I Want to Invest, But what to Buy? - A Note for New Investors

Every so often, I'll see someone pop into a message board or a Reddit thread and proclaim that they have $500 and they're ready to invest - they simply need some advice on what to buy.

I'm struck with a mixture of emotions every time I read one of these threads. On the one hand, I'm thrilled that this individual has saved money so that they could better their life. On the other, I worry that disappointment may lie in their future and stunt their growth as investors for years to come.

If you find yourself in this position, I implore you - no, that's not strong enough - I beseech you to take a deep breath and think about what it is you want to accomplish.

Investing is Not Easy - But the World Makes Us Think it is

First, let me say that I get it. You've worked hard to save a tidy initial sum, and now you want to put that money to work. There's a natural impulse to want to take action. I often fear that this impulse may lead new investors to purchase investments that don't help them meet their goals.

Worse still is that the expectations that new investors carry are often miles away from reality. I don't blame people who have never invested before for thinking that the 300% increase in Apple stock over the last two years is typical. Investments like Apple, Tesla, Bitcoin, or Gamestop are constantly praised in the media. Reddit threads discussing these tickers are upvoted to the front page. These are the investments that your friends and family gush over (if they own any).

It's easy to understand why it is common to think that these types of results are single stock trade away, and it pains me to say that this not the case.

What Results Should a New Investor Expect

It depends.

I'm kidding; I'm not going to answer the question with "it depends"... But seriously, it depends.  

Ok, I'm done being annoying. Investment results are driven by many factors. I spent a decade reviewing these factors with rich folks and large organizations when I was managing investment portfolios. These factors include things like time horizon and risk tolerance and can start to feel very hand-wavy. But here's something concrete: Right now, the yield on a low-risk (essentially zero-risk) government bond is 1.6% the expected return on US stocks is somewhere between 5%-7% (see this, and this, and this). That means that even if you load up on risk and only buy stocks, on average, your $500 portfolio will only be worth $530 a year from now

Assume for a second that this new investor does not want to invest in high-risk stocks, and they want something safe. If they opt to invest in government bonds, then after a year, they will have only made $8. These are not the kind of investment returns that inspire Reddit posts. 

But... But... I read about someone on <INSERT PUBLICATION> who made $10k on a $500 investment.

I have, too, and these stories are real (unless they are trying to sell you something). What you have to remember is that the return expectations above are AVERAGES. For every person who makes 20x their initial investment in the stock market, roughly 19 people will lose their entire investment.  

Over a lifetime of investing, you will likely have a few of these home-run investments. However, they are rare, and they are most definitely not something you should count on.

The most significant risk that new investors face is not choosing an investment that blows up and goes to $0. It's choosing an investment that blows up and sours their opinion of investing forever.

What Should New Investors Do?

Focus on understanding. Go through the motions, get yourself into a position to execute: open a brokerage account, fund the account, research some investment ideas, heck, go ahead and make a trade. But at every step along the way, make sure you understand what is occurring.  

For instance, when you're evaluating a broker, research: Is your broker trustworthy? What do they charge to trade? Do they have a hidden agenda? (I know Robinhood is super popular right now, asking these questions about Robinhood would definitely be an interesting exercise)

When you're looking at investment ideas: How much risk is associated with a given investment? How much cash does the investment generate? Are there fees associated with holding an investment (like with an ETF or a mutual fund)? Are the fees reasonable?

When you're ready to make your first purchase, go slowly. Don't feel like you have to invest everything the day your account is funded or even 6 to 12 months after your account is funded.  Finally, commit to learning. Try listening to investment-oriented podcasts, read investment blogs, maybe even pick up an investment book (or audiobook); I have some recommendations.

If you feel so inclined, I have a free investment course geared towards helping new investors get comfortable investing in stocks. Whatever you choose, make sure you are getting a steady diet of information. An hour a week over a year will be much more valuable than a 7-day cram session.

Enjoy the Process

Investing is a process. If you want to be a successful investor, you should find joy in the process. If you don't find joy in the process, perhaps investing isn't for you. There are many ways to meet your financial goals without dedicating yourself to investing: target-date retirement funds & financial advisors, to name two.

If you find that you do enjoy the process, then welcome to the club. Find a community where you can discuss and explore ideas. And if you found yourself at the end of this article and you're disappointed with my lack of a recommendation: My recommendation is this; invest in yourself. Take your current level of enthusiasm and use that to fuel your early education.