How to start investing in the stock market for beginners – a hands-on 3 step guide

When I was a 13 year old kiddo, I spent my summer holidays reading the book “Rich Dad Poor Dad.” Yeah, I know I’m a weirdo.

But looking back, I am glad my Dad gave me that book to read because it sowed in me the seeds of investing and managing your money.

At the beginning though – it was as much a blessing as it was a curse because after I read that book, I was so passionate about investing that I read and learned everything I got my hands on aaaand……..got confused. This “investing thing” seemed so complicated and everybody advised different things.

Some said “Just index it bro.” Others said I should follow the greats and do value investing and dividend investing like Warren Buffett.

Confused, I learned all that I could including financial ratios and charts and everything in between in an attempt to start investing in stocks. I realised much later that though those things can be helpful, investing can be much simpler and you don’t have to know all those things just to get started.

Moreover, before you go into the tactics and strategies, there are two very important steps to take which can significantly impact your performance.

Thus, I want to walk you through a comprehensive way of approaching investing and give you the exact tools and templates I use that make it a lot easier. Knowing all this when I started would have saved me almost 4 years of struggle and confusion.

At the end of this post, I also reveal a very simple but very effective investment strategy that takes only 30 minutes a year and does not require you to look at charts or financial statements. With this strategy, you would have made money in 2008 in spite of the global financial crisis!

I’ve also included a link to a simulation software and recorded a video to show you exactly what buttons to press to implement this strategy using fake money at first before you are ready to start.

I find that many of my friends do not invest because they don’t know how to use the software and/or are afraid they will press the wrong buttons.

It is my goal that after reading this comprehensive article for beginners on how to start investing in the stock market, you will:

  1. Get the exact tools and strategies to ensure you save money every month for investing without necessarily sacrificing on anything.
  2. Get complete step by step video instructions on how to setup a mind numbingly simple but jaw dropping effective investment strategy that takes only 30 mins a year to implement, doesn’t require you to analyse any financial statements and would have made you money in 2008 despite the global financial crisis.

Intrigued?

LET’s DIVE RIGHT IN!

STEP 1 to start investing in the stock market: Determine your objective

The first thing I ask my friends when they say they want to start investing is what their objective is. Is it to keep growing your money to retire at age 65? Or to build a source of passive income of say $1000/month?

This is crucial because the strategies for building passive income are different than the strategies that simply grow your wealth over time.

So as you are reading this, take a moment to determine what your goal is – is it to grow your wealth or get some passive income every month (or few months).

As a first step, we will look at how to grow our wealth. Building passive income takes a little bit more knowledge and skills so we’ll look at that another day. If you’re interested to learn, leave a comment below!

STEP 2 to start investing in the stock market: Don’t save what is left after spending. Spend what is left after saving. 

“I don’t have enough money to invest.”

Have you ever found yourself saying that?

I used to say that too. I also used to say “What if I invest this $2000 I have and then find that I need money next month to pay some bills?”

These are the questions that I used to waste a lot of time thinking about when I first started investing.

What changed things for me and helped me grow my investing account exponentially was a quote from Warren Buffett that my mentor shared with me and it goes like this – “Don’t save what is left after spending. Spend what is left after saving.”

You may have heard this is another form – “Pay yourself first.”

Before I learned this, I used to think to myself “I will control my expenses this month so that at the end of the month, I have savings left to invest.”

BIG MISTAKE!

Instead, I took my mentor’s and Warren Buffett’s advice to heart and opened an automatic savings account so that a portion of my income is automatically transferred to this savings account every time I receive my pay cheque.

This way, I found that every month I was automatically saving a portion of my income without me doing anything. My ATM card or credit card are not connected to this account so there was not way I could spend this money “by mistake” unlike before when I would try my best to save money throughout the month but then find that I didn’t save as much as I hoped.

The steps needed to setup these accounts can be found on your bank’s website. Try googling “[Bank name] automatic savings.”

For example, here are instructions from Chase Bank in the US and DBS bank in Singapore.

Ensure that the banks do not charge you fees for these accounts!

If you encounter any difficulties, comment below and I’ll do everything I can to help.

Wondering how much to save each month? A rule of thumb is 10% of your income.

Why wait? Go ahead and set up those accounts now – they usually only take a few minutes and once you’re done, you can watch your savings grow without any more effort on your part while you learn how to invest those savings!

I’ll wait for you while you open those accounts.

Done?

Awesome!

Now that you are automatically saving a portion of your income, you can tell with 100% certainty how long it will take for your savings to hit a certain number. For instance, if you’re saving $250 every month and your target is to save $2000, it will take you $2000/$250 = 8 months to do so.

To do your own calculation, take out a calculator and divide $2000 by the amount you have decided to save each month (i.e.) $2000/[your monthly savings].

Then set a reminder on your calendar for that day. It’ll give you something to look forward to and serve as inspiration and motivation!

STEP 3 to start investing in the stock market: Strategise 

Congratulations!

You have determined what your objective is around investing and have setup an automatic savings plan to ensure you save for investing every month before you spend on other things.

The next step is to take this money that you’re putting aside every month and put together a strategy in place that will help you achieve this objective.

For the purpose of this post, I am going to assume your objective is to grow your money (i.e.) you are not looking to get a monthly or yearly income from the investments.

If your goal is to get passive income then you will need a different set of strategies than the one I am about to reveal below. However, the strategy below will serve as a great foundation for your investing knowledge and you can later build on it to generate passive income.

