Taking the first steps and getting started investing is the hardest thing to do. There's fear. There's the unknown. There's the idea that millions of other people know more than you and you'll get taken advantage of.
At the same time, you know that you should get started. You know that starting to invest early is the best way to build wealth over time. You may have even already read our resource on getting starting investing.
So we reached out to some of the smartest experts when it comes to investing and asked them a simple question - what's the best advice you have for a beginner? Take your time and read through this article because it's a goldmine of straight talk about getting started investing.
Approach investing for the first time the way you would approach learning to drive for the first time – focus on the basics and get those right.
For investing, that means starting by setting a financial goal (i.e. what you want to buy, when you want to buy it, and how much it will cost). [Note that “investing” by itself is not a financial goal!]
The number of years until you buy whatever it is you want to buy (the “when you want to buy it” when you defined your goal) is the primary driver of how much you invest in stocks, how much you invest in bonds, and how much you invest in short-term investments (along with other factors like your risk tolerance and personal circumstances). The longer you it is until you will use the money, the more in stocks (for example, if it’s 15 years or longer, you may consider putting 90%-100% of your investment in stocks).
Diversification is key – hold many different kinds of stocks and many different kinds of bonds for the portion of your portfolio you have in each of those asset classes.
Implement in a way that makes sense for you. And here’s where the car analogy comes back. It is much easier to start out driving an automatic transmission car than it is to start by driving a manual transmission. For example, if your goal is retirement, a Target Date Fund can help be the automatic transmission of your investing – providing a mix of stocks, bonds, and short-term investments appropriate for your time horizon, giving you diversification, evolving the target as you get closer to your goal, and rebalancing regularly to keep you on track.
Lastly, put it on autopilot. Pay yourself first, and make regular contributions from your paycheck or bank account so you won’t spend it. Check on your progress on an annual basis or so.
At your first job, you’re probably, if you’re like 88 million Americans, going to be eligible to participate in a defined contribution plan. A defined contribution plan is an employer sponsored retirement plan, meaning, in most cases, the employer will match, to some extent, how much you contribute to that plan. They’re commonly known as 401k, 403b, or 457 plans.
You’ll be given some paperwork to fill out, and, if you’re like I was when I was going through onboarding at my first employer, your head will be spinning. One of the (many) forms you’ll fill out is how much you want to contribute to your defined contribution plan.
Chances are that your employer will match some amount – usually 100% of the first 3% or 4% or 50% of the first 6% or 8% of your salary that you contribute to the plan. It’s called a plan match.
Most people who participate in plans that offer a match will contribute up to the match (although according to 401k plan manager Financial Engines, 25% of plan participants miss out on their employer match)
However, that’s probably not good enough.
The estimated amount that a person needs to save for 30 years in order for the nest egg to cover half their expenses for a 30 year retirement, assuming that expenses keep pace with inflation and don’t increase over time, is 16.2%.
So, even if your employer matches 50% of the first 8% that you contribute, it’s STILL not enough. You’ve hit 12%. If your employer covers 100% of the first 3% and that’s what you contribute, you’re at 6%, 10.2% short of what you need to be saving.
Don’t let the anchor of the employer match cause you to undercontribute to your retirement plan!
Jason Hull, CFP®, is the CTO of the online, comprehensive financial planning service myFinancialAnswers.
When you are just starting out, your first priority should be building up an emergency fund, and consider investing once that’s established. It’s important to form saving and investing habits by setting aside money on a regular basis. Your assets will build over time, and you’ll gain momentum and feel encouraged as you watch your balances grow. Tools like the ShareBuilder Investment Plan enable you to invest a set dollar amount and buy fractional shares of stocks, ETFs and mutual funds.
Before starting to invest, reflect on your objectives, timeline and risk tolerance. Are you looking to save for a down payment on a car or home or do you want to start planning for retirement? Does the idea of volatility put you in a cold sweat or are you comfortable investing in riskier assets? An honest assessment of your goals, expectations and anxieties can help you build out a strategy you can stick to.
Younger investors may want to take advantage of low-cost resources to develop an investing plan. For example, digital asset allocation tools will take into account your investment horizon and risk tolerance, and you can use criteria including price and performance to select the funds you want to invest in.
If you know you should be investing but are hesitating because you lack confidence or trust in the markets, you may want to partner with a financial advisor who can talk through your fears, offer unbiased advice and develop a financial plan you are comfortable with. Remember, there are consequences to sitting on the sidelines too, including a smaller nest egg in the long-term.
An advisor can also help you balance your financial priorities, including establishing an emergency fund, managing student loans or other debt, and building up a nest egg by investing.
