Recently, I was looking at buying a new electric toothbrush. The one I have now is pretty loud. Do you know how many electric toothbrush options there are?! Because I cared about sound, I found myself watching YouTube videos of people brushing their teeth. Yes, it was gross. After an hour (ashamed it went on this long), I was overwhelmed with the choices and quit my search.
Figuring out the investing process is like shopping for anything nowadays – there’s a bunch of choices, and it turns into information overload. However, like brushing your teeth, it’s important for your (financial) health.
Starting to make money? Just got a job that offers a 401k? Want to grow your net worth? Investing your money early and smartly can help you accomplish your financial goals faster.
If you’re new to this whole concept of “investing,” first make sure you’re ready to invest.
We’ll hold your digital hand as you set up your retirement or brokerage account, develop an investment hypothesis and feel that powerful rush of watching your money work for you (with some help from unicorn math magic, aka compound interest).
Step 1: Open an account
If you have a job that offers a 401k, then you already have an investing platform at your fingertips.
When you started, you probably were given some paperwork or an email to the company’s platform where you can create your account, set your password and see your investment options. Here is also where you set your contribution amount.
Contribution: How much of your paycheck (pre-tax) is automatically sent to your 401k
For furious savers, you want that percentage as high as you can reasonably sustain it. If your company does a matching program (aka free money), it’s highly recommended you contribute as much as they will match.
For non-401kers, you have a couple of options. You can either set up a brokerage account or your own individual retirement account (IRA). The major difference between them is when you want to use the money and how you will be taxed.
It’s recommended to max out your retirement savings accounts before you forge ahead with a brokerage account (Because IRAs have tax benefits).
However, managing a small amount of money in a brokerage account CAN be a great way to feel like an #investingboss and build confidence trading stocks and bonds.
For longer-term savings and account growth, though, an IRA is the best place to start.
There are lots of places you can open your IRA account; the bank you keep your savings account with might even offer one. Fidelity, TD Ameritrade, Vanguard, Charles Schwab, and Ally are names you’ve probably heard of that offer them.
There’s a variety of options and some differences between them, so do a little bit of research. Make sure you look out for account minimum fees and commission prices.
But don’t stress about choosing between account providers too much, or you might never pick one (like shopping for electronic toothbrushes).
Just give it your best decision-making skills and dive in.
Step 2: Figure Out Your Investing Goals
When do you want to retire? What are you saving for? What is a reasonable contribution amount based on your income?
These are necessary questions you need to answer to figure out how you will use your investment account. Depending on your investment goals, you’ll approach your investment strategy differently.
For starters, figure out how much money you can reasonably plop into your investment accounts each week/month/quarter. Being consistent with the amount you put towards your savings is key.
(Sigh. Consistency is boring but crucial for so many things in this life. Like dental hygiene.)
Curious about your risk profile? Read about picking asset allocation here.
Step 3: Figure out what to buy
You have your account. You’ve figured out your goals. Now what?
Time to shop! But this isn’t mindless, buy it and try it kind of shopping.
Purchasing investments should be done with care since investing does come with risk, and some investment purchases could come with transaction fees if you back out too soon (like mutual funds or ETFs.)
Many many investors recommend newbies invest in low-cost diversified index fund ETFs.
To help you out, here are the names of some popular index ETFs you can buy in under 5 minutes:
- VOO: Vanguard S&P 500 ETF
- FNILX: Fidelity Large-Cap Index
- IVV: iShares Core S&P 500 ETF
- QQQ: Invesco NASDAQ-100 Index
Wondering what S&P and NASDAQ mean? Deets here.
Diversification
It’s best to diversify where you put your money. In other words, buy lots of different assets so that if one investment fails, all your eggs aren’t in one bad basket.
Some key points of diversification:
- Diversify between domestic and foreign
- Diversity between assets
- Diversify between industries
- Diversify between big and small companies
This might sound like a lot of buying. Luckily there are investment products that do this for us. Mutual funds and ETFs offer diversified funds. There are also diversified bond funds. If you don’t know exactly where to start, index funds are an easy way to get overall market exposure.
Diversification won’t help with global or domestic market downturns when index benchmarks plummet, like the 2008 financial crisis, 2001 9/11 terrorist attacks, the 1990s dot-com bubble, or world-wide pandemics (looking at you COVID-19.)
Sad but true: things like that will likely keep happening over of the course of your investing career.
Best you can do is pay attention to the markets, and when the ship starts to really sink, start to think about finding safer waters (like high-rated bonds). In cases when the market sinks a few consecutive days without a clear reason, it’s usually best to sit tight. Remember, you’re in this for the long-game.
Step 4: Patience and Monitor
Once you set up your investment account, it shouldn’t require daily, or even weekly, check-ins. Maybe once or twice a month, check in on your investments and see if you need to readjust anything. Remember, it’s going to take time for your account to grow. The more you contribute, and the more often you contribute, the faster it will grow.
Investing your money can be scary stuff. What if the market crashes? What if you make the wrong investment decision? Yes, there’s risks to it. But there is a smart, cautious way to go about investing to manage that risk and help you achieve your #lifegoals. Money is freedom.
RECAP
How to Invest:
Step 1: Open a retirement account or use a pre-existing 401k you have through your corporate job
Step 2: Decide how much money to contribute each paycheck. Set up automatic payments. Decide how much to invest in stocks vs bonds.
Step 3: Buy diversified assets like index funds.
Step 4: Don’t freak out when market drops. Monitor investments once or twice a monthly.
Also, remember to brush and floss.
