Investing is one of those things that everyone knows they should be doing, but a huge percentage of people simply don’t. It’s like going to the dentist, an act that the American Dental Association says 42% of people don’t do often enough. That’s eerily similar to the 45% of Americans who don’t have any money in the stock market, according to a recent Gallup poll.
When asked why they’re not investing, consumers point to cash flow issues associated with a high cost of living and increasing expenses. But for some reason, these issues don’t tend to prevent people from enjoying subscriptions like Internet service, gym memberships, and smartphone plans.
The simple explanation is that subscription services come with instant gratification — when you subscribe to a service, you can enjoy it right away. Investing is a bit different. It’s a long-term game in which you might not enjoy the fruits of your labor for years, or even decades, making it hard to consistently shell out money to buy into the stock market.
Why You Should Treat Investing Like a Subscription
How much money do you have building wealth for you? With nearly half of Americans not even owning a share of stock, for many the answer is none.
If that’s your answer, that’s OK — you’re not alone. But you should consider making a change.
Treating investing like a subscription service will help create this change:
- Resist Overspending. When you treat investing like a subscription service, you’ll be paying yourself first, meaning you won’t have as much extra money sitting around in your checking account tempting you to overspend after each paycheck hits. You’ll begin to think of your investment contributions like a bill you have to pay — to yourself — rather than something optional you do only when you have extra money left over.
- Investing Becomes Automatic. Humans are creatures of habit. When you treat investing like a subscription, you’ll be creating a habit of investing. Once that habit is set, it becomes almost effortless to maintain.
- Consistently Build Wealth Over Time. Successful investing is a long-term process. By treating your investments like a subscription, you’ll consistently build wealth over time, setting the stage for a strong financial foundation in the future.
Treating investments like a subscription works so well that many employers adopt this model with automatic retirement contribution plans, where your contributions are deducted from your paycheck and put to work in the market automatically. If you’re already taking advantage of a plan like this, you’re one step ahead.
One of the best changes you can make in this situation is to adjust how you look at investing in general. Don’t think of it as something that will benefit you only in the long run — look at investing like a subscription to a wealth-building service that comes with instant benefits. Here’s how to create an investment “subscription” for yourself:
How to Start an Investing “Subscription”
As with any other rewarding process, setting up a “subscription” to building wealth on Wall Street will take a little preparation. Here are the steps:
1. Decide How Much to Invest Monthly — and Start Investing Now
First you need to decide how much money you’ll be putting into the stock market on an initial and monthly basis. When determining how much money to invest, there are a few factors to keep in mind:
- A Starting Investment. You’ll want to start with as much money as possible. The more money you have invested, the more you stand to earn from your investments. However, you don’t want to bleed your emergency fund dry. Review your savings and determine how much money you might need for emergencies — some suggest keeping three months of income in your savings account. Keep whatever you’re comfortable with in savings; any excess can be invested.
- Assess Your Financial Situation. You know how much money you make, and you probably have a rough idea how much you spend on bills. But, how much money do you need for food, gas, and entertainment each month? If you don’t already have a budget that answers this question, it’s time to create one through something like Tiller. Knowing how much you have at the end of each month will allow you to set realistic investing goals.
- Consider Taking Advantage of Employer-Sponsored Retirement Plans. Employer-sponsored retirement plans are great for several reasons. First and foremost, the funds for these plans are taken from your paycheck before taxes, reducing your income tax burden. Moreover, automatic payroll deductions immediately turn your investing process into a subscription service.
- Consider Automatic Transfers. It’s also a good idea to consider setting up automatic weekly, biweekly, or monthly transfers from your checking account into your investing account to get the subscription model rolling. It’s a way to further automate your contributions and hide money from yourself so you’re never tempted to spend it “just this once.” You can also use apps like Acorns. Every purchase you make will be automatically rounded up to the nearest dollar and the rounded up amount will be invested in a diversified portfolio.
- Keep Your Monthly Contributions Manageable. It’s important to make sizable investments on a regular basis in order to take advantage of the power of the stock market, but you don’t want to set unreasonable expectations of yourself. If it’s too difficult to keep up with your monthly investing obligations, you’ll be more likely to fall off track, skipping contributions and setting your wealth building efforts back. So, it’s important to set a reasonable monthly contribution goal. The key here is balance. Don’t skimp on your financial future nor strap yourself in the now.
Once you have an understanding of the amount of money you can afford to invest initially and how much money you’ll be able to contribute monthly, it’s time to start investing immediately.
The most important power of the stock market is compounding gains. This happens when the money you earn through your investments begins to earn money for you. Ultimately, the longer your investments have to grow, the more your gains will compound for you.
The longer you wait to make your first investment, the smaller your time horizon gets, meaning less time for compounding gains to work on your behalf. So, as soon as you know how much money you’re going to invest, it’s important to get started.
