Since personal financial education is a critical part of education that gets left on the cutting room floor of most school districts, it’s normal to feel overwhelmed and unsure of how to invest. We all feel the pull to “beat the market” and to ensure that our investments are performing at an acceptable level, so often we wait for the perfect moment to invest or that shining stock that you can sell for 10 times what you bought it for. These are all good things to strive for, but for most of us, this opportunism can really hurt us.
What’s Your Investing Style?
If you love investing and spending your spare time shorting stock then by all means, go for it. This type of investing can have huge windfalls if the market breaks in your favor, but it requires a lot of effort and attention be paid to individual companies and the economic environment. If, however, you’re part of the majority that knows they should be investing but have no interest in managing their portfolios on a regular basis, there are many better alternatives available to you today. Think about what kind of investor you are. You may aspire to keep up with the markets on an hourly basis and react accordingly, but does your job and life really allow you the time to do that? If the answer is “no”, maybe it’s time to start letting your investments run themselves. You can always change how you invest if life slows down and you find the time to more actively manage your portfolio.
What’s Really Important?
Overall, what’s really important is that you’re investing as early and as regularly as you can. The magic of compound interest and long-term markets gains is typically more powerful than investing late and hoping to choose the right investment that will propel you to wealth. The latter often forces you into risky positions that you otherwise would have chosen to avoid.
If you don’t know where you ultimately want to invest your money, just invest it somewhere until you are able to do your research. Some interest is better than none during this time. By leaving those funds in your bank account instead of investing them somewhere, you are not only losing the time that interest could have been accruing, but your money is also being devalued by inflation every second. Investing is your best bet to beat inflation and then some.
Also, try to automate monthly or bi-weekly payments that come out of your banking account on the day you normally receive your paycheck. By setting even small automatic payments you will be surprised at how a small amount can grow over time, and if you are keeping a budget and assuming this money will be gone at the beginning of each month, you can invest without even missing those few additional dollars.
How to Easily Invest
So what are some helpful websites to get your investments started today? There are a bunch of great sites out there depending on what you’re looking for. First think about how much you are looking to invest. Personally, I’ve been using and recommending Betterment for a few years now. It’s a great way to get started investing without feeling overwhelmed with your lack of knowledge. Their dashboard is very intuitive and illustrates your portfolio growth in an easy to understand way. It also allows you to create as many accounts as you would like and assign them to your individual goals. I even keep part of my emergency fund in here since one of the best features is a simple formula where you can tell each account how much you would like invested in stocks and how much in bonds. For something like an emergency account, I tend to go heavy on bonds since they’re much lower risk. Then for other accounts, if you need a fast rule for allocating between stocks and bonds, you can use the “100 - Your Age” rule.
The “100 - Your Age” rule essentially works like this: Say you’re 30, 100 minus 30 will leave you with 70% of your account that should be invested in stocks. You will want to remember to change your allocation every few years, however, to lower the amount allocated to stocks. The idea behind this is that your portfolio should be adjusting with your economic picture as you near retirement. By the time you reach retirement, you should have tapered your risk so that you can safely maintain the income you need for your retirement. Obviously, it doesn’t always work out that way, but that’s the intention behind the “100 - Your Age” rule.
While I personally like Betterment, they don’t have the lowest fees compared to other services if you’re investing less than $10,000. If you’re starting really small, take a look at this great article The Washington Post published on some of the low cost tech solutions you can use to start investing today if you have $100 or less. It does a great job of breaking down the cost and benefits and can serve as a great resource if you’re just not sure how to even get your money into an investment account.
Alternatively, if you are looking to invest more than $10,000 you may want to go with something like a Vanguard fund. The higher your investment, the lower the cost of your investments. In Vanguard’s case, the mutual funds you invest in all have cost ratios associated with them. This is the cost that it takes to run and keep that mutual fund balanced (essentially someone else is doing the research and diversification for you). If your investment exceeds $10,000 you will automatically qualify for a reduced cost structure which is important to consider when you are leaving your investments in someone else’s hands.
You Can Always Adjust Later
Always remember that you can change your mind and your portfolio. If you find you have more time to actively manage your portfolio or you started with a small investment, but now have enough to reap the benefits of the $10,000+ Vanguard accounts, it’s usually surprisingly simple to reallocate or transfer this money. The decisions you make now don’t have to be final, though you will want to consider the tax consequence of withdrawing money from these accounts. The most important thing to remember is to get started ASAP. It’s better to have your money working for you in some capacity than not at all.
Written By: Lindsay Dell Cook
Lindsay Dell Cook is a CPA, writer, and founder of Budget Babble. She lives in Philadelphia with her uber supportive husband, and enjoys taking their adorable mutt for walks or reading a good book while buried under a pile of cats.