Please note: We are not investment advisors, and nothing we say here is intended to be or should be taken as investment advice.
Please read the information in our Terms of Service and the Disclaimer at the bottom of each page, and make your own investment decisions based on your own financial situation, and in consultation with your own financial professionals. The information below is presented merely to describe the investing process generally and to raise some of the basic issues in a general way.
I. BEFORE YOU INVEST:
A few words about risk
- All investments involve risk. Markets are unpredictable. They will go up and down based on things that are completely out of your control. This can include
- global events
- economic forces
- extreme weather
- political climate
- regulatory change
- policy changes
- news events
- technological innovation
- cultural trends
- corporate fraud
- no apparent reason at all (market scare, etc.)
- It is impossible to list all conceivable sources of risk. The point is that investing means taking on risk, including the risk of possibly losing your entire investment.The reason you may take out more than you put in is that you are being compensated for taking on this risk. More risk may mean a higher return, but it doesn’t always work out like that. The general rule: don’t invest more than you can afford to lose, as you could lose all of it.
- Just because the markets have been kind to many long-term investors in the past, there is no guarantee whatsoever about future results. At certain times, the markets have all but collapsed (e.g., the Great Recession and the Great Depression), but so far, over the long haul, they’ve been good to those who are patient.
- The last financial crisis caught many financial professionals off-guard, and it’s certainly possible (or likely?) that the next one will as well. There is no crystal ball or magic fortune cookie numbers. (And if people tell you they can predict the future, and they’re looking to buy the Brooklyn Bridge, tell ’em we got a guy.)
- Risk is one of the reasons why investing is not for everyone. Some people don’t have the stomach for it. They don’t like watching the numbers go up and down, knowing that their net worth can plummet unexpectedly on any given day, seemingly at the whim of the day’s news cycle or other factors beyond their control. They’d rather keep their savings in FDIC-insured products, like savings and money market accounts, and other very safe investments. That’s fine, but they’ll probably have to save a lot more to reach their magic retirement number.
- So therein lies the conundrum. Play it safe and you’re probably not going to keep up with inflation. Take on market risk and you are subject to the risk of loss in a downturn. And there will be downturns.
Some ways to manage risk
If your mind goes down the market-crash-and-burn rabbit hole, there are a few things to consider:
- If you start early and won’t need the money for retirement (or other long-term goals, which is a relative and personal term) in the next 10 or so years—there’s no hard-and-fast number here, so you’ll have to decide this one for yourself—you have the benefit of time for the market to recover. Admittedly, though, there’s no guarantee that all market downturns will turn back and recover again, even though they historically always have. On every financial disclaimer is the mantra: Past performance is no guarantee of future results.
- Risk comes in many flavors: it is not an all-or-nothing proposition. You can research investments that are high risk (like emerging markets), moderate risk (like certain equity investments), or lower risk (like certain bonds). You have to think about your personal tolerance for risk and adjust your investments and asset allocation to match your own risk tolerance.
- Diversification among different asset classes, sectors, and risk levels is one way to manage your overall risk. In theory, this should smooth negative swings in any one category or asset class (assuming the markets don’t tank). As the saying goes: don’t put all of your eggs in one basket.
- Another way to help manage your risk is to slowly allocate capital to the market and build confidence. Many advisors recommend that you do not deploy all of your capital into the markets at once.
- Don’t invest in anything you don’t understand. (Looking at you, cryptocurrencies, as well as specific futures and other contracts.)
- The risk of staying out of the market entirely is that you are probably losing ground over time because your money is not keeping up with inflation. So you have to measure market risk against money-in-your-matress risk and see which side wins out for you.
- This often-quoted passage from 2008 by one of the most-admired traders in the world is particularly apt:
In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.“
Buffett, Warren E.,“Buy American. I am.” New York Times (Oct. 16, 2008).
- As an update to Warren Buffett’s 2008 Op-Ed piece, the Dow has more than doubled since then.
