How to get started in investing?
January 19, 2016 11:45 PM Subscribe
Total investment newbie in need of advice on how to get started with investments and what type etc.
I'm 32 years old and make 6 figures but I'm totally clueless (not exaggerating) with finances and investments. I don't want to just have my money sitting around in my checking account doing nothing; I want it to work for me...but how? Where do I get started?
My goal is to set aside some money towards investments and just leave it there for a long time so that it can grow. I wouldn't withdraw from it until maybe retirement. I'm risk adverse so I don't want high risk. Just low risk and steady growth. I already get 401k through my work bc they match.
I've heard of money market accounts but the interest rates are very low. I was thinking maybe mutual funds but I don't really know what that even means or where to open one or how to pick the stocks and stuff. Please advise.
Also should I use the services of a financial advisor? I think I need one since I'm so clueless about what to do with my money but because of that reason I'm afraid of being taken advantage of. Are financial advisers trust worthy on the whole? With my personal financial information in their hands would I stand a risk of getting swindled or having my identity stolen or something? Thanks.
I'm 32 years old and make 6 figures but I'm totally clueless (not exaggerating) with finances and investments. I don't want to just have my money sitting around in my checking account doing nothing; I want it to work for me...but how? Where do I get started?
My goal is to set aside some money towards investments and just leave it there for a long time so that it can grow. I wouldn't withdraw from it until maybe retirement. I'm risk adverse so I don't want high risk. Just low risk and steady growth. I already get 401k through my work bc they match.
I've heard of money market accounts but the interest rates are very low. I was thinking maybe mutual funds but I don't really know what that even means or where to open one or how to pick the stocks and stuff. Please advise.
Also should I use the services of a financial advisor? I think I need one since I'm so clueless about what to do with my money but because of that reason I'm afraid of being taken advantage of. Are financial advisers trust worthy on the whole? With my personal financial information in their hands would I stand a risk of getting swindled or having my identity stolen or something? Thanks.
Best answer: If you really feel clueless about investing, then paying a fee-only financial adviser can be a good choice. Really, though, you're a smart person and you can totally do this on your own. Not joking. All it takes is a little time and patience to learn the basics. Once you understand what's going on, you're set.
I've been reading and writing about money for a decade now, and in that time I've come to realize that most smart folks in finance recommend the same investment strategy for individual investors: Set up automatic investments into a portfolio of index funds, mutual funds designed to match the movement of the market (or a portion of the market).
It's easy to get started. Without going into the whys, here are the hows:
That’s it. Seriously. Do this and you should outperform most other individual investors over the long term. (Here's more about this investment philosophy/strategy.)
This strategy isn't just great for investing novices. Even market professionals endorse it. In his 2013 letter to shareholders, for instance, Warren Buffett outlined what will happen to his vast wealth when he dies. Most of it will go to charity; some will go to his wife. How will his wife's money be handled?
posted by jdroth at 2:46 AM on January 20, 2016 [31 favorites]
I've been reading and writing about money for a decade now, and in that time I've come to realize that most smart folks in finance recommend the same investment strategy for individual investors: Set up automatic investments into a portfolio of index funds, mutual funds designed to match the movement of the market (or a portion of the market).
It's easy to get started. Without going into the whys, here are the hows:
- Put as much as you can into investment accounts — as soon as possible. Fund tax-advantaged accounts (such as retirement accounts) before taxable accounts.
- Invest in low-cost index funds, such as Vanguard’s Total Stock Market Index Fund (VTSMX) or Fidelity’s Spartan Total Market Index Fund (FSTMX).
- If the stock market makes you nervous, or you want to spread the risk, put some of your money into a bond fund like Vanguard’s Total Bond Market Index Fund (VBMFX) or Fidelity’s Total Bond Market Index Fund (FTBFX).
- If you want diversification with less work, invest in a low-cost combo fund like Vanguard’s STAR Fund (VGSTX) or Fidelity’s Four-in-One Index Fund (FFNOX).
That’s it. Seriously. Do this and you should outperform most other individual investors over the long term. (Here's more about this investment philosophy/strategy.)
