How to Invest in 2022 (and beat inflation!)
In this video, I’m going to cover the basics on how to start investing in the stock market today and beat inflation!
Intro
Since it’s the start of the new year, now is the perfect time to cover the basics on how to start investing in the stock market if you have yet to do so. You may have also heard about rising inflation concerns, which generally means you don’t want to have a lot of money sitting in cash because as inflation rises, your purchasing power as a consumer will go down.
I think the majority of people know they should probably have a stock portfolio, but have no idea where to start. That’s exactly how I was just a few years ago. There’s a lot of jargon, and it can seem quite complex, but I want to keep things simple enough where you can start a stock portfolio with just a few hundred dollars to have better diversification, grow your money so your purchasing power doesn’t evaporate as you get older, and build a little nest egg that can compound an almost unbelievable amount over time.
It’s also a good time to remind you that I am not a financial advisor. I’m just a goofball on YouTube, so don’t just take my word regarding investing. Do some research on your own, and feel free to consult licensed professionals.
Getting Started
You may have heard this often-quoted study about how 40% of Americans can’t afford an unexpected bill of $400. In my opinion, the two worst types of stress to have are health and financial, so I look to do what I can to avoid these as best I can.
One crucial way to avoid financial stress is to get in the habit of saving money. In order to do that, you have to know what your income is every month and what your expenses are every month. This way you can know how much you can allot to savings every month.
If you are looking for a very simple and straightforward way to do this, I have a free budgeting spreadsheet on my website that you can download and fill in – no email or anything is required. I also wanted to highlight the power of compounding interest with your savings, so it will show you that as well. You can find that link here.
The other thing I want to mention before we start is that it’s a good idea to have an emergency fund of cash in a savings account that’s readily available in case of… well, an emergency. The rule of thumb for an emergency fund is to have 3-6 months worth of living expenses that’s very liquid – where you could access it at a moment’s notice.
So let’s say you’re all set with your emergency fund and want to start a stock portfolio. Let’s do it.
Why Should You Invest?
Okay, why should you invest in the stock market? Well, the simple reason is to grow your money faster than it would grow in your bank’s savings account. The average interest rate on a savings account is .06 percent, which is practically nothing. The inflation rate has accelerated a lot over the past year, and it’s now sitting close to 7%. This means if most of your money is sitting in a savings account earning .06% interest from your bank, it is not keeping up with the rate of inflation and that money will be worth less in the future. What you could buy for $10,000 today, will cost you $10,700 in a year if the inflation rate is 7%. So let’s start a stock portfolio. On average, the annualized return of the S&P 500 is 10.5%. That’s a lot better than the .06% your bank offers, and over time, that higher rate of return will compound your account and grow it much larger.
Get a Brokerage Account
The first step you need to invest in the stock market is to open an account with a brokerage. As far as what brokerage is best for you, it will depend on what country you live in and how involved you want to be. I am most familiar with the US stock market and brokerages for US citizens, so that’s what I’ll stick to covering in this video.
If you aren’t super interested in the stock market, but know you should probably start investing, I’d recommend M1 Finance. This is a super simplified way to start investing. You create pies based off stocks or funds that you want to invest in and set the percentages allocated to each. M1 will then do the buying for you on the stock exchange, and you can just sit back and relax. You can also check out expert pies, which are made by professional allocations that you can just click and add to your portfolio. For instance, if you want to be like Buffett, you can check out the Berkshire Hathaway pie, which seeks to replicate the holdings of Berkshire Hathaway. You can see it’s performed quite well over the last 5 years.
So it’s super freakin’ simple. I’ve mentioned this platform before, but I have an account here with monthly recurring deposits from my savings account to this portfolio. I don’t check it very often – I just let it sit there and do its thing –– because this is a long-term portfolio. I don’t care about day-to-day fluctuations, and I don’t care about timing the market. To me, it’s more important to just get started and get in the habit of contributing to it if you’re able to.
There are a few other platforms you can check out that are somewhat similar. Wealthfront and Betterment are two platforms that focus more on personalized and automated portfolios based on your goals. So you aren’t really going to be picking out individual stocks like you’re able to on M1 – rather, you would select a strategy, and they would handle the allocations for you.
So here’s a tiny little savings account I have on Betterment leftover from when I had a retirement account there. It’s not very exciting, but it’s pretty safe.
If you want to be more involved with managing your portfolio, you may want to open a brokerage account on a platform like TD Ameritrade, Schwab, E-Trade, Webull, or Fidelity. Each brokerage will have their own trading platform. I use TD Ameritrade’s ThinkOrSwim platform on a daily basis and I like it a lot. I also have a Webull account which is pretty solid as well.
The benefit to using a brokerage like these is it gives you more flexibility and control. For instance, if you want to buy long-dated options contracts to introduce some leverage to your portfolio, you could do so. If you wanted to try other options strategies like covered calls, where you sell an options contract while holding 100 shares of the underlying company – you could do so.
That gets into a more advanced territory and if this isn’t something that really interests you, I would recommend keeping things simple by using M1 Finance, Betterment, or Wealthfront.