Another way to look at it
There are lots of financial experts out there: investment advisors, CFPs, brokers, financial analysts, financial journalists, economists, MBAs, CPAs, wealth management advisors, chartered financial analysts. . . the list could go on. These experts know a lot about markets and returns. But at the same time, you could argue that they don’t know anything. The reason for this is that markets aren’t always rational; they don’t always follow rules or patterns. Experts may point to charts and formulas and trends that show the market will go be going up or will be going down, but at the end of the day, the market gets the last word (and the last laugh).
If people invested at the right time and did well in the market, they think that their advisor was a genius. If people invested at the wrong time and lost money, they think their advisor did a bad job. Both of these views are wrong.
Before investing, consider lots of factors, including:
- Do you believe in the economy remaining strong over the long term? (global economy, U.S. economy, etc.—depends on where and in what you’re investing)
- Do you acknowledge that there will be large downturns from time-to-time, but you believe in the strength of the economy to recover and come back stronger, even if that takes a number of years?
- Do you have the benefit of a long-time horizon to ride out these probable negative events?
- Do you have the stomach to ride out these probable negative events?
- Do you think that there will not come a time when the economy (global or U.S.) will crash and burn, and fail to recover?
- Some U.S. investors invest in foreign and U.S. markets to diversify their portfolios and others choose to invest only in the U.S. markets and diversify in other ways. Again, this is your call.
Deciding whether to invest is a personal decision and something that you’ll have to figure out on your own.
Starting to invest early
- The earlier you start investing, the longer you will have to take advantage of compounding.
- The later you start to invest, the more you would need to invest to try to reach the same target.
- A difference of even a few years can make a large difference in ending value, due to lost compounded interest.
- If a person saves and invests $5.25/day at a 10% return compounded monthly until age 65:
- beginning at age 22, the total would grow to $1,368,191
- beginning at age 25, the total would grow to $1,009,892
- beginning at age 30, the total would grow to $606,285
- beginning at age 35, the total would grow to $360,977
- beginning at age 40, the total would grow to $211,882
Even though you should consider investing as early as you can, there are still a few prerequisites you should think about before you invest:
- You should pay off any high-interest non-mortgage debt, whether student-loan debt, credit-card debt, or otherwise. (If you are paying a higher interest rate than you would potentially be earning in the market, it would be better to use those dollars to pay off your high-interest debt than to invest in the market.)
- If your non-mortgage debt is low-interest, that’s a different question and something you’ll have to consider on your own, weighing in factors such as:
- the total amount of your low-interest debt;
- the current market conditions;
- your ability to continue to make monthly debt payments in full and on time;
- the term in years of your low-interest debt (long-terms student loans, for example, can last 20 years or more);
- your risk tolerance and the type of investments you are considering (high-risk vs. traditionally safer investments);
- your current income level;
- your current and expected expenses;
- your overall financial situation; and
- other financial considerations unique to you.
- In the perfect world (which we don’t live in), it would be ideal to be debt-free (excluding mortgage debt) before you invest beyond any tax-advantaged retirement plans.
- You should have an emergency fund in place to cover at least 6-9+ months of expenses in case of job loss, health emergency, etc. (See “Invest for the long term” and “Step 6 in “10-Step Financial Fitness Workout“.)
- You should also have a savings cushion for other unexpected expenses (such as broken appliances, car repair, new roof, etc.). (See Step 6 in “10-Step Financial Fitness Workout.”)
Goals to strive toward
Although everyone’s personal financial situation is different, many financial professionals would suggest that people consider the following:
- If you have access to a 401(k) plan or other employer-sponsored retirement plan:
- Sign up for your company-sponsored retirement plan as soon as you are eligible. Don’t assume you are participating in the plan by default. Employer plans are all different, and you need to find out the terms that apply to your company’s plan.
- Contribute at least as much as the amount needed to qualify for the maximum employer match. If you can only handle less than that amount, try to increase your contributions over time until you have at least qualified for the maximum match amount. Don’t leave free money on the table.
