how the interest rate grows as you increase deposit duration for each bank. Then select a term (I suggest six months) and figure out where you'll earn the most interest with your deposit. Before you commit, share your calculations with whoever sets your CD up (full disclosure, I've never bought a CD) and ask if you've calculated the interest you'll earn correctly. Interest and compounding can be tricky to get right; I know my personal accounting software gets them wrong for loans.

Once you've started putting your money to work, you can look and learn about other assets. Bonds, for example. They work similar to CDs, but with funny names for interest and principle. Treasuries are considered the safest such investment, and you can get them via TreasuryDirect. My suspicion is that you'll look at the going auction rates and decide they're not worth it (some people think there's a Treasury bond bubble!) You might look at corporate or muni bonds, but right now I'd say it's too hard to judge the risk of default for the novice (and expert).

Next, the stock market, which you've asked about in particular. Stocks outearn bonds, so there's understandable temptation to start there. Picking stocks for the long run is a tiring game stacked against the small investor. Mutual funds, particularly stock index funds, let you buy fractional shares in a bunch of stocks at once. Look for passive ones that merely seek to duplicate a benchmark like S&P 500, and "no load" in particular.

Picking individual stocks is a losing game. People like Cramer on Mad Money are not so much giving people what they want as giving brokers the clients they want. People who trade too much on too little information with too little experience and expertise. If you go this route, keep in mind that the purpose of a stock is to generate profits and return them to investors, usually by dividends. So the value of a stock should be its time discounted dividend payments. If you want to see results in less than 20 years, dividend paying stocks are it. Some companies choose to retain all earnings and never pay a dividend; I'm not sure what purpose it serves other than to become too big to fail.

Finally, if you want to get an indepth introduction to this, Yale has posted pretty easy (in my estimation) course lectures on the subject of investments called "Financial Markets".
posted by pwnguin at 3:15 PM on August 21, 2010

If you want to learn more about Roth IRAs and other personal finance topics, I like how J.D. Roth explains things.

How to Start a Roth IRA (and Where to Do It). This article's originally dated 2007, but seems to have steady advice.

Otherwise, I'd start an emergency fund if you don't already have one. Say at a local bank or credit union, so it's easy to access if the plumbing goes or you need to replace a window this winter.
posted by dragonplayer at 3:45 PM on August 21, 2010

Response by poster: I live in Canada. Is a Roth IRA applicable here?
posted by Kitteh at 4:39 PM on August 21, 2010 [1 favorite]

No. A Roth IRA is a creature of US tax law. I think you need a Registered Retirement Savings Plan, a creature of Canadian tax law.
posted by ifandonlyif at 5:04 PM on August 21, 2010

I know it isn't exactly what you're looking for but consider investing in yourself - learn a new skill or another language, see a career counselor, earn a certification and/or maybe start a small, part-time business. A thousand bucks goes WAY farther on self-improvement than with stocks.
posted by codswallop at 6:45 PM on August 21, 2010 [4 favorites]

Stay out of stocks and the stock market entirely -- it will be blowing up again soon as "economic stimulus" runs out and the bubble "stimulus" (i.e. money printing and debt creation) generated bursts.

In Canada look to invest in GIC (Guaranteed Investment Certificate) housed inside a TFSA (Tax Free Savings Account) for safe, tax-free compound interest. Over the next while your objective will be to not LOSE money. Why not open a high-interest savings account (ING Direct, PC Financial) while you're at it.

For some alternative perspective on the imminent economic collapse (the one not being reported in the corporate media) listen to the interviews at King World News and scan the articles at Zero Hedge (and the links in its blogroll).
posted by rumbles at 7:33 PM on August 21, 2010 [1 favorite]

Don't listen to anyone who will tell you the stocks are going one way or another, they will be right only half the time. Those who are saying that the stock market is "blowing up" or maybe even "going wayyy up", are going based on pure speculation.

Use your first $1000 to get a financial adviser that will educate you about money and start a small investment based on their recommendations. Once you have the appropriate accounts set up, it will be easy to just "put" money there whenever you have some.

