Getting Started with Stock Market Investment

Before you actually do "jump into the market", here's a very important checklist to review for deciding whether and when to jump:

Make sure you have your financial house in order and have a sufficient "rainy day fund" to cover at least six months living expenses if you should lose your job.
Decide for yourself how you feel about the overall national economy. DO NOT invest even a penny in the stock market unless you feel that the national economy is heading up or is at least stable.
Look around at your local economy and decide for yourself whether it really seems like "business is good" or at least that "business is getting better".
Look around you, at work, around your community, your friends, your family, your local stores, the mall, and notice what products and services are popular and which companies either produce those products and services, or that are somehow involved in their distribution or service or maintenance. This does not mean that those companies are necessarily good investments per se, but does show that you are in tune with the economy and the markets that companies are themselves seeking to make money in. Basically, what are people spending money on and how easily is that money being spent.
Do some light reading and listen to a range of the stock market and investment gurus and pundits and maybe even a couple stock brokers and their in-house 'research'. But, take everything that any of them say with a rather large grain of salt. They all have some agenda and in some way are profiting from what they say, and none of them will lose anything if you follow their advice and end up losing your shirt. The point is simply to listen to as broad a range of views as possible.
After doing all of the above, give yourself a little time and then make your own decision. No matter how brilliant and knowledgeable and experienced all those experts and professional seem, it is your own independent distillation of all of their advice that really matters. You have to live with your decision, not them. Do not even think of delegating this decision of yours to any of them, because it is your money that might be lost, not theirs.

Realize that by making your own decision you are making the most significant possible contribution that any one person can make towards making the stock market work. The stock market (as well as the economy and even our society) is simply the sum of all of our individual decisions. We won't have a very vibrant and robust stock market (or economy or society) if we all make the same decisions at the same time. The stock market simply would not work if we all decided to buy or sell at the same time. By making your own decisions at your own pace, you are doing the right thing.

If you do decide to "jump into the market", keep a few points in mind:

Be prepared to leave your stock market investment alone for at least a year or two if not 5, 10, or even 20 years. In other words, make sure their are no contingencies in your life than might cause you to have to sell your stock to pay expected or even unexpected expenses. Maybe this means you should invest less money than you would like to.
Do not invest more money than you can afford to lose. As we have seen, what seem like sound companies can go bankrupt almost overnight. Investing in the stock market does not have to be like gambling, but market losses can sometimes be quite extreme.
DO NOT invest money that you may need within the next 5 years. DO NOT put your house down payment in the market expecting to boost it in a short period of time.
Stick with the overall market "indexes" (Dow, S&P 500, Nasdaq-100) unless you truly feel like you know what you're doing. DO NOT buy individual stocks unless you feel comfortable with the prospect that you could lose all of that investment. It is always better to diversify into a number of different stocks in different sectors, but if you do want to 'gamble', understand that that is exactly what you are doing: gambling.

Once you have decided to "jump into the market", follow these easy steps, in order. Hint: NO CHEATING!... because if you do cheat, Mr. Market and Mr. Murphy will certainly rob you blind.

Develop a comprehensive budget so you know where all your money goes.
Try to pay off ALL your credit card and installment debt (other than your home and car payment.)
Try to put away enough "rainy day" savings to cover six months of your expense budget.
Budget a fixed amount each month that will be for "investment". If you don't do this, then discretionary expenses will likely eat up all your available income.
Open a low-cost online brokerage account, such as with Muriel Siebert, Fidelity, Ameritrade, Scottrade, Schwab, E-Trade, etc.
Once or twice each month, take each dollar of your monthly investment budget and split that dollar as follows:
1. If you still have credit card debt, apply 20 cents to pay it down.
2. If you still haven't built up your six-month rainy day fund, put 20 cents there.
3. Leave 20 cents of what remains in a money market brokerage account as a reserve.
4. Split the remainder of the dollar (40 to 100 cents) in equal parts and both equal dollar amounts of these four exchange-traded "unit investment trusts":
  - "Diamonds" (symbol: DIA) - equivalent to buying the Dow Jones 30-stock Industrial Average.
  - "Spiders" (symbol: SPY) - equivalent to buying the S&P 500 Index. If you are investing a very modest amount of money, you may want to focus 100% of it on these "Spiders" since they most closely mimic "the market".
  - "Qubes" (symbol: QQQQ) - equivalent to buying the Nasdaq 100 index which is heavily weighted by tech stocks as well as bio stocks.
  - "Tech Sector Spiders" (symbol: XLK) - similar to Qubes, but includes NYSE stocks such as EMC, IBM, HWP.

If even this simple approach to stocks seems too complicated, consider a simple S&P 500 index mutual fund such as from Vanguard. Another alternative, especially if you have a relatively small amount of money to invest is ShareBuilder.

If your monthly investment budget is too small, do still open the brokerage account and deposit the money there since it will earn an excellent rate of interest. Then, whenever you accumulate $500 (besides your rainy day fund and investment "reserve"), buy the four "stocks", in equal amounts.

If you have only a modest amount of money to put into the market and don't feel comfortable with this complicated dollar-cost averaging investment plan but you still want to "put some money in the market", open an account at a discount broker and simply buy the S&P 500 'Spiders', symbol SPY.

Don't worry about the commissions. At $8 or $15 a trade, that's peanuts compared to what you'll make over the years.

The purpose of the "reserve" is to be able to buy additional amounts of stock whenever the market falls off significantly. Whenever the market (Nasdaq or Dow) falls by 15% or more, use 20% of your investment cash reserve to buy additional, equal dollar amounts amounts of the four "stocks".

The purpose of buying the four "stocks" in equal dollar amounts is to instill a sense of discipline in your investing and to assure a little diversification. Diamonds have a bit of Old Economy flavor to help balance the "volatility" of the tech stocks. But this investment plan is more heavily weighted towards tech stocks because they will give you better long term gains.

Don't even think about investing in individual stocks until you've built up a "nest egg" of at least $50,000. Then, you can consider selling off no more than 10% of the four "stocks", in equal dollar amounts, to buy whatever stocks you want to play with. But, whenever your individual stocks comprise over 30% of your total investment account, sell them down to 20% and invest the proceeds back in the four "stocks". This process is designed to maintain a sense of discipline that will help you build wealth over the years with minimum anxiety.

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One more thing... Have fun!

Jack Krupansky

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Updated: January 30, 2006 09:52:44 PM -0500