- After you have contributed up to the full match, your ultimate goal (after contributing to any Roth IRA you may also have) is to continue to increase your contributions over time until you are able to max out your 401(k) or other employer-sponsored retirement plan (i.e., contribute up to the maximum allowed) every year.
- In addition to any employer-sponsored plan you may be in:
- Consider opening a Roth IRA (if you are eligible), a traditional IRA, a SEP IRA (if you are self-employed or have extra income from a side hustle), or some other type of retirement account. (You can read more about the different types and eligibility rules here); and
- Increase your contributions over time until you are able to max out your IRA(s) (i.e., contribute up to the maximum allowed) every year.
- Once you have maxed out any employer-sponsored plan and IRAs OR if you want some flexibility from a non-retirement account:
- Look into opening a brokerage account for general investing to give yourself some flexibility that you won’t have with a retirement account (for example, no upper limit on amount invested and no restrictions on timing of withdrawals).
- If you have an employer-sponsored retirement plan AND you are also eligible for a Roth IRA, you might want to consider allocating your investment dollars in this order (subject to your personal financial situation and your specific needs):
- 401(k) or equivalent plan up to the company match;
- then max out your Roth IRA to take advantage of future tax-free earnings;
- then max out your 401(k) or equivalent; and, finally
- then any taxable brokerage investment account as needed for flexibility or other reasons.
The reason why step 2 would theoretically come ahead of step 3 in many cases is that tax-free earnings with after-tax contributions are usually better than tax-deferred earnings with pre-tax contributions. (Your tax bracket may be lower when you are younger than when you are ready to retire, but that’s not necessarily true in every case. You also should consider whether you need more money in your pocket earlier on or whether you’re better off paying the tax now and withdrawing the funds tax-free later on.) You should speak with an accountant or other tax professional to address your particular financial situation and needs so you can decide what would be best in your case. See Tax Preparation on this page.
II. GETTING STARTED
What type of account are you looking for?
When you open a brokerage account, you’ll need to indicate what type of account you want to open.
- Is this a retirement account, a brokerage account for general investing, or some other type of account?
- A retirement account is a tax-advantaged account like a traditional IRA, Roth IRA, rollover IRA, etc. These provide tax-deferred or tax-free earnings depending on the type of account. You will need to select which type of retirement account you want to open. (See here for details on these and other retirement accounts.)
- A brokerage account for general investing is a regular, non-retirement, taxable investment account. These accounts have the flexibility of allowing you to withdraw funds anytime without penalty. And unlike retirement accounts, there are of course no upper limits on the amount you can invest each year. If you hold the investment for less than one year, you pay tax on any short-term capital gains at the equivalent of your ordinary income tax rate. If you hold the investment for more than one year, you pay tax at the long-term capital gains rate of up to 20%, depending on your tax bracket.
- There are many other types of accounts, such as 529 accounts for educational expenses, custodial accounts, etc. You can find information about these accounts from the brokerage firms themselves when you go to set up an account.
- You will also need to indicate if the account will be an individual account or a joint account.
Managed account vs. robo-advisor
If you are knowledgeable about the market and investing, stay current with financial news and events, and feel comfortable making investment decisions on your own, then you might want to consider saving yourself some fees by handling your investments yourself. Fees will still be charged for investments in things like mutual funds and ETFs (these fees are much lower than most managed account fees), but there would be no advisory fees on top of that.
On the other hand, if you don’t know the difference between an ETF and a WTF (or even if you do), you might want to consider a managed account or a robo-advisor:
1. Managed account
- With a managed account, you will be paying one or more financial professionals to actively (as the term says) manage your account for you.
- In return, you will pay a fee which often starts at around 1% of assets under management (may be lower or higher depending on the amount being managed and the firm or advisor used).
- Managed accounts typically have a minimum investment amount, which may exclude many potential clients.
