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Your retirement plan at work, like a 401(k), is an essential part of building wealth. But beyond contributing enough to get the full employer match, you might be feeling itchy to expand your investing reach.
To start, you need a seat at the table: You have to open a brokerage account to begin trading. After that, there are some simple stock market strategies to keep in mind.
1. First consider a traditional or Roth IRA
OK, now that you’ve tuned up your 401(k), it’s time to venture into investments beyond employer-sponsored plans. A top first stop for beginner stock market strategy is to invest in tax-advantaged accounts, such as through a traditional or Roth individual retirement account.
You can contribute up to $6,000 a year ($7,000 if you are 50 or older) to either or a combination of both these types of IRAs. Each has different tax advantages, so check out which IRA is best for you. Besides tax benefits, you’ll have a better choice of investments through a traditional or Roth IRA than the few dozen or so options in most 401(k) plans.
2. Only invest cash you won’t need for five years
One big drawback to traditional and Roth IRAs: There can be penalties and tax ramifications if you withdraw funds before the age of 59½. Roth IRAs are more forgiving on early withdrawals, but you generally can’t take out full contributions or earnings for at least five years.
That’s a key rule of thumb to keep in mind with any stock market strategy: Don’t invest cash you'll need back within five years. Patience pays when investing — you need to give your assets time to weather the market's ups and downs.
A key rule of thumb to keep in mind with any stock market strategy: Don’t invest cash you'll need back within five years. ”
A taxable brokerage account won’t penalize early withdrawals but also won’t offer the tax advantages of an IRA or employer-sponsored account (most brokers offer both taxable and tax-advantaged accounts).
» Ready to start? Find the best IRA providers
3. Harness the power of passive stock market strategies
Ideally, you want to create a balanced portfolio while keeping costs down. The strategies that most investors lean on to do that are mutual funds, index funds and exchange-traded funds. Rather than betting on any one company stock, they pool multiple stocks together, balancing out the inevitable losers and winners.
And these funds are built on passive management strategies. Passive investing seeks only to match wider market gains, as opposed to active investing that tries to outperform the market by frequently buying and selling stocks. Yet over a 30-year period, actively managed funds grew by 3.7% a year, while a passive approach using funds that track market indices grew by about 10% a year, according to Dalbar, an independent evaluator of financial performance.
Passive investing also brings fewer of the fees that can erode long-term investment growth. That has sparked a growing array of robo-advisors that automate portfolio management, which allows these companies to charge much lower fees than actively managed accounts.
4. Limit active stock trades to 10% of portfolio
If you want to buy stocks, try to keep these to 10% or less of your total investment portfolio. Again, actively managed stock market strategies that seek to beat the market regularly underperform passive strategies.
If you throw all of your money into one or a few companies, you’re banking on success that could quickly be halted by a single regulatory problem, new competitor or PR disaster. If you still have a strong interest in actively trading with a portion of your portfolio, some stockbrokers offer educational tools and simulators that allow you to practice trading before you dive in. (Need some guidance? Check out our list of the best-performing stocks this year.)
» View our picks for the best brokers
5. Make a regular investment plan
Active investors race to buy low and sell high, but that’s easier said than done. A better strategy, experts say, is to make new investments at regular intervals. Successful investing is less about timing the market than giving a broad portfolio of investments the time to grow. And many of the best brokers will waive their minimum balance requirement if you make monthly deposits of $100 or more.
Unlike the frenzied image you may have of stock market trading, slow and steady typically wins the investing race.