7 Steps To Stock Investing Without Too Much Risk (2024)

Millennials are more likely than other generations to be risk-averse.

They hold 52% of their savings in cash and only 28% in stocks, according to a UBS study. For other generations, the weightings are nearly the reverse: 23% in cash and 46% in stocks.

A 2013 Accenture report found that 43% of Millennials identify as conservative investors, whereas just 27% of Gen Xers and 31% of Boomers do.

And 43% said they would never be comfortable investing in the stock market, in a MFS Investment Management study.

But investing conservatively — or investing very little and holding your money in cash — runs counter to conventional investment advice for the young, which says, invest aggressively now, while your long time horizon will allow you to recover from any losses, so you can reap the compounding benefits of growth.

If you’re a gun-shy Millennial investor or a risk-averse investor of any age, here’s how to try out stock investing without getting burned.

1. Learn about the various types of investments.

If you’re absolutely brand-new to investing, get the lay of the land first. Read some basic books (here’s a good list), join an Investing 101-type Meetup group, and do some research, such as on the Bogleheads forum, for do-it-yourself investors.

“Know: what is a stock, what is a bond, what is an investment allocation, what’s a mutual fund, what’s an ETF,” says PJ Wallin, a certified financial planner with Richmond-based Atlas Financial. “Kind of like Warren Buffett said with derivatives, ‘If it’s too hard to understand, maybe I shouldn’t invest in it.’”

2. Invest in a broadly diversified portfolio of low-cost ETFs (exchange traded funds) and index funds.

Keeping your costs low is surefire way to reap higher returns. Over time, tiny percentage charges and or small fees add up — for a median-income two-earner family, they will eat away almost one-third of their investment returns in a 401(k), according to a study published by the public policy organization Demos, The Retirement Savings Drain: Hidden and Excessive Costs of 401(k)s.

Going with index funds and ETFs not only keeps your costs low, but it also limits your risk. “With an index approach, where you’re investing in mutual funds or ETFs that allow you to get access to over 8,000 individual positions, you’re not at risk of one company going bankrupt or falling out of favor with the market,” says Wallin.

3. Don’t try to beat the market; participate in it.

In trying to beat the market, investors usually underperform not just the market, but even the investments they choose, because they buy and sell at less than optimal times.

“Virtually no one goes through a bull market and a bear market and comes out better than an index fund,” says Michael Kitces, partner and director of research for Pinnacle Advisory Group and financial planning blogger.

To participate in the market’s gains over time, Wallin suggests creating a portfolio diversified across different asset classes — large cap, mid cap, small cap, U.S., international developed, international emerging, etc. — and then depending on how far you are from retirement, or how much risk you want to take, determining the balance of stocks versus bonds. Regularly invest a portion of your paycheck or other money so that you’re not timing your trades but just making investing a habit. Learn these 10 secrets to outperforming other investors. And don't make these five big investing mistakes.

4. If you want to try investing in stocks, set aside a small percentage of your portfolio — and be willing to lose it all.

Once you’ve got a nice nest egg started, you should have a financial planner or investment advisor who is a fiduciary, meaning they’ll give you financial advice that’s in your best financial interest, ahead of their own. (See the slide show below for what questions to ask when choosing a financial advisor.) With your planner, determine a percentage that you can safely set aside for stock investing. No matter what, it should be an amount of money that you don’t need to achieve your goals.

“If you want to try out a little stock investing, take a small portion of your money and do it with abandon and have fun and good luck to you, but for the rest of your money, keep it in a diversified portfolio,” says Kitces, who recommends people set aside no more than 5% or 10%. “We see very affluent folks that do it with 2% because that’s a lot of money if you have a big account,” he says. Treat this money as if it were gambling money — accept that you very well may lose it.

