How to Win at the Stock Market

how to win at the stock market

As a financial coach, the question I most often get asked by friends at parties is “Will you teach me to invest?” 

Most people think it’s equivalent to learning a new language or figuring out chemistry — neither of which I’m very good at. 

The truth is, there are tons of different ways to invest. Some investments require large upfront amounts of money, like buying real estate. Others require knowledge of new technology, like investing in a start-up. 

But today we’re going to talk about investing in the stock market. More specifically how to win at the stock market. Why? Because it’s the most widely accessible and democratized investment opportunity. Well, besides crypto. But I’ll save that for another time!

Anyone can invest in the stock market. It doesn’t require a huge upfront investment and no one is screening you to decide if they want you to invest in their business or not. 

So, here's what you need to know about how to win at the stock market: 

How the Stock Market Works 

The stock market is a place to buy and sell small pieces of public companies, called shares or stocks. These shares and stocks are organized into exchanges – like the New York Stock Exchange or the Nasdaq. 

If you were to think of the stock market like a farmer’s market, the stocks would be the fruits and vegetables and the exchanges would be the vendors’ stalls. 

But unlike picking up an Instagram-worthy bouquet of sunflowers at the Saturday morning farmer’s market, you can’t just go in and buy stocks. Instead, you have to go through a broker, like eTrade, Robinhood, or Vanguard. 

(Trying to figure out the best brokerage for you? Here's everything you need to know.)

You can think of that like going to the farmer’s market during COVID-19, when you couldn’t touch the fruit yourself and the vendors had to hand you what you want, which would make the vendors like the brokerages you have to use to place your trades — the buying and selling of stocks. 

Now that you understand the lay of the land, let’s dig into what you need to know about investing in the stock market. First, a quick history lesson. 

History of the Stock Market

Below is a historic look at the S&P 500. The S&P 500 is an index that measures the performance of the largest 500 companies in the United States. 

how to win at the stock market - S&P 500 historical chart

And you can see how the S&P 500 has changed over time. Even after the worst stock market crashes — in 1929 and 2008 — it still came back to record highs in the years after. In fact, there hasn’t been a single 20-year period in which it had negative returns. And over the past nine decades it delivered an average rate of return between 6 and 8%.

This is an important fact to know about when you’re starting to invest. 

Why? Because this means that if you can stay invested — as in, not pull your money out when the value goes down — you have a good chance of making money over the long-term. 

That brings us to our first stock market investing strategy: buy and hold.

Stock Market Investing Strategy: Buy and Hold

If you can put your money in the stock market and not touch it for 5+ years, you will likely make money. It’s as simple as that.

The trick is not taking your money out when the stock market goes down, which is why we really emphasize the importance of having an emergency fund in place before you start investing. You don’t want to be forced to take it out because you need it, and you don’t want to react emotionally when it dips, which is one of the biggest investing mistakes people make. You want to be playing a long-term game if you want to make money.

Now, if you’re worried about buying the market at an all-time high, I’d like you to look at the graph again. At any point in history — unless it was immediately after a crash — the market has always been at an all-time high. That’s because companies are growing and innovating and contributing to a growing stock market. So as long as you plan to be invested for five or more years, the best time to get invested was yesterday.

Like Warren Buffet says, “It’s not about timing the market, it’s time in the market.” 

Now that you’ve got your long-term buy and hold strategy down, next we’re going to talk about what to invest in. 

how to win at the stock market - think like an investor banner

What to Invest In

If you’re like most people, you probably think that investing in the stock market means picking stocks. 

Depending on how much research you’ve done — and no, “the smart guy at work told me to buy Wal-Mart stock” doesn’t count as research — we like to equate picking stocks to playing roulette. You’re putting your money on a single company and really hoping your bet wins.

Now, of course there’s a time and a place for single stock bets, which we’ll talk about next. But first, another farmer’s market analogy. 

Imagine your partner went to the farmer’s market and came back with three baskets full of kale. What would you think? 

I would think, “Hmmm. Was there a huge discount on kale today?” Then I would think, “How am I ever going to eat three baskets of kale? I don’t even like kale that much.” 

But mostly I would be super bummed that my partner didn’t get avocados, or blueberries, or apricots, or cherries. And this, my friends, brings us to a lesson in diversification!!

To take it one step further, and really bring this point home, imagine that when my partner picked up the kale, it was covered in bugs and we had to throw it all away. 

You could say our investment in kale went to zero. And if had we also had some avocados, blueberries, or apricots, we might have been able to pull together a nice little snack. 

That’s what you want to do when you invest. You want to get a little piece of a lot of different things so that you’re not overexposed to a certain industry or company, and therefore reduce your risk of loss if one company or industry performs poorly. 

The easiest way to do this is by investing in low-cost index funds. 

how to win at the stock market - index funds

Index funds give you broad exposure to large segments of the entire stock market with a single fund. For example, if you wanted to get exposure to the largest 500 companies in the U.S., you could invest in the Vanguard 500 Index Fund or the Fidelity 500 Index Fund

To bring the farmer’s market analogy back in, an index fund is like a smoothie; it’s filled with tiny pieces of fruit from the entire market.

How to Start Investing

You can start investing in index funds pretty easily. First, pick an index. If you’re just starting out, a broad-based index fund, like the S&P 500 or a total market fund, is a good place to start. Or, if you want a completely hands-off approach, you can look for target date index funds. 

Target date index funds are funds where the allocation within the fund changes over time based on the year you plan to retire. So, as you get older, and closer to retirement, the fund moves from being mostly stocks to being more evenly weighted between stocks and bonds.

To find your fund, you can Google the name of the brokerage — like Vanguard, Fidelity, or Schwab — and then the name of the index or market you want to invest in — like total stock market fund, 500 index fund, or target date fund. 

Then you want to look for index funds that have the lowest fees, also known as expense ratios. For example, Fidelity’s 500 index fund has a 0.02% expense ratio. Vanguard’s total stock market index fund is 0.04%. Vanguard’s target date funds have an expense ratio of .15%. Anything less than .3% for the expense ratio is reasonable. 

how to win at the stock market - expense ratios

Now, when you go to actually get invested, you’ll notice that some index funds have a minimum investment requirement of $1,000 – $5,000. If you haven’t saved that much, but want to invest using this broad, diversified approach, you can either find an index fund with a $0 minimum investment or find the equivalent  exchange traded fund (also known as ETF). 

Of course, to make these investments, you’ll have to open an investment account at one of the brokerages. You can do this through your retirement account, like a 401(k) or an IRA, or through a general investing account.

how to win at the stock market - how to invest

Okay, we’ve talked about long-term investing, diversification, and index funds. The last thing I want to cover is picking stocks. 

How to Pick Stocks

Earlier I equated picking stocks to playing roulette and that’s really the best way to think about it. If there’s a single company you really want to place your bets on because you have some brilliant investment thesis about why this company is really going to kill it, then go for it! But only invest as much money as you’re willing to lose. 

If you choose to invest in single stocks, just do it with a small percentage of your investment portfolio, then invest the majority in index funds.

After all, index funds have historically performed well, they have low fees, and they offer incredible diversification.

And remember, the best way to lose money in the stock market is by pulling out your money before the market has time to recover.

Don’t react to the daily news cycle; set it and forget it. You’re playing a long-term game. Pick your index funds, invest your money, and leave it alone!

That is everything you need to know about how to win at the stock market to be a successful investor. And if you’re interested in learning more about investing, build wealth, and doing so in a community of women, then check out our free class, Think Like an Investor

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