How much should I invest in stocks? A guide to getting started

Investing can be a great method to help you build wealth, but how much money do you need to invest in stocks? While some experts recommend investing 10%, 15%, or 20% of your income into stocks, the right number will depend on different factors, including your goals, disposable income, risk tolerance, and investment horizon.

A good start to deciding how much you should invest would be to clearly define your financial goals. Are you investing to meet short-term goals, such as saving for a down payment on a house in five years, towards long-term goals, like saving for a comfortable retirement, or both? Setting your goals and defining your priorities can help you shape your investment horizon and keep you on track to grow your money over time. 

You might want to focus on setting specific, measurable, achievable, relevant, and time-bound, or SMART financial goals, to help you stay organized and better meet your objectives. SMART goals can help you stay accountable for your finances.

Once you have set your goals, you might want to consider how much money you can afford to invest in stocks. A common method to budget money is the 50/30/20 rule, which suggests allocating your net income in the following way: 

• 50% for needs or essentials (e.g., rent, mortgage payments, bills, groceries) 

• 30% for wants or discretionary spending (e.g., dining out, entertainment, non-essential shopping) 

• 20% for saving/investing/debt (e.g., emergency funds, stocks and other investments, credit card debt, student debt, etc.) 

You can adjust the wants and savings or debt repayment depending on your income and acquired debt, but for example purposes, let’s consider the 50/30/20 allocation. Of the 20% for saving or investing, the amount you contribute to stocks will depend on your investment risk tolerance.

Your investment risk tolerance, or level of risk you are willing to take when making an investment decision, plays a crucial role in shaping your investment strategy, which can help you determine how much to allocate to stocks.

If you are someone who is more risk-averse, you might want to consider a more conservative approach and allocate a smaller amount to stocks, such as 10–15%. This can help you minimize the possibility of significant losses while still leaving you potential for substantial gains.

However, if you have a higher risk tolerance and a longer investment horizon, you might want to consider allocating more to stocks, such as 25–20%. Having a longer investment horizon can give you more time to recover from market fluctuations while still leaving room for possible gains.

Regardless of how much or how little you decide on allocating to stocks, you should still be aware of the possible risk of losses, including total loss of principal, that comes with investing in stocks.

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Now that you might have a better sense of how much you can invest, you need to determine where to put your money, in terms of what stocks to buy and what investment platform or brokerage account to use.

There are thousands of stocks available worldwide, giving you a wide range of investment options. 

The best stocks to invest in depend on your personal financial situation and risk tolerance. You might want to do your research on market trends and past performance of a specific stock before purchasing any shares. You can start by researching companies and industries that match your interests.

If you don’t want to keep track of individual stocks or want to further diversify your investment portfolio, you can also consider exchange-traded funds (ETFs). ETFs are essentially investment funds that are traded on stock exchanges like individual stocks, which hold a basket of assets including stocks. Some ETFs track popular stock market indexes, while others focus on specific sectors or commodities, so it is wise to do some research on these as well.

Again, it is important to consider that you might face potential losses when investing in stocks or ETFs.

After doing your research and deciding on what stocks or ETFs to purchase, you’ll have to choose the type of investment account to open. You can invest in stocks through a brokerage account, such as with a broker or through a robo-advisor, or retirement accounts like an IRA or 401(k).

There are several options when it comes to choosing an investment account, so you might want to determine which option is the best for you. For example, standard brokerage accounts may not offer tax advantages, but retirement accounts, like a Roth IRA, do come with significant tax advantages.

Like with most major financial decisions, if you are still unsure about how to approach investing in stocks, you might want to consider seeking advice from a professional such as a financial planner or a Certified Public Accountant. A financial advisor can help you establish an investment strategy that aligns with your financial situation and risk tolerance, and assist in portfolio rebalancing to help you achieve your goals. It is important to do your research when choosing a financial advisor to ensure you find someone you can trust with managing your finances.

When it comes to how much you should invest in stocks, the actual amount depends on your unique situation. Aspects such as your income, investment horizon, goals, and risk tolerance can help you determine how much to set aside in stocks. 

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The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.