A friend of mine once said he found investing very confusing because everybody he spoke to seemed to be in a different “camp.”

Some said indexing is the way to go, others swear by value investing, yet others say dividend investing is the way to go and then some people say trading is the best thing ever.

Here’s what I told him – investing is like trying to lose weight. Some will say nothing beats running, others will say you simply cannot escape going to the gym 3 times a week and then there will be some people who say swimming is the best exercise as it forces you to use all your muscles.

As we all know, they are all correct – as long as you do one of them regularly, you’ll lose weight. Just pick one sport you like the most.

The key is CONSISTENCY.

Likewise, in investing, there is no one magic pill which works. There is no evidence that shows one strategy to be superior to another – at least not that I have found over the last several years of learning investing.

As it turns out, even great investors like Warren Buffett may not perform as well as certain strategies for a period of a few years.

Therefore, what is most important is to do something we like and enjoy so that we do it consistently.

For some of us, this could mean automating our investments so that we never need to think about them. For others, it could mean analysing companies and picking stocks because they get a lot of enjoyment out of understanding different companies and seeing what makes them tick.

I asked some of my close friends what their ideal way to invest would be. The top responses were:

  1. I don’t want to spend more than 30 mins a year on investing.
  2. I want to do something which is safe and doesn’t result in wild fluctuations. The thought of going to bed and waking up to see a sharp drop in my stocks terrifies me.
  3. I do not want to be picking stocks, reading financial statements or looking at charts.

As it happens, this can be done. We can invest with as little as 30 mins a year (actually you could automate it too if you like). Not only that but we can put in place a strategy that could potentially make us money in spite of a stock market crash.

And the cherry on top – no stock picking, no financial statements and no staring at charts!!

We will go into how to do this in just a second.

Before we do that, why not download a simulation software so that you can put this strategy into place right away using fake money? This way, you’ll get accustomed to investing and feel more motivated to start investing with real money once you see how easy it is!

So go ahead and download that software and while it’s downloading, we can discuss further on how to setup this investment strategy and how has it worked historically.

Is it downloading?

Awesome!

Meanwhile, let’s discuss what we’ll be doing and how this strategy works.

Firstly, we’ll begin by buying a stock market index fund. An index fund is a fund that tracks an index.

An index is a measure of a number of stocks in the stock market as opposed to one single stock. For example, the S&P 500 index is an index that reflects the performance of about 500 companies listed on the stock exchange in the United States.

Research has shown again and again and again that even most professional fund managers do not perform better than the index! Hence, by investing in an index fund, we will do better than most professional fund managers.

An added bonus is that we need not analyse the financial statements of any single company and try to determine whether it is worth buying stocks in that company.

However, when a stock market crash occurs (like it did in 2008), even the index can take a heavy beating. So how can we protect ourselves in such a case?

Well, it turns out that when the economy crashes and stocks get slammed, it is likely that the people who are pulling their money out of the stock market are parking it somewhere else – perhaps in bonds or gold. As a result, bonds and/or gold may go up.

Hence, besides this index fund, we also want to own a little bit of bonds and gold in our portfolio to offer protection or perhaps even keep growing our money in spite of a stock market crash.

It turns out that if we invested 25% in each of these 3 investments (stocks, bonds and gold) and kept the remaining 25% as cash, we would have done surprisingly well all these years.

Let’s take a look at this in action. Below are the results of this strategy by using portfoliovisualizer.com

As shown highlighted in red, SPY is the index fund chosen for stocks (this fund invests in US stocks and tracks the S&P 500 index), TLT is the fund chosen for long term US government bonds, GLD is the fund chosen for gold and lastly, there is cash.

25% of the money invested is allocated to each of these.

The columns shown the total return for that particular asset class in the given year.

As we can see, in 2008, stocks (SPY) dropped 36.81%. However, bonds (TLT) went up 33.93% and gold (GLD) went up 4.92%. Lastly, cash in the bank earned interest and returned 1.59%.

Therefore, as shown in the last column, someone who invested in this manner would have made 0.91% return on investment in that year even though the stock market dropped 36.81%!

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Equally impressive is the fact that between 2005 and 2016, there were only 2 years with negative returns. These were 2013 (return of negative 2.35%) and 2015 (return of negative 2.80%)

If you’re as geeky as me and would like to know the economics behind this strategy, why it works and what you need to do in those 30 minutes every year, click here to watch a video of me explaining all the details to a friend. It’ll be faster and easier than reading the entire book.

At this stage, you might have many questions swirling in your head –

  1. Why 25%? Can I choose some other combination?
  2. How can we make money is something goes up and the other thing goes down?
  3. You said this will take 30 minutes every year. What’s that for?

Let’s leave than for another day!

For now, how about we get into action and start practicing and implementing the knowledge you’ve gained!

There is a ton of information out there. What’s most critical is to implement and get into action and get your hands dirty using fake money so it’ll give you practice and prepare you mentally for investing with real money.

In order to make this simulation realistic, I created a video to demonstrate how you can get this strategy going in less than 10 minutes. I show you exactly what buttons to press so you can simply copy along.

I hope you enjoy it and put it to use.

With that, I want to thank you for reading all the way until the end. I hope you have benefited from this.

In the comments below, please let me know:

  1. What was your biggest learning point?
  2. What challenges are you facing around investing?
  3. What would you like to learn next?

Go ahead and let me know – I respond to every comment.

 

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