- Some people think managed account fees eat into returns unnecessarily. Other people think the value provided by an experienced financial professional more than makes up for the fees charged. This is something each person has to decide, based upon the size the portfolio, level of financial knowledge, financial situation and goals, investing style, personality, and other factors.
- If you want guidance but don’t want to pay the usually higher fee of a managed account, then a robo-advisor may be for you. (See our section on Robo-Advisors.)
- Robo-advisors use algorithms—based on input from you about risk and other factors—to come up with an asset allocation for you that is automatically rebalanced as the market changes.
- Contrary to popular belief, there are still humans overseeing, rebalancing, and perfecting your allocations to various degrees. In some cases, they may even shut down trading if they think it is for the benefit of the investor, such as in a massive market plunge.
- Two of the leading robo-advisors are Betterment and Wealthfront. Algorithmic advising has become so popular recently that many of the traditional brokerage firms have launched their own robo-advisor solutions. Look here for our ever-growing list.
What broker do you want to use?
- If you opt for a managed account, you will be working with a financial professional in person or by phone (or both).
- If you choose a robo-advisor, the process is done through an app or online (with some offering varying degrees of human assistance).
- If you decide to handle your investing on your own, you can manage your investments completely by app or online, or you can speak with financial professionals at a brokerage firm in person or by phone (or any combination thereof) for information but not investment advice.
Some of the leading robo-advisors are listed here.
Some of the leading online brokers include (in alphabetical order):
3. Some of the leading micro-investing apps include (in alphabetical order):
How much do you want to invest?
- Investment amounts are a very personal decision, based on a number of factors, including:
- your current financial situation and long-term financial goals;
- your income and likelihood of promotion or advancement;
- potential for additional income from a second income stream or side hustle;
- amount of current savings and ability to increase savings rate;
- current expenses (necessary and discretionary);
- current market conditions;
- other investment plans already in place such as an employer-sponsored retirement plan or an IRA; and,
- other relevant life and family matters.
- As noted earlier, you should aim to have at least paid off all your high-interest debt and to have an emergency fund in place before beginning to invest.
- If you are new to investing, you may want to start with a small amount (even 1% of your gross income) and then increase that if and when you are able down the road.
- Some employer-sponsored retirement plans have an automatic-invest (default) option of around 3% of gross pay, which increases by a set percentage (sometimes 1%) every year unless you indicate otherwise.
- For some people, a good target to aim for is to ultimately contribute about 10-20% of gross income to retirement investing (including any 401(k) contributions and any company match). This target may be hard to achieve, especially when you are just starting out. (Some people find ways to save 25%—or much more—of their gross income and have been able to retire much earlier or otherwise achieve financial independence much sooner with such higher savings rates.)
- If your investment is in an employer-sponsored retirement plan that offers a matching program, you should try (VERY HARD) to invest up to the full employer match. These are benefits that are part of your total compensation package, and it would be a shame to leave that “free money” on the table.
- Ideally, you also want to find a way, if possible, to max out any employer-sponsored retirement plan contribution amounts as well as IRA contribution amounts. If you cannot contribute up to the maximum right now, find an amount you can handle and then consider making a plan to increase that incrementally over time (an extra 1% or more each year until you reach the max?). If you increase these investment amounts in small steps, you may not feel the pinch as much.
What is your risk tolerance?
Risk tolerance (the amount of risk you are willing to take on through investing) is a bit of a nebulous term and is like pinning the tail on the donkey. It’s one thing to say you might want to be very aggressive in your investing, but it’s another to know how you would sleep at night if the market were plummeting. Would you be likely to panic-sell, locking in huge losses, or would you run out to buy more shares while the price is so low? On the other hand, it may be comforting to tell yourself you want a very conservative approach. However, how would you react to decades of returns that are so meh that you don’t see a realistic way to reach your financial goals?
