Understanding and navigating stock investments.

When it comes to investments, many people might jump straight to one method. These can often be the most viable ways they see their friends and peers gaining big returns in the stock market. Data from the 2019 U.S. Federal Reserve’s Survey of Consumer Finances shows that more than half of all American families — 53% to be exact — owned publicly traded stock of some form. Most of them did so indirectly through investments like mutual funds, which pool money from many investors and put that money into a portfolio of securities such as stocks, bonds, and short-term debt.

But today, it’s much easier for the average Joe to start independently investing in their own stocks thanks in part to free stock trading apps like Robinhood. According to a July 2021 CNBC report, 18 million Robinhood users have accounts linked to their banking information. This was just a few months following a trading frenzy earlier that year when amateur online traders spiked stock prices for video game retailer GameStop. But what do you do if you want to invest in stocks and don’t have a clue where to start? Broadly speaking, it comes down to constantly reassessing your willingness to accept risk on your investments and doing plenty of research.

“When we talk about diversification of your portfolio, you know that if you’re only in one area and those stocks don’t do well, you can see a lot more fluctuation in your portfolio…”

Hope Gerdes, Edward Jones

Where to Begin

Edward Jones Certified Financial Planner® Hope Gerdes says most financial advisors won’t offer advice about specific stocks unless they’re working directly with a client. However, there are 11 broad areas of stocks to invest in for those who want an idea of what types of companies are on the market.

That list includes materials such as companies that process fertilizer or copper. There are also communication services (cellphones and streaming providers) and consumer discretionary (non-essential goods and services like fast food and vacation services). On the opposite end of the spectrum, there are consumer staples (everyday items like diapers or dish soap), financial services, and industrials (plane and tractor manufacturers).

Hope goes on to say that most of the other categories are exactly what they sound like: energy, health care, technology, and utilities. Then, there’s a miscellaneous group that houses pretty much anything that doesn’t fit under one of those more specific areas.

“When we talk about diversification of your portfolio, you know that if you’re only in one area and those stocks don’t do well, you can see a lot more fluctuation in your portfolio,” Hope says. “All of this is based on how much risk you’re willing to take.”

When to Risk it For the Biscuit

A properly diversified stock portfolio should include stocks from each of these 11 areas. That’s because the more diversified an investment portfolio is, the more an investor reduces their overall risk profile.

Those 11 areas are also divided into what Hope says are “offensive” and “defensive” stocks. Basically, defensive stocks are safer when it comes to market volatility and overall risk, while offensive ones can be better investments if you anticipate the market rising. The health, consumer staples, and utilities categories are all considered defensive while the rest are offensive.

Stocks can outperform the market depending on what you’re invested in, but they can also be more volatile. That’s why Hope suggests novice investors start their portfolios with known quantities.

“If I have somebody that’s interested in buying stocks and they say specifically, ‘I want to get my feet wet and I want to try some stocks,’ the first thing I tell them to do is go around your home and look at the companies that you have in your home,” she says. “Who makes your shampoo? Who made your bread? What kind of chips are you eating? Who produced the medicine in your cabinet? Those are going to be companies you’re already investing in, that you know a little bit about their products. You’re going to be a little more comfortable buying them because you know them already.”

Reducing risk also comes down to constantly reassessing your situation, says Tony Shanley with Stifel, Nicolaus & Company. In his experience, it’s somewhat similar to Maslow’s Hierarchy of Needs (the psychological theory comparing people’s needs to levels on a pyramid). When major needs like where you live or what you do for a living change, it can be a major stressor and change your investment risk as you move back down that pyramid to address those changes. Whatever the case, he says this is something an investor should be doing constantly. The same goes for figuring out your risk tolerance, or more simply put, the level

of risk you as an investor are willing to take.

“Everybody’s risk tolerance is different,” Tony says. “If you have a medical emergency, which happens, all of a sudden your needs change. Your risk tolerance changes. You need to have access to money. You have to have liquidity for your funds. So it’s a constant conversation about where you are.”

Do Your Research

Financial advisors like Tony, say that while apps like Robinhood are more based on speculation because anyone can invest without consulting a financial advisor, they’re also a good way to learn about investing and get a feel for the basics — especially for younger people.

For that crowd, Tony says simply being open to talking about money with your friends and peers can be a good way to learn. He recommends finding a mentor, asking questions, or getting a group together to talk about ideas.

“Money is one of those things that not everybody’s really comfortable talking about failures or successes, but amongst friends, it’s a great way to learn,” He says. “Robinhood is dangerous in that your hand’s on that trigger all the time, but it’s also a wonderful learning experience.”

Hope says that for investment such as this, or other ways someone might “dabble,” it’s still important to do your research. 

“Knowledge is power on that front,” she says.

But when it comes to your long-term finances, Hope says it’s probably better to seek the advice of professionals. That’s especially true when folks working as financial advisors are trained and licensed, while someone making YouTube videos about investing could have no qualifications at all. Hope says rookie investors should be especially wary of anyone trying to charge them for information about investing when the alternative of connecting with a financial advisor to talk about the same information is often free and comes with a fiduciary standard.

“Money is one of those things that not everybody’s really comfortable talking about failures or successes, but amongst friends, it’s a great way to learn”

A brokerage like Edward Jones might also have its own list of what professionals call “quality stocks,” based on factors like a company’s geography, its history, and its credit rating.

Hope says of the thousands of publicly traded stocks, Edward Jones considers only 300 of them “quality.” So it’s hard to research that many options without much background knowledge.

Know Your Alternatives 

Investing in individual stocks is not the only way to invest. There are also mutual funds or exchange-traded funds, which Hope says a financial advisor can help with finding a good fit.

“Instead of jumping in with both feet on this stock that your buddy on the golf course told you about, it would be more relevant and beneficial if you started monthly investing…”

Hope Gerdes, Edward Hopes

For many, a monthly investment in a retirement fund like a Roth IRA is also a good option. Hope says they can get someone in their mid-20s, for instance, enough money saved to retire comfortably if they do it consistently.

“Instead of jumping in with both feet on this stock that your buddy on the golf course told you about, it would be more relevant and beneficial if you started monthly investing — $50, $150, whatever you can take to get to a comfortable time to quit working,” she advises.