2. Choose an Investing Strategy
Once you’ve got some money set aside to begin investing, it’s time to decide which investment strategy you’ll follow. Investment strategies are important because they give you a set of guardrails for your investing decisions and help you avoid emotional investing mistakes that can lead to losses.
Some of the most popular investment strategies include:
The growth investing strategy provides investors with a path to take part in profits generated by high-growth companies. These companies may be in the startup phase, may have recently launched an IPO, operate in emerging markets, or sell a product that’s seeing a drastic increase in demand.
One of the best examples of a growth stock at the moment is Amazon.com. The company is one of the largest in the world, and it continues to see significant revenue and earnings growth as the coronavirus pandemic resulted in virtually everyone shopping online. Many expect the online shopping trend will continue even after the pandemic ends, and so too will the growth in Amazon.com.
Value investing is a popular strategy among beginners and experts alike. Value investors use a range of valuation metrics to determine whether a company’s current share price is higher or lower than it should be. The goal of a value investor is to buy stocks at a discount and hold them until they reach a fair market valuation.
When this happens, the value investor looks for the next opportunity to buy a piece of a quality publicly traded company at a discount.
Income investors are investing with two goals. Like all investors, they want to buy stocks and other assets that are going to grow in value. However, income investors are also looking for their holdings to generate income.
To achieve this, income investors look for investments that provide either dividend, interest, or rental payments. Some of the most common opportunities income investors look for include dividend stocks, dividend ETFs, and real estate investments.
Investment-Grade Fund Investing
Finally, you may decide that it’s best to dive into investment-grade funds. These funds provide a relatively passive approach to generating wealth.
Keep in mind that investment grade funds aren’t all built the same. Some will focus on growth, some on value, some on income, and some simply on exposure to the stock market in general. So before diving into an ETF, look into key metrics like historic performance, expense ratio, and portfolio assets to get an understanding of what you’re actually investing in.
3. Decide What to Invest In
Once you’ve set your strategy, the next step to setting up your investing subscription is deciding what kinds of securities to invest in. Before diving into the stock market, it’s important to decide your ideal asset allocation — the mix of asset classes you want to hold. Here are some of the most popular asset types on the stock market today:
Individual stock picking is the form of investing that first comes to mind for many investors, even beginners to the stock market.
Investing in individual stocks is the process of buying shares in a publicly traded company like Amazon.com, Apple, and Google, thereby becoming an owner of a small piece of that company. As the company grows, you’ll share in the growth through the increased valuation of the stock you purchased and may participate in profits through dividend payments.
Although it’s a widely understood approach, choosing individual stocks also happens to be one of the most research-intensive ways to go about investing. After all, to be successful investing in individual stocks, you need to identify the best stocks to invest in, do your due diligence on each company before you invest, and keep track of the performance of your portfolio and any news about your investments.
Nonetheless, if you decide stocks are the way to go, choosing your own selection of stocks is the only way to have complete control over your investment portfolio.
ETFs, Mutual Funds, and Index Funds
One of the most common ways to take advantage of the wealth-building power of the stock market without choosing individual stocks is to look into investment-grade funds offered through investment firms such as Vanguard. The most popular types of investment-grade funds include:
- Exchange-Traded Funds (ETFs). ETFs pool money from investors to buy stocks or other securities according to the strategy outlined in the fund’s prospectus. For example, an ETF might invest in companies of a particular sector, size, or theme. The vast majority of ETFs are passive investment funds. As a result, they tend to come with lower expenses than actively managed funds like mutual funds.
- Index Funds. Index funds are another form of passively managed investment-grade funds. These funds are designed to mirror the performance of their underlying index. For example, a Nasdaq index fund attempts to mirror the performance of the Nasdaq composite index by purchasing shares in every stock listed on the Nasdaq.
- Mutual Funds. Mutual funds are actively managed investment-grade funds. The managers of these funds are constantly moving money around in an attempt to take advantage of the next big opportunity on Wall Street. Unfortunately, due to the work involved in managing mutual funds, they tend to come with higher expenses. So, before investing in a mutual fund, it’s wise to look into its historical performance to find out whether the higher cost is likely to equate to increased profitability — because in many cases, it doesn’t.
Robo-advisors like Stash and SoFi are a relatively new concept in the stock market, with Betterment — one of the pioneers in the space — only being founded in 2008. Robo-advisors are another way investors can gain access to the wealth-building power of the stock market without having to dedicate too much time to research.
Robo-advisors give investors the ability to deposit funds and take a hands-off approach to investing. Once you deposit your money, the robo-advisor you choose automatically invests in a diversified portfolio, generally consisting of ETFs, mutual funds, index funds, and bonds.
By investing with a robo-advisor, you’ll gain widespread exposure to the stock market, generally across various sectors and market capitalizations. All you do is continue to contribute to the robo-advisor fund of your choice and it takes care of the rest.