What to Buy
If you are opting to manage your brokerage account yourself, but don’t know what to buy, I would personally look into ETFs. An ETF is an exchange traded fund and is essentially a basket of different stocks that trades on the market similar to an individual stock. But, if you buy one share of an ETF, you’re not relying on just a single company. Instead, your risk is spread out across many different companies, often covering different sectors, which can make ETFs a safer investment than just buying something like Tesla, for instance. A lot of different companies offer ETFs and will have different fees to manage the funds, so if you don’t know where to start, I think Vanguard makes some of the best funds and their fees are quite low.
Let’s check out what they offer on their site. You can filter by risk, asset class, etc. If you’re younger, you may have a higher risk tolerance, because you have more time to withstand volatility and you want to focus on growing your account. A good way to get an idea of what kind of returns you may be able to expect is to sort by performance. You can look at the average annual returns since that fund started.
Let’s take a look at VOOG. This is an S&P 500 Growth ETF, so it’s more volatile than some more conservative funds, but it can be a good way to grow your account. The expense ratio is .10% which is considered low, so that’s good. If we click on Portfolio & Management, we can see this fund contains 304 stocks and at the end of 2021, it was heavily focused on tech stocks.
If you invested $10,000 into VOOG a year ago, you would now have over $13,000 in your account. Not bad. What if you bought $10,000 of VOOG 10 years ago? Well, you’d have over $57,000. That is wild.
That’s just one example and the stock market has been on an historic bull run over the past decade, so it’s worth noting that those returns won’t always be so high, and I would recommend spreading out your money to multiple different funds, so you don’t just own ETFs that are heavily tech focused. There are ETFs focused on the energy sector, bonds, financials, industrials, dividend yields, etc.
How to Buy
So this may seem pretty straightforward to some, and maybe the hard part for others, so quickly, I’ll cover how to buy shares.
If you’re using something like M1 Finance, it’s as simple as selecting the funds or stocks you want to add to your portfolio. From there, you can set the allocation percentages for each. In the video, I share one I put together. I’m not saying you should do the same thing I’m doing. I put this together rather quickly, and it could definitely be refined and diversified more. But once you build your pie, M1 will then go and buy the right amount of shares for you and you're good to go. If you’re using a more traditional broker, you’ll need to do the math to figure out how to divide up your money to each fund or stock. If you want one share of General Electric and one share of VOOG, you’ll need about $390. And the issue you may run into is if you’re using a broker that doesn’t allow you to buy fractional shares of a company, you’ll be pretty limited in what you can buy if starting with a small account.
So as I mentioned, I have an account on TD Ameritrade. Their main trading platform is called ThinkOrSwim, which may look pretty advanced. If you want to learn about how to use it, I have a video breaking it down rather simply that you can find here. Otherwise, you can trade on their mobile app or on their web platform. When the market is open, I can just set my share size to one and click buy.
If you’re using a brokerage like Webull, you can buy fractional shares with just $5. So if you only have $300 to invest, you can still divvy that amount up however you’d like by owning just a fraction of one share. So that’s something to consider when choosing your brokerage.
Timing the Market
As I mentioned earlier, we have been on a long bull run with the stock market, and a lot of people have been worried about a larger correction – a bubble bursting – or even a recession for a while now. And of course, that’s certainly possible. So should you wait until the market drops before starting your portfolio? You could. But it’s impossible to time the market.
Remember, this is about building a long-term buy and hold portfolio, so I personally wouldn’t be overly concerned with short-term market volatility. I think it’s better to start a portfolio while you’re motivated, while it’s fresh in your head, and get in the habit of setting a portion aside every month to save, even if it’s just $20. But of course, this isn’t financial advice, and I’m just a dummy on the internet, so you’ll have to decide for yourself what you think is best, but that is just how I look at things.
Compounding Gains
Okay, if this video hasn’t motivated you yet to start investing, let’s talk about compounding gains, which I’ve mentioned a few times already. I don’t want you to think you need $10,000 or more to start a stock portfolio for it to grow into something sizable.
Let’s say you start with just $300 and every month you’re able to save $25 to deposit into your brokerage account. And let’s say you’ve averaged a little below the S&P’s 10.5% returns and you’re earning just a 10% return. In ten years, your $300 start with just $25 a month will turn into over $5,500. Not bad, right? If you’re 25 years old now, by the time you hit 65, your account will be at $146,459. That’s getting more interesting.
Let’s up the stakes a little more. Maybe your grandma bought in on the Google IPO because she knew the internet wasn’t just a fad and well, she’s left you $5,000. And maybe you’re able to sock away $250 every month to your investment portfolio. In 40 years, you’ll be a millionaire. And of course that 1.5 million won’t be that much with inflation, but it’s a heck of a lot better than nothing.
Now, I know a lot of younger people – including myself – are often more intrigued by immediate gratification and the idea of waiting 40 years to have a little bit of money isn’t that exciting. But compound interest by design makes the biggest difference when it has time to go work for you, so that’s why conventional savings advice is usually: start saving as early as possible!
Final Thoughts
Alright, I hope this gave you a better understanding on how to start investing in the stock market and how you can do it yourself or sign up for a platform that can make it even simpler, and the power of compounding returns. This was all just for an individual brokerage account and not a retirement account like a Roth IRA, which – could offer some tax advantages if you don’t already have one, but that’s for another video.
Again, if you want to, download my free and simple budgeting spreadsheet I have linked above along with a few of the brokers I mentioned in this video.
Thank you so much for watching. If you found this video to be helpful, consider subscribing to my channel and hitting the thumbs up button on this video will help this video get seen by more people and is greatly appreciated.