You may be thinking it’s time to get into the stock market.
Whether it is a resolution for the new year or you want to get in on the gains you saw others make, you’ll want to make sure you do it right.
To be sure, stocks climbed higher in 2021, with the S&P 500 up about 25%. It was also a year that saw a surge of retail investors into the market, buying into meme stocks like AMC and Gamestop, as well as other investments, like cryptocurrency.
Yet, investors would do best if they kept things simple, said investing legend Charles Ellis, author of the book “Winning the Loser’s Game.”
In fact, most people do way too much decision-making about investing, Ellis 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.”
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 start
For those just getting into the stock market, Ellis advises beginning 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.”
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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.
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