RRSP's and TFSA's are two important registered account types in Canada that you should understand. Either have someone teach it to you or learn about them online.

Read basic financial blogs.
posted by Sonic_Molson at 8:08 PM on August 21, 2010 [1 favorite]

Good advice here.

I gather that you are young and that your question is about how to begin a lifelong investing habit that, at least over time, will pay off for you.

Here's my take: index funds are great, but they're entirely passive. There's nothing to do but watch them follow the market. If your goal is to gain hands-on investing experience, I recommend buying the stock of a company you know something about versus buying based solely on analysts' recommendations. Do you have a favorite line of clothing? Do you love Starbucks? Is there a gas station you favor? Are there tech gadgets you like that are produced by public companies? Buy a small block of shares in one or two, then track everything about them that you can.

This approach makes learning easier, not to mention a heck of a lot more fun, because the numbers you will be monitoring will have meaning to you beyond the numerical. You'll find yourself looking with new eyes at, say, a retail store you frequent. How well is the place run? What makes me and others like their product? Is their product unique, or is it the way they market the product that appeals to you? What is their growth strategy? Does it make sense to you?

Once you know "your" company well, you'll likely to want to take a look at how their competitors are doing. Compare their numbers to "your" company's numbers. Who's doing best in that space? Are the old dogs mopping up, or are the upstarts? Think about why.

Is this the best way to maximize the value of your $1K? Absolutely not. Is it a good way to learn about investing in equities markets? I claim it is. It not only helps you choose a stock from among thousands, the connection to your own life will help you appreciate, weather and understand fluctuations in your stocks' fortunes over time (e.g. whether a rise/fall in your stock's valuation is due to the market or to some factor intrinsic to the company, etc.). I also think it is a good way to avoid following bad tips, like Cramer's so often are, and it's a good way to motivate yourself to learn how to use the analytical tools provided by your on-line brokerage.

Over time, of course, you won't need to have a personal connection to the stocks you own. You'll know how to evaluate them on their numbers (and other factors) alone.

Finally, don't try to time the market. If you have a good reason to have something in your portfolio, buy it. If something no longer fits, sell it and move on. You do want to buy and hold, generally speaking, but few companies that are big now were big 20 years ago. Your portfolio will turn over.
posted by Short Attention Sp at 4:24 AM on August 22, 2010

If you choose a mutual fund (which, to my understanding, is basically a whole bunch of snippets of different stocks controlled by people in the money business), be careful. Mutual funds may include oil, tobacco, casinos, weapons of mass destruction, etc. It's worth putting a little work to find an advisor who will help you invest in companies doing things you feel you can ethically support.
posted by lover at 12:18 PM on August 22, 2010 [1 favorite]

One more thing.... Don't forget that investing itself costs money (unless your investments are sheltered inside TFSAs of RRSPs). The investment industry wants nothing more than to charge you to invest YOUR money. Canada has some of the highest mutual fund fees (MERs) in the world. So in addition protecting against the loss of your principal, it's crucial to remember that the slow trickle of investment "fees" and other costs can be a real and momentous drag on your actual returns.

Additionally, different investments (stocks, dividends, interest, etc.) is taxed differently. This too can be a drag on your returns. In sum, always remember that its not just you who wants to make money on your money.
posted by rumbles at 8:49 PM on August 22, 2010

I'm a huge fan of recommending the book The Only Guide to Investment You'll Ever Need; Tobias covers the basics thoroughly, and you'll at least feel you're not throwing the money randomly into something.

Roth IRA or IRA are both good for retirement; Roth IRA if you're going to make more money later in your career than you do now, or IRA if you'll make less at retirement, generally. Mutual funds are investments in groups of stocks. Index funds are a specific type of mutual fund that are picked by trying to exactly match a market index (the S&P 500 is the 500 largest companies, for example). Mutual funds pay a manager, and the manager has to be good; index funds do not pay a manager, and simply "follow the market", more or less.