This strategy isn't just great for investing novices. Even market professionals endorse it. In his 2013 letter to shareholders, for instance, Warren Buffett outlined what will happen to his vast wealth when he dies. Most of it will go to charity; some will go to his wife. How will his wife's money be handled?
"My advice to the trustee couldn't be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.) I believe the trust's long-term results from this policy will be superior to those attained by most investors..."Are there other investment strategies that might provide similar returns? Sure. But this method is sound, easy to understand, and requires very little time to manage and maintain. You can read more about it in books by folks like Burton Malkiel and William Bernstein.
posted by jdroth at 2:46 AM on January 20, 2016 [31 favorites]
Thirding low cost index funds. Also, look into targeted retirement accounts set up as IRAs. These accounts reduce risk as you approach retirement, and the IRA reduces your taxes. There's a limit as to how much you can invest each year.
posted by geekBird at 2:57 AM on January 20, 2016 [1 favorite]
posted by geekBird at 2:57 AM on January 20, 2016 [1 favorite]
Diversify your information sources (advisors especially), and keep reading & reading, it will help you ask better and better questions from the advisors you eventually consult. Lately I've been getting a kick out of Mr.Money Mustaches "financial freedom through badassity".
You might already be a great saver, but if not, reforming discretionary spending habits can do amazing things in the long run. Try to filter through all the 'get rich quick' narratives out there, and seek sources that speak to you on smart saving (esp. cutting useless costs/consumption)/choices that support _genuine_ quality of life.
I did my best to 'go it on my own' as advised above... but I was paralyzed with too much information to actually act on it. I procrastinated for over a year before paying a one-time-fee to have an advisor help me get a more complete picture of my debts/assets/income in relation to long term goals. To me, it was well worth the cost (~300$) as 1) I asked a ton of questions, solidifying what I'd learned on my own 2) a lightbulb went on as to the consequences of saving more (literally, with graphs), and was far more motivated to do so and 3) my advisor helped me lay out simple, concrete actions/timelines that I then finally pursued on my own.
My advisor always made it clear that I was free to choose, and ultimately I did not purchase the their managed fund portfolio and instead went with low-cost fund at Vanguard, which was just fine with her too.
posted by iiniisfree at 3:28 AM on January 20, 2016
You might already be a great saver, but if not, reforming discretionary spending habits can do amazing things in the long run. Try to filter through all the 'get rich quick' narratives out there, and seek sources that speak to you on smart saving (esp. cutting useless costs/consumption)/choices that support _genuine_ quality of life.
I did my best to 'go it on my own' as advised above... but I was paralyzed with too much information to actually act on it. I procrastinated for over a year before paying a one-time-fee to have an advisor help me get a more complete picture of my debts/assets/income in relation to long term goals. To me, it was well worth the cost (~300$) as 1) I asked a ton of questions, solidifying what I'd learned on my own 2) a lightbulb went on as to the consequences of saving more (literally, with graphs), and was far more motivated to do so and 3) my advisor helped me lay out simple, concrete actions/timelines that I then finally pursued on my own.
My advisor always made it clear that I was free to choose, and ultimately I did not purchase the their managed fund portfolio and instead went with low-cost fund at Vanguard, which was just fine with her too.
posted by iiniisfree at 3:28 AM on January 20, 2016
I will also say that low risk is a mistake when you're young. You start out with moderate risk (I favor Exchange Traded Funds based on the S&P).
Part of the magic of compounding interest is that the higher the interest, the longer it's compounding the greater the returns.
Historically the S&P has returned 10%. Are there years when it plummets? Yup. Are there years when it's cranking? Yup. If you keep investing though, it averages out and it doesn't take too long before you have a handsome next egg.
Get a book like Suze Orman's updated, The Road To Wealth. Easy to read and I find that she's really good at explaining why in addition to offering solid advice.
Good luck!
posted by Ruthless Bunny at 4:06 AM on January 20, 2016 [1 favorite]
Part of the magic of compounding interest is that the higher the interest