Before investing, make sure you understand what you are paying and the options available to you. It makes sense to pay for services that you use, and that help you succeed. At the same time, over the course of a 40-year career, the difference between one or two percent in fees can translate into hundreds of thousands of dollars in lost retirement savings. The more knowledgeable you are about fees, the services you receive, and the impact on your portfolio, the closer you’ll be to reaching your financial goals.
While no college student likes to contemplate D's, I recommend that they keep the following three D's in mind when it comes to investing: Discipline, Diversification and Diligence.
I am a strong believer in having a well-articulated investment discipline to protect one's portfolio from oneself. As the Dalbar studies have shown over the years, the huge gap between investment returns and investor returns is due to investor behavior, or the tendency of all investors, professional and beginner, to shoot themselves in the foot. Behavioral Finance has become a huge field for this very reason.
Diversification is the only free lunch in investing, and thus is a must for all portfolios.
Investing requires Diligence since we are talking about real money. Know what you own and why, and keep on top of how it is doing without driving yourself and engaging in unnecessary trading.
Choosing the right investments is often one of the biggest hurdles for young people looking to start investing - but it doesn't have to be. In fact, there are three key legacy myths about investing that simply don't ring true today. In today's investing reality...
1. Appointment-investing is no longer necessary. Thanks to digital tools and technologies, you can learn, research and invest on your terms - when, where and how you want.
2. You don't need to pick stocks. Choosing the right investments may be the biggest hurdle for millennials looking to start investing - but it doesn't have to be. There are far simpler vehicles, like low-cost mutual funds and ETFs, that offer pre-packaged, built-in diversification.
3. It doesn't take a ton of money! You don't need a lot of money to get started or to create a good plan. In today's super-connected world, financial advice is at your fingertips - all you need is an internet connection and a device. Once you have a plan, start with small, automatic contributions, be disciplined and be patient, and you'll be well on your way for financial success.
Automate your savings. The best way to keep on the right path is to have an automatic savings plan. Decide on how much you want to save on a weekly/monthly/quarterly basis, and set it up to automatically transfer from your bank account. Soon, you won't even be missing the money, and you'll see your accounts grow over time.
Finally, consider the help of a professional. Investing can be overwhelming and a chore. If you don't want to spend the time, find a financial advisor that can help you. You want an advisor that is a good fit - don't just judge them on performance, but also consider fees, accessibility, and personal values. You want this person to be someone you can work with for the next 30+ years.
Generally, it is best for individuals to begin saving as soon as possible in the first job after graduating college. Many recent grads will make excuses to not save, for example; commitments to paying off student loans or other consumer debt taking higher priority, OR a desire for spending money on entertainment and lifestyle as opposed to prioritizing the future.
The first step in creating and executing a savings plan involves goals. Just like saving for that first big expense (i.e. car) during teenage years, a plan without future goals is useless. Saving just 5% of a $35,000 annual salary can amount to more than $250,000 30 years later (based on 7% return and 3.5% annual pay increase).
If you're fortunate enough to work for a company that also matches contributions to the plan, you should at least commit to saving enough to capture the match. Otherwise, you could be leaving free money on the table.
After goals and earmarking how much you should save, the next important consideration is how you will invest your money. If you're young and just starting out, be as aggressive as possible as hopefully you won't touch the money until retirement.
The last primary decision to make is determining if you should make pre-tax or Roth deferrals. If time is on your side, and your starting income is lower than you expect it to be in the future, oftentimes Roth is the right decision.
Investing is a simple, yet complex, process and should not be entered into without some education. I always recommend that new investors begin by learning what the stock market is and isn't, which can easily be done through a handful of books. Investing is a life long pursuit, and requires life long learning.
Once you have learned the basics, building a portfolio comes next. In the beginning, starting with a target date fund is a good way to go in order to get broad diversification in a portfolio that is age-appropriate.
As a young investor, you have the benefit of years of future compounding and can generally take on higher levels of risk. This typically means allocating most of your funds to equity investments through mutual funds, ETFs, or individual stocks, and shifting more of your portfolio to bonds later in life.
Investing can be very rewarding, but it takes a lot of time and effort to do it well. And, there are no guarantees that you will make money doing so. I can guarantee you that there will be times when you will have significant paper losses, and these will test your resolve. Nevertheless, investing for the long term can be very rewarding.
The best advice I have for beginning investors is to keep it simple. Pick a low cost index funds that tracks the "Total Stock Market", or if that's not available, one that track the S&P 500 Index. A lot of people think that the most important investing decision is choosing which fund to buy, but what actually has the biggest impact on your future wealth is how much you invest.
So, rather than focusing on picking a fund, spend your energy on figuring out how to maximize your savings. Put investing on auto-pilot by establishing an electronic monthly contribution.