Assessing your own risk tolerance is part art, part science, and maybe part alchemy. It involves knowing yourself and your financial goals but also being realistic to the ups and downs of the market. Factors such as your age, time until retirement, and overall financial picture also come into play. Some advisors use hypothetical questions to try to assess risk tolerance. (For example: What would you do if your investment fell significantly over the course of a month? Sell? Hold on and ride it out? Buy more at a lower price?) Others ask questions about your comfort level with investing, willingness to take on high risk for high reward, and other questions that seek answers to different investing scenarios. These types of questions are helpful to get people thinking about their tolerance for risk, but some questions may speak more to fear, insecurity, or lack of confidence than they do to actual risk appetite. At the end of the day, everyone has to decide the right risk level for himself/herself.
Some basic terms you should know
Before you decide what you might want to invest in, let’s get some preliminary definitions out of the way. This is not rocket science:
- When you buy stock or shares in a company, you are buying an ownership interest (equity interest) in that company. Stock is about ownership rights, including the right to receive dividends, when and if issued.
- When you buy a bond, you are lending money to an issuer of the bond (could be a government, corporation, or municipality). The bond represents debt to the borrowing entity. You are paid fixed-rate or variable-interest on this loan until the principal is repaid, which can be in perpetuity.
- A mutual fund is a fund that invests in a portfolio of securities with money pooled from different investors. The price of a mutual fund is set at the end of the trading day and, while you can place an order throughout the day, the official buy or sell of the mutual fund occurs at the end of the day at a fixed price.
- An ETF (Exchange-Traded Fund) is like a mutual fund that is traded on an exchange. The price of an ETF varies throughout the trading day, and you can buy or sell an ETF anytime during the trading day.
- Expense Ratio (ER) is the fee charged to investors in a mutual fund or ETF. Expense ratios in ETFs are usually lower than in regular mutual funds.
- Actively-managed mutual funds are managed by one or more financial professionals who decide what the fund invests in.
- Passively-managed funds do not need to be actively managed because the components of the fund track an index or a segment of a particular market. Index funds, for instance, are passively-managed funds that track and mirror a particular index, such as the S&P 500 Index. ETFs following this strategy have been gaining popularity due to how they provide low-cost access to broad market exposure.
- An index is a statistical way to measure or monitor changes in a particular market or section of the market by tracking changes in a representative sample of that market.
- The S&P 500 Index, for example, tracks the performance of 500 leading U.S. companies and covers about 80% of the large-cap equities market. (Large cap means large market capitalization. Market capitalization is just # of shares outstanding multiplied by current price per share. If Google had 1000 shares outstanding and the current price was $100—dream on— then the market capitalization would be $100,000. Most of the blue chip firms you have heard of (Amazon, IBM, etc.) are on this index.
- Asset allocation refers to the percentage of each security type or asset class that makes up your total portfolio. For example, an asset allocation of 1/2 stock and 1/2 bond would mean your entire portfolio is 50% invested in stocks (whether domestic, international, or both) and 50% invested in bonds.
- Diversification means investing in different types of securities, sectors, and asset classes so that any large negative swing in one area won’t have as large an impact on your total portfolio. People who invested all their “eggs” in tech stocks, for example, in the late 1990s had more than egg on their face when the tech bubble burst.
- Rebalancing means re-adjusting the asset allocation in a portfolio (moving funds from one asset class to another) due to changes in the market, in order to achieve the asset allocation you want to maintain. For example, if your allocation to tech stocks soared, and the others remained flat, you would be over-allocated to tech, and might want to sell some of those stocks and reinvest in other categories to retain your allocation strategy.
- FANG or FAANG: Have you seen these acronyms in the financial media lately? This has nothing to do with vampire teeth. The FANG acronym represents the high-performing stocks of Facebook, Amazon, Netflix, and Google. This acronym was coined by Jim Cramer of CNBC’s Mad Money. FAANG, which adds Apple stock to the group, is often quoted in the media to show how these top stocks are performing. Finance loves acronyms, like the PIIGS (Portugal, Ireland, Italy, Greece and Spain), who were expected to fail, or the BRICs (Brazil, Russia, India and China) that were expected to take off in the late “oughts.”
