Investing in stocks and mutual funds (really, anything non-real estate related) is not something where I claim to be an expert. However, I’ve done pretty well by following a simple system, where I invest in some very low-risk models. Generally, I’ve done better than the standard 8% returns on our stocks year after year. And my husband and I have done this all without using any type of financial planner or money manager. (We are cheap and don’t want to pay fees to have someone else manage our money!). Plus I figure if I put my mind to anything, I can learn it.
1. Invest in Blue Chip Stocks
I started investing after reading “Investing in Stocks for Dummies”, which I borrowed from the local library. I learned right away that investing in Blue Chips stocks is the “Warren Buffet way” of investing. Buffet is a billionaire from his investments, so I thought, let’s follow his lead.
Blue Chip stocks are not the flashy new kids on the block that have just sprung out of nowhere. Tesla, Nvidia, and Redfin are all trendy, successful stocks, but they are too recent to be considered Blue Chip. Although these stocks have been producing solid returns today, who knows what they will do in ten years.
Blue Chip stocks are the opposite of the flashy, young stocks. Instead they are the tried and true good old boys and girls of the market. Think of Blue Chip stocks as the members of the Rat Pack, like Frank Sinatra. They’re still as good today as they were in the 60s. These Blue Chip stocks have proven their reputation over the last decade as solid earners. Most Blue Chip stocks pay solid dividends, quarter after quarter, allowing for heavy re-investment (see tip #4 below). A list of current Blue Chips stocks can be found here. My favorite has been Johnson & Johnson, which has produced solid dividends and returns for us over the last 6 years.
No fancy day-trading skills are needed with Blue Chips. They are a long-term play. Just buy and hold.
2. Invest in ETFs
ETF is short for Exchange Traded Funds. I learned about investing in ETFs when reading “ETFs for Dummies”, a follow-up to my “Stocks for Dummies” book. ETFs are traded just like stocks and have their own ticker symbols for the market.
Think of these guys as a collection of stocks under one name. For example, instead of buying Blue Chip stock like Coca-Cola, Johnson&Johnson, and General Electric individually, you may find an ETF that houses all of them underneath one ETF ticker symbol. There will be a smaller portion of each Blue Chip stock under the ETF than if you bought them individually, but you will still see the same overall increases in the market. Since the ETF houses more than one stock, they are generally less vulnerable to market shift than individual stocks. Prices for ETFs are also generally lower than buying stocks individually, which also makes them pretty appealing.
Trading fees are much lower for ETFs than stocks, even my Blue Chips. In fact, some banks, like Charles Schwab, allow ETF investors to buy and sell ETFs without charging any trading fees. Sites like Vanguard and Charles Schwab also have free tools to compare returns on ETFs, which lay out the returns over the past month, past year, and past 5 years. It makes it pretty easy to select the ETF that is the least risky. Just type in the ones you are looking at and use the tool to compare their returns. My husband and I started investing in ETFs about 3 years ago by using these tools and we’ve had consistent gains year over year. I tend to favor healthcare ETFs and he tends to favor technology based ETFs, since those are our sectors of work. ETFs also produce dividends which can be reinvested. (Hooray!)
3. Reinvest All Dividends
ETFs and Blue Chip stocks pay dividends to their investors. Paying dividends means that each quarter we generally get a small payment (dividend) from the company’s profits. This dividend is deposited directly into the brokerage fund that we use to fund our investments. Generally, this dividend is way less than $1 per share, so it won’t make you rich. But it’s still free money that can be used for investing. And it adds up over the years. Think about getting free money to reinvest quarterly for 6 years like we have on Johnson & Johnson. It definitely adds up to additional shares over time.
Set up your brokerage account to automatically re-invest dividends, which is what we do. Generally when you buy an ETF or stock, there is a box to check to automatically reinvest dividends. Check it! I’ve never seen a dime from my dividends because we throw them right back into our Blue Chip and ETF investments. These dividends add up to free shares overtime, which only helps build your earning potential.
4. Invest in Your Company’s ESPP
Most publicly traded companies offer their employees the ability to purchase the company’s stock at a discounted price through an Employee Stock Purchase Plan (ESPP). Mine allows me to buy company stock every 6 months at a discounted rate of 15%. So, if the company’s stock is trading at $100 per share, I can buy it for $85. (Free $15 per share for just buying ESPP!) Imagine if I bought 10 shares, I’d have spent $850 dollars but have a stock profile worth $1,000. Woo-hoo!
This is a no-brainer for me. so I’ve invested in my ESPP since the first period I was able. If I can make $15 per share just by buying through my company, I’m all in. And since I’m employed at the company I generally know when things are looking up or looking down, so my investments are pretty safe. My husband does the same with his company’s ESPP. We try to invest as much as we can.
Be aware that most ESPPs have a vetting (waiting) period that you must meet before you can sell your shares. I recently sold off a large amount of my ESPP so my husband I could participate in our first capital venture, which I will be posting about soon.
5. Invest in Your Company’s 401k
401ks are the name for the retirement plan offered by most large companies. Since 401ks are run by the company or the company’s contracted money management firm, this is the only time I invest and let someone else manage my funds. I use this loosely since really, the money manager is using an algorithm to invest. The algorithm is based off of selections the employee makes when enrolling in the 401k plan. Generally these selections include: predicted retirement year and level of risk tolerance. Then the algorithm matches the risk and retirement year to some pre-selected mutual funds. Technically, I could do this myself, however, there’s the potential for free money (a favorite thing of mine!) here too.
So where’s the free money? A lot of companies will match up to 3% on an employee’s investment in a 401k plan. (An extra 3% of my investment matched by my company, why yes, I will take that!) This is another quick way to earn an additional 3% on an investment you are probably already making in your retirement. Even if your company doesn’t match, 401k investments are generally taken pre-tax, which makes them a great investment route.
Personally, I selected the most high-risk group for my 401k investments. This works for me since I have diversified into the other areas above. But no matter if you want to play it risk-adverse or risk-tolerant, start investing now!