If you're able to tolerate the ups and downs of the stock market, a very common suggestion is investing in an index fund. NYSE:IVV is one, for example.

Companies like Scottrade charge very low fees per trade ($7), and no residual fees; on the flip side, they don't ever give you advice. A full service broker will give advice, but may charge $50+ per trade, and will advise you to trade more often than might otherwise be reasonable, because they make their money on those trades.
posted by talldean at 8:55 PM on August 23, 2010

Hmm. I am not sure from your question whether you want to invest in a particular stock so you can be a bit competitive with your husband, picking and choosing various investments and seeing who comes out the best, or if you're more looking for a longer-term pick, just trying to find one vehicle that you can check in on a few times a year. It's different advice for different scenarios.

If you're interested in dicking around with investments as a hobby, something you want to spend several hours on every couple of weeks, at least, you might be more interested in looking into opening up a brokerage account and trading stocks (etrade, scott trade and charles schwab are all places where you can get your feet wet doing that).

If you're more a set it and forget it type, wanting something you can invest in, check in on every once and a while, and hopefully in 5 years or so you'll have doubled your money, then you might want to look into something a bit more general, like a mutual fund.

The difference --- very generally speaking --- why you have to pay so much more attention to investments in individual companies, is that individual companies are a lot more volatile. They can spike or crash for lots of reasons, some to do with the company's own actions, some to do with external events. In order to invest successfully over time, most people feel you have to have a good understanding not only of the general economic picture of that industry but also of that particular company's policies and products. You have to know what you're on about, in other words. Of course, even if you do know what you're on about luck plays a big role, and as with many things in life it's far better to be lucky than good. Higher highs and lower lows, and if it's the fun of the chase that temps you it's the way to go. Good luck.

If, on the other hand, the idea of totally blowing this $1,000 bucks bothers you more than the idea of maybe doubling it in a short time appeals, then you might want something safer. And that's why for retirement and so forth, people generally look to mutual funds. A mutual fund is a bunch of money pooled together by a large group of investors, which is then invested in many different stocks by a professional investment manager. The idea is that this tamps down on some of the volatility risks you get investing in stocks by spreading that investment out among the stocks of many companies. It also allows small players such as yourself to get in the game --- $1,000 might get you a handful of shares from a dozen companies; if one stock in your portfolio were to go south, it could take out a big chunk of your total. If what you have instead is a small piece of 500 stocks or 1000 stocks, then your earnings with line up much more closely with that of the market as a whole.

This is not to say that mutual funds don't come in flavors. They do. There's a site called Morningstar that will help you taste the rainbow --- tons of good data on different companies, strategies, and performance. Some mutual funds try and mimic the whole of the market (SPDR, famously, tracks the Standard & Poor's index), or a big chunk of it, say large US companies (domestic large-cap). Some try to invest in small companies that have bigger potential for growth (small-caps) some try and find beat up companies whose potential has been underestimated (value investing). Many, many, many try and sell you on the unique strategy of their genius fund manager which will enable you to beat the market (aka "generate alpha") because of X,Y and Z (an actively managed fund). There's also these things called ETF (exchange traded funds) which you can easily trade in and out of and which often focus on much narrower sectors within the market (health care, say, or renewable energy).

I have rambled on a great deal here, I hope some of it was useful. I once had a job that forced me to educate myself on how some of this stuff worked quite rapidly. I'm not and never have been a financier, but one thing I did take away from that experience is this: This is an arena in which it is very, very difficult to differentiate luck from skill. The whole reason to give your money to a fund manager to invest for you is that he's supposed to know more than you do about this stuff --- but how you from a position of ignorance can figure out how to pick the guy who's actually good as opposed to the guy whose peculiar hunches happened to be right this year (there's always one guy) I've never quite been able to work out. There was a fund manager who beat the market for 15 years in a row --- and whose fund lost so much money in the crash of 08 that if you kept your stuff with him for all 16 years you'd have been down about 5 % overall. Remember that guy and diversify.
posted by Diablevert at 8:43 PM on August 24, 2010

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