5. To mitigate the risk even further, look into Motif Investing.

“What a true experienced stock investor will tell you is that it’s important to have risk structures for yourself so you don’t have one idea that blows up your entire portfolio,” says Kitces. One way of doing that, even when you veer from the typical diversified portfolio and dive into stocks, is to spread the risk again, which you can do through Motif Investing, which founder Hardeep Walia calls “a concept-driven investing platform” that allows you to follow through on your own investing desires.

Let’s say you think the Internet in China will grow hugely in the next several years, and you want to invest in companies that will benefit. While it might take a while to investigate all the various Chinese portals, e-commerce companies and social networks, and then choose a few to invest in, you could instead buy a China Internet “motif,” or a selection of up to 30 companies that stand to grow along with China’s internet. (Motif offers 150 motifs it has curated, plus almost 65,000 motifs that users, many of whom are professional investors, have created.) Each motif is $9.95 per trade, which, since most trades consist of buying shares in 30 stocks, is much cheaper than what you’ll find on similar platforms.

While many planners would be extremely cautious about recommending their clients invest in stocks, Kitces says that Motif is an improvement: “To take the classic example from 10 years ago, if you were investing in an energy motif instead of an individual energy company, you don’t have the risk that the individual company you picked turns out to be Enron. So you can still benefit from the boom in energy, and not worry that the company you picked might turn out to be a problem company even in the middle of what was otherwise a good idea.”

6. When trying Motif, decide what type(s) of investing you'd like to do.

Walia emphasizes that the platform suits a range of investing strategies and personalities: If you’re an active trader and you want to trade the most beaten-down stocks every week, such as in its Buy the Dip motif, you can choose a motif that will do that for you. Motif can even accommodate the low-cost diversified part of your portfolio that is the core of your strategy with its Horizon models, which are automatically rebalanced every quarter and completely free (no management fee, no $9.95 charge).

“We have people on our platform who are day traders that trade 30 times a day, and we have what we call ‘set it and forget it’ investors — ‘Give me the one motif I need to buy and let me go to sleep. I really don’t have time for this.’ We can cover all these ranges,” says Walia. With your play money — go with an in-between strategy where you won’t trade every day, but you can take a more active role and veer from the traditional passive investing philosophy.

7. To select motifs to buy with your ‘play’ money, go with industries or subjects you understand, or convictions you have.

Unlike regular investing where certain principles guide your actions, with motif investing, it’s really about what you know or think. “Invest in the ideas that are compelling to you and for which you think there’s a reasonable basis,” says Kitces. Don’t choose motifs based on past performance: “If your view is that 3D printing is going to go crazy and be the biggest idea over the next 10 years, frankly, I couldn’t care less what it’s done over the past year.”

If, say, you believe interest rates will rise and some companies will benefit, you could buy theRising Interest Ratesmotif.“We always encourage people to start with something they understand, if you’re a newbie investor. My dad’s a surgeon, so he might take something like Minimally Invasive Surgery,” says Walia. “It doesn’t mean it’s the right investment, but it’s a nice way to get comfortable investing if you’re a new investor. You can say, ‘This is overpriced right now, I understand the companies in this motif.’”

Unlike with a mutual fund or ETF, you will see all the securities you will own, and the weighting behind each. If you want, you can change the weighting within the basket, or if you think certain companies in the sector are missing, you can add them (up to the 30-stock limit). Socially conscious investors will be happy to know they can also remove stocks from their motif.

Select several motifs to fill out the non-traditionally allocated portion of your portfolio to further spread the risk. Walia owns 20 such motifs. Depending on how much money your 5% or 10% is, you will may want to spread your risk out with as few as five motifs or as many as Walia has.

Finally, don’t try to time your trades to buy low and sell high. Buy a motif because you believe in it — not because the price seems low. “Everything has been going up for five years straight, so frankly something that has been down in the past year when the market has been up tremendously, to me would certainly would raise questions. Why do you want to buy something that can’t even make money in a bull market? Clearly other investors don’t think it’s a good deal at the price it’s at. You could believe they’re wrong and have a good reason, but it better be a darn good reason rather than 'it’s cheaper than it was a year ago.'”