As stocks continue to hit record highs, you may be thinking about taking up investing.
Since the Covid-19 pandemic hit, investors have been piling into stocks and alternative investments such as cryptocurrency. Fully 15% of current retail investors began playing the stock market in 2020, according to a Charles Schwab analysis of 500 investors.
It’s easy to get caught up in the excitement. The S&P 500 jumped more than 14% the first half of 2021. Then there is the hype surrounding meme stocks, like AMC, which hit all-time highs in June, and GameStop, which ran up earlier this year.
Yet experts caution about blindly following the crowd.
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For investing legend Charles Ellis, author of the book “Winning the Loser’s Game,” the key to investing is keeping it simple.
“Most of us do way too much decision-making about investing,” he told CNBC contributor Jenny Harrington in an interview for CNBC Pro. (Harrington is CEO of New Canaan, Connecticut-based Gilman Hill Asset Management.)
“Fewer instructions works better,” added Ellis, an advocate of passive investing, such as index funds, over active investing. “Fewer decisions work better.”
Some new investors are looking to make rapid trades or try to time the market. However, starting slowly and understanding the importance of diversification and asset classes is what certified financial planner Crystal Alford-Cooper tries to impress upon her clients.
“This is the age of distraction,” said Alford-Cooper, who is vice president of planning at Glen Echo, Maryland-based Law & Associates. “In your mind, you need to stay away from the noise and stay focused and disciplined about the things you can control.”
How to begin
For those just getting into the stock market, Ellis advises starting with the basics.
“It’s a little bit like ‘how do you start eating ice cream?'” said Ellis, founder and former managing partner of Greenwich Associates. “You start eating vanilla, and plain vanilla would be either the total market index or the Standard and Poor’s 500 Index, which represents a very substantial fraction of the total market.”
Gilman Hill Asset Management’s Harrington agrees.
“As with most things in life, you’re not going to be an expert on day one, and with around 7,000 ETFs and 3,500 stocks publicly traded in the U.S., it can feel overwhelming to make a choice,” she said.
Harrington recommends starting with something like the SPDR S&P 500 exchange-traded fund, which replicates the broad market.
If you are buying stocks, pick a handful that you know and where the underlying companies have proven track records.
“Start with investments that are easily understandable and use that foundation to learn more and to develop your investment understanding and vocabulary over time,” Harrington advised.
For Alford-Cooper, one of the most important things to have is a written investment plan that works with your risk appetite. Then, stick with it.
“You can pick a great index fund that has companies that you know and use every day,” she said. “Keep away from people telling you what they do and what they made last year.”
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Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.