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Investing in stocks: what you need to know

November 18, 2013 By Liz Weston

Dear Liz: I currently have a 401(k) and an IRA, but want something more. A longtime CPA, who is very close to our family, recommended that I buy some stocks, but I’m unsure how to go about this.

Answer: When you’re investing, it’s important to be diversified. That means you should spread your money among different types of investments so you don’t have all your eggs in one basket, so to speak.

You’d need hundreds of thousands of dollars to be properly diversified with individual stocks. When you’re just starting out, it’s a lot smarter to buy mutual funds or exchange-traded funds that invest in a wide variety of stocks. Vanguard Total Stock Market ETF, for example, invests in more than 3,600 companies and has an ultra-low expense ratio of just 0.05%.

The fees you pay for your investments are important, since high expenses can dramatically reduce your total returns. Funds that try to beat the market, rather than match it, often engage in a lot of trading that drives up costs. Funds sold through full-service brokerages can carry high expenses as well.

So look for a discount brokerage that allows you to invest with minimal fees and commissions. Or consider one of the new breed of online advisors, such as Betterment or Wealthfront, that offers a low-cost basket of investments that are selected, monitored and rebalanced using sophisticated technology.

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Filed Under: Investing, Q&A Tagged With: asset allocation, bonds, Investing, Stocks

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Comments

  1. Johanna says

    November 18, 2013 at 8:01 pm

    Much of the money in your 401(k) and your IRA is probably already invested in stock mutual funds – and if it’s not, it probably should be.

    I’ve seen questions similar to this turn up again and again on different personal finance sites. “I have a 401(k) and an IRA and now I want to invest in the stock market too.” But “the stock market” is not something completely separate from your 401(k) and IRA. In particular, just about any investment you can make in a regular, taxable account (stocks, bonds, mutual funds, etc.), you can also make in an IRA. The fact that someone is even asking this question suggests to me that their first step should be to understand the investments they already have, before they start trying to invest even more.

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