To The Moon

For many newcomers to the stock market, the most difficult thing is not stock selection or market timing, but having a correct understanding of stock market risks. However, many people are not aware of this.

How to start investing in stock markets? - For beginners

What factors determine whether a newcomer can succeed in investing?

You may think it's about making money, but the real factor that determines your success or failure is the risk in the stock market. 

Investing in ETFs is the best way to help novice investors understand investments and control risks.

What are the risks in stock market?

The risks in the stock market come from two sources: individual stock risk and systematic risk.

Individual stock risk refers to the specific risks associated with a particular stock, such as financial fraud in the case of Luckin Coffee, obsolescence in the case of Nokia, or the impact of Elon Musk's statements on Tesla, and so on.

Systematic risk can be understood as the overall risk faced by the market as a whole. This includes factors such as long-term interest rate increases affecting valuations, the impact of pandemics on the stock market, or even events like former President Trump's tweets. All stocks in the market are influenced by these uncertainties.

Systematic risk is difficult to control, but individual stock risk can be managed. Investing in ETFs is the most effective way to control individual stock risk. Therefore, ETFs have lower risks compared to investing directly in individual stocks, and the price fluctuations are more moderate.

The best choice to avoid Individual stock risk?

For novice investors, the best approach is indeed to invest in index funds that track major US stock market indices, such as the S&P 500 index fund (e.g., $SPDR S&P 500 ETF Trust(SPY)$ ) and the Nasdaq index fund (e.g., $Invesco QQQ Trust(QQQ)$ ). Index funds provide excellent control over individual stock risk and are considered the best ETFs for this purpose.

And when it comes to investing, dollar-cost averaging (DCA) through regular contributions is a suitable strategy, especially for beginners or investors who don't have the time to actively manage their investments. Let me illustrate this with an example...

Suppose you start investing $100 per month from the age of 20 and assume an average annual return of 8% based on the historical performance of SPY. By the time you retire at 70, your investment could grow to nearly $800,000, while your total cost would only be $60,000.

If we backtest this strategy using real historical data of the S&P 500, over a span of 50 years, you could potentially accumulate $868,000. And this is considering only a monthly investment of $100. If you have the capacity to invest more, your ultimate wealth could be even more impressive.

It's important to note that these calculations are based on historical data and assumptions, and the actual returns may vary. However, the underlying principle of long-term, consistent investment through index funds remains a sound strategy for many investors, particularly those who are starting out and have a long time horizon.