Lastly, while ETFs offer some advantages over mutual funds, for beginning investors, stick with mutual funds because you'll be able to invest an exact dollar amount every month.
Start investing today. Even if you don't have much money now, your time is on your side. If you can get in the habit of putting money away now, whatever amount it may be, it'll be one of the most powerful habits you could possibly develop.
Keep emotions out of it. Investing comes with waves of emotions- greed and fear. New investors may end up getting into the market when everything looks great, this is when the market begins to collectively get "greedy." When the market goes down, scared investors leave the market.
Known what the money is for. It is easy to get caught up in wanting to "make money in the market." It is also easy to get caught up in "not wanting to lose money in the market." Know the purpose of the money and the outcome you want to achieve and go from there. Have a plan and stick to it when markets are great and when they are terrible because over a long period of time you will be dollar cost averaging.Never invest money unless you are okay with losing it. When it comes to investing, there are no guarantees. Understand that there is years of data that shows an upward movement of the markets. Is it guaranteed to stay moving upward? No. Is it possible it will continue on the trend? Totally. Investing is about using the power of compounding interest to grow your wealth, when you finance a purchase, you are guaranteed to be paying the interest. By investing, you are unlocking the opportunity to possibly get paid interest.
Start young. If you have a goal of accumulating $ 1,000,000. The amount you need to save annually goes go dramatically. See the example below:
If you have 30 years you need to save $10,586.40 annually.
If you have 20 years you need to save $24,392 annually.
If you have 15 years you need to save $39794 annually.
This assumes a 7% annual return.
The behavioral aspect of saving early pays off later as you be accustom to having a lower amount to spending for daily expenses which really helps in managing expectations. Have older couples re-adjust their spending patterns latter is very difficulty because the habits are usually in place for decades.
Save enough to at least get the company match on your work plan. This is free money.
If you have a ready started working and save little to nothing. Start with 1 or 2% and subsequently increase the amount you save when you get a pay raise.
Don’t neglect your employer’s retirement plan. Allocating 5% -10% of your income to a 401(k)or SIMPLE IRA that offers matching contributions is possibly the best way to accumulate wealth.
Assume that you earn a starting salary of $40,000 and your employer offers a 3% matching contribution on your annual salary if you participate in the company’s retirement plan. This benefit amounts to a tax free raise of 3%. Or you might consider it to be like a built-in investment return on the funds you invest.
If you contribute $2,500 annually and your employer kicks in $1,200 then your assets have an automatic capital gain of 48% on your annual contribution amount. This is a return that every Wall Street hedge fund manager would love to have.
Keep your investments simple. Until you gain some experience in investing you would be wise to invest money into asset allocation funds or target date funds. If your retirement plan offers target date funds find one that matches your risk tolerance.
As a young investor it’s likely that a fund that holds at least 70%-80% in stocks is a fund that would match your risk tolerance. Because the funds provide broad diversification and consistent asset allocation strategies they are perfectly acceptable for 100% of your investment amount.
The only caveat is that it is best to identify a fund that is low cost (no more than .25% -.75% in annual expense ratio) and is not considered to be “actively managed”.
The best advice for young would-be investors is just to get started. The longer the time horizon, the better chances of achieving large returns.
One of the biggest mistakes many investors make is trying to time the markets. The problem with that is that you have to be right twice (when to enter, when to get out). If you've found a stock that looks promising (solid management, good earnings potential), buy and hold for as long as makes sense.
Too often, investors focus on the short term, panicking when the markets correct and sell. Huge mistake. Think of it like buying a home. Buy when home prices are low, sell when they're high. Most investors do the opposite with stocks, unfortunately.
Common Themes For Beginner Investors
These 13 experts in financial planning, investing, and wealth management all shared several common themes that new investors should focus on:
1. Automation: Most of the experts shared thoughts on automating savings and investing. It's one of the easiest ways to get started investing and be consistent at it over the long run. We are huge believers in automation, and have a great guide to setting up an automatic IRA if you want.
2. Take Advantage Of Your 401k: Many of our experts shared how new investors need to take advantage of their employer's plans. Investors need to remember that this is free money, and by taking advantage of an employer match, it goes a long way in boosting returns. Jason Hull also reminded investors not to be trapped by the dollar amount of your company's match. Contribute more and boost your savings!
3. Be Mindful Of Fees: Finally, many of our professionals reminded readers to be mindful of investing costs and fees. This can be in the form of financial advisor costs, or ETF or mutual fund expenses. We love using FeeX to analyze our investments to ensure we aren't overpaying in fees.
What advice do you have for beginner investors?
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him here and here.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.