How to open an account
- If you’ve considered the issues discussed already (and we’ll go into more detail on the Investing tab), you can open an account many different ways, in about 20 minutes. (However, the account background check and the transfer of money to your brokerage account may take a few days).
- Opening a brokerage account can be done through:
- mobile app (for online brokerage accounts or for accounts through a robo-advisor);
- online (and many provide phone assistance, if needed); and
- in person at a brokerage firm’s office.
- If you are opening an account using an app or online, simply follow the prompts which work step-by-step through some or all of the issues addressed above.
- If you are opening an account in person or with telephone assistance, the financial representative will lead you through the same process.
- You will need to fund your account by providing access to your bank account.
- You also need to provide your name, address, citizenship status, social security number (for tax and identification purposes), and answer a few other basic questions.
So here’s where the interesting part comes in. You have a sense of your risk tolerance and you know how much you want to invest, but you need to decide what to invest in. Individual stocks or mutual funds? Stocks, bonds, or some other asset class? Domestic or international? Mutual funds or ETFs? Actively-managed or passively-managed funds? What should your asset allocation look like?
Arrgghhhhh, maybe you should just put your money under your pillow and see if the tooth fairy will show up?
Investing for the long-term doesn’t have to be intimidating. Whether you move forward with a human advisor, a robo-advisor, or on your own, the best thing you can do for yourself is to get educated.
- For starters, there is a ton of information on the the major brokerage firms’ websites—and in financial media, books, and blogs—to help beginning investors understand the terminology and workings of the market and various investment products.
- There is no one-size-fits-all approach. Everyone’s needs and financial situation are different.
We can’t tell you what you should invest in, but we can describe some of the different approaches that some people follow (and you can take it from there).
A look at stocks and bonds
- As a general rule: stocks are higher risk and higher reward; bonds are lower risk and lower reward. (Although as Mark Twain is credited as saying: “All generalizations are wrong, including this one.”)
- There’s another saying (not sure who first said it) that stocks help you eat well and bonds help you sleep well.
- Some people think one way to begin investing is to choose a stock-to-bond asset allocation based on your age, as follows:
- Deduct your age from 100, and that is the percentage you should be invested in stocks, with the balance in bonds. So, e.g., if you are 30 years old, under this approach, a target asset allocation would be 70% stocks:30% bonds.
- Arguing that our retirement years will be longer than they used to be, due to greater longevity, some people suggest deducting your age from 110, and that is the percentage you should be invested in stocks, with the balance in bonds. So, e.g., if you are 30 years old, under this approach, a target asset allocation would be 80% stock; 20% bond.
- Some people use 120 as the measuring stick. Using that number as a guide, a 30-year old would target an allocation of 90% stock:10% bond.
- Some people think that because younger investors (in their 20s and 30s) have plenty of time for down markets to correct themselves, these investors should be heavy or all in on stock, and much lighter on bonds.
- Some people think you should opt for a target date fund (a fund with a target date tied to when you think you will retire). These funds automatically decrease the percentage of funds allocated to stocks and increase the percentage allocated to bonds as the retirement date gets closer (i.e., a higher percentage in bonds as a person gets older). So, for example, if you are 30 today and you think you will retire when you are 65, you would look at a target date 2050 or 2055 fund. (The dates are typically every 5 years.)
Those are 5 different approaches based just on age, and there is no single right answer. You have to know yourself, know your risk tolerance and your long-term goals, know your financial situation, and decide this for yourself.
What about index funds?
- The news is full of stories about how “plain vanilla” low-cost index funds that track the total market are rapidly entering people’s portfolios.
- The rationale is that it’s hard to try to beat the market. With an index fund that tracks the market, you can in essence “be” the market.
- Index funds provide you with broad exposure to different markets at a low fee.
- Their lower fee may make up for, or help you beat, the returns a manager may make (even if a managed account were able to outperform the passively-managed index fund).
