This is the Holfolio Guide to Investing. It will continue to improve over time.
The specific examples are for US investors, but the general principles apply to everyone. You can find our UK guide here
This is probably the most important question to answer first. The short answer is to turn your money into more money. You’re probably sick of hearing about growth rates right now with COVID-19, but the power of compounding still surprises me nearly every time I run these sorts of numbers:
If you put $100 a month into your bank account for 40 years, earning 1% interest a year, you will have turned $48,000 of savings into $59,000. If instead you put that $100 a month into the stock market, and it earns an average rate of 8% a year, you will have $349,000 in 40 years time.
The extra risk of the stock market gives you extra returns. The extra returns from just $100 a month is worth $290,000. Don’t work for your money, make your money work for you. That is why you should invest.
If you have a few months of expenses stored as cash (i.e. a rainy day fund), and you’re not planning a big change in the next few years (e.g. buying a house, retiring), then you should be putting any excess savings into the stock market. You need to have the mindset that you will not see the money you put into the stock market for at least five years. This will give you the time to recover from any falls that may occur.
The best time was when you first had more than a few months of emergency savings. The second best time is now!
Don’t try and time the market, it’s almost impossible to do. Instead, just set up regular monthly payments to purchase as much as you can afford every time you get paid. When the market is down you’ll be able to afford more shares, and when the market is higher your monthly amount will buy fewer shares. This is dollar cost averaging, and is your friend in times of market panic. Just keep buying, regardless of the scary headlines, and in the long term you won’t regret it.
Virtually all brokers in the US now offer zero commission. RobinHood were the first, and despite some badly timed service outages, still have the best user experience. If you want a more traditional service, Interactive Brokers, Fidelity, TD Ameritrade, Charles Schwab, and E-Trade are five of the most popular stock brokers - you can find out a more detailed comparison here
In terms of geography, you should invest everywhere. You want to be as diversified as possible, so a global index fund would seem to be the best ‘base case’ holding to have. As you can see with my own holdings, I buy the FTSE All World ETF every month (ticker: VWRL). I like this because it is about as passive as it gets. You’re not making an opinion on which regions or which sectors you think will do better, this is just a broad index.
For many people, simply holding a global fund such as VWRL.L will suffice. For those who have more of an interest in the markets, you might want to also hold some individual stocks that you think are going to do very well in the next few years. There are millions of books and articles going into detail on what makes a stock attractive to buy, and this is where you can get lost in the rabbit hole of too much information. You could also invest in different asset classes (cryptocurrencies, P2P, private investments) to broaden your portfolio even more.
Just try not to major in the minors, and keep perspective of the big picture. It helps if you keep a note of why you bought the stock in the first place, so that you can keep checking whether this is still true, regardless of how the price has changed since.
If you want to read more about investing, here are our three favorite books
If you want to see what other people do with their money, then sign up now to Holfolio.com