Wall Street isn’t the only place you’ll find strong investment opportunities. One of the most common opportunities outside of the stock market is real estate. There are two common ways to make money with real estate:
- House Flipping. When a property is damaged, its market value decreases dramatically. Often, once repairs are made, the house’s value grows by much more than the cost of the repairs. House flippers bank on this concept, purchasing damaged or unappealing real estate at low prices, fixing and beautifying the property, and selling it for a profit.
- Rental Income. Other real estate investments are income investors, with a goal of building a book of income-generating properties. These investors purchase real estate with the intent to rent the space to earn a monthly income.
Although most people don’t have enough cash sitting around to purchase a piece of property at the moment, you can start now by setting money aside on a regular basis with a goal of building enough savings for a down payment on your first real estate investment. From there, earnings from your first purchase will help to fund growth in your real estate portfolio. And if buying whole properties sounds a little too rich for you, you can look into other types of real estate investments through companies like Fundrise or Groundfloor.
Cryptocurrency is becoming a more and more popular asset. The dramatic rise in the value of Bitcoin through the beginning of 2021 has only exacerbated interest.
While the dramatic growth seen in the space as of late is exciting, investing in cryptocurrency is risky. Currently, cryptocurrency isn’t a widely accepted form of currency; instead, it’s more of an emerging technology investment.
The cryptocurrency market is known for high levels of volatility that could result in significant losses. As such, beginners should steer clear of the cryptocurrency frenzy and look toward more stable investment opportunities. Nonetheless, if you have a strong understanding of financial markets — including currency markets — and a healthy appetite for risk, you may want to include cryptocurrency in your portfolio.
Regardless of how you go about investing, safe-haven assets should be part of your allocation strategy. Safe-haven investments are investments known to increase in value or maintain their value during turbulent economic and market conditions. Some of the most common safe-haven investments include:
- Bonds. Bonds are a debt instrument issued by municipalities, the United States Treasury, and corporations. These bonds offer coupon rates, which work like interest rates to provide income on your investments. While the value of bonds won’t generally grow as fast as the value of quality stocks, they provide safety because they tend to stay far more stable than stocks in bear markets.
- Precious Metals. Precious metals like gold and silver have long been considered safe investments. Due to the high demand and naturally limited supply of precious metals, they are known to increase in value during times when the overall market is experiencing declines.
- Utilities Stocks. If times get tough, you may be willing to live without the latest and greatest in technology, but you’re not likely to give up electricity. Even in market downturns, utilities companies don’t tend to experience fluctuations in income, making them relatively stable safe-haven investments.
4. Do Your Research
Next, you’ll want to do your research and find investment opportunities that fall in line with the investing strategy you’ve chosen. The most successful investment decisions are well-thought out and well-researched.
If you’re investing in a stock, take the time to look into what the company does, the size of the addressable market it caters to, its profitability, historic performance over the past five-year period, whether it pays dividends, and whether the current share price represents a fair valuation.
If you’re investing in ETFs, pay attention to historic performance, expense ratio, the assets the ETF invests in, and the investing strategy the fund follows.
No matter what asset class you decide to invest in, the more research you do before investing, the stronger your chances of your investments being profitable.
Pro tip: Before you add any stocks to your portfolio, make sure you’re choosing the best possible companies. Stock screeners like Trade Ideas can help you narrow down the choices to companies that meet your individual requirements. Learn more about our favorite stock screeners.
5. Reward Yourself
One of the hardest parts of sticking to an investment plan is the lack of instant gratification. As mentioned above, when you pay for a subscription, you are instantly rewarded with access to the service. It’s important to reward yourself for continuing to pay for your investing subscription as well.
But how do you do that?
Simply keeping track of your investments may provide the instant gratification you’re looking for. Think about it: do you remember when you started saving, how exciting it was to watch the balance in your savings account grow? You weren’t using that money right then, but there’s a sense of satisfaction in watching your wealth build.
Take a moment on a monthly basis to comb through your investments. Most often you’ll find that your money has been working hard for you and growing each month, which is rewarding to see. Sure, there will be short-term hiccups from time to time, but if history is any indication, you’ll enjoy gains during most months.
By watching the compounding growth of your contributions plus your capital gains, you don’t have to wait a whole lot of time to feel rewarded by your investment subscription. You’ll be watching your investment portfolio grow on a monthly basis, which will prove at least as gratifying as making your other monthly subscription payments.
While many who invest do so on an “I’ll invest as I have it” basis, doing so sets the stage for failure. These investors often find that months go by in which they didn’t make investing a priority, and it’s easy for this haphazard investing model to lead to an inability to reach your financial goals.
Instead, treat your investing account like a subscription service with predetermined monthly contributions. In doing so, you’ll create a habit surrounding investing. This is one of the best habits you’ll ever create. The habit of investing consistently sets the stage for a financially stable life and a comfortable retirement.
While making your monthly contributions, stick to your strategy and keep diversification in mind. The fact is that well-researched, strategic investments have the best chance of yielding strong returns.