- Warren Buffet (a huge fan of low-cost index funds) made a number of comments about them in his 2017 annual letter to Berkshire Hathaway shareholders, including:
- “Investors, on average and over time, will do better with a low-cost index fund than with a group of funds of funds.”
- “Over the years, I’ve often been asked for investment advice, and in the process of answering I’ve learned a good deal about human behavior. My regular recommendation has been a low-cost S&P 500 index fund.”
- As the market changes and different funds or asset classes change in value at different rates, the percentage mix that you began with will change with the market. Rebalancing means re-adjusting the allocation (moving funds from one asset class to another) to achieve the asset allocation you want to maintain.
- For example, suppose you want to maintain an asset mix of 50% stocks and 50% bonds, and you invest $1,000 ($500 in a stock fund and $500 in a bond fund). If after X years, the stock investment is now worth $1,000, and the bond investment is now worth $600, your asset allocation is now 62.5% stocks ($1,000/$1,600) and 37.5% bonds ($600/$1,600). In order to “rebalance” your portfolio back to 50/50, you would move $200 out of the stock fund and put it into the bond fund. You would now have $800 in each, which is back to an asset allocation of 50% stocks and 50% bonds. That movement of money to re-adjust the asset mix is called “rebalancing.”
- The general advice from most brokers is that you should look at your portfolio quarterly (not daily, not yearly). Market movements may mean it’s time to rebalance to maintain your diversification, which is one of many ways to reduce risk.
- Robo-advisors: You might consider using a robo-advisor if:
- you want a professionally managed account without the higher price of a personal financial advisor;
- you want to include a greater mix of asset classes in your portfolio, besides just stocks and bonds, but you don’t want to, or don’t feel confident in your ability to, do the research and analysis yourself; and/or
- you want to take advantage of tax-loss harvesting and rebalancing of your portfolio, but you don’t want to handle these matters on your own.
- Low-cost index funds that track the total market: If you are looking for broad exposure to the market at a low fee, you might consider low-cost index funds (available as mutual funds or ETFs; the latter tends to be cheaper) that track the total market. The funds are passively-managed because they are tied to an index, so the fees can be much lower than in an actively-managed fund.
- Mutual funds other than index funds: There are thousands of actively-managed mutual funds that are not tied to any index. You can review and compare features of different funds using the online comparison tools provided by most online brokerage firms, or free resources like Yahoo! Finance or Google Finance.
- Target date retirement funds:If you want to “set it and forget it,” you might want to consider target date retirement funds. These funds are targeted to the year (to the nearest 5-year period) that you expect to retire. The target date fund automatically adjusts the allocation of stock and bond holdings based upon age and number of years until retirement, so that the portfolio takes on less risk as you get closer to retirement.
- Individual company stock: Many financial professionals would say that investors should have solid experience with the market and investing in general before they consider buying stock of individual companies. Issues such as diversification, valuation, earnings, market share, product, industry trends, and many other factors need to be carefully analyzed and addressed before buying shares of individual companies. You may want to follow an individual stock and really research the company before you consider taking the plunge.
IV: SOME GENERAL THOUGHTS ON INVESTING
- Do your homework.
- Understand what you’re investing in before you invest.
- If you don’t understand something, ask questions.
- Start small.
- Monitor your progress from time to time. Don’t become glued to the day-to-day results (you WILL go crazy).
- Consider increasing your investment amounts as your finances allow.
- Markets will go up. Markets will go down. Don’t panic when they go down. Don’t be irrationally exuberant when they go up.
- Don’t invest in anything that sounds too good to be true (because there’s no such thing).
- Don’t invest on margin (using borrowed funds). That can destroy you when the markets are in a downslide.
- If you are using an advisor, you should always know how your advisor is being paid. Make sure your advisor follows the fiduciary standard, meaning s/he is acting in a position of trust, always placing your financial needs first and acting in your best interests above her/his personal financial interests.
- Don’t invest more than you can afford to lose.
- Feel good about yourself for taking a positive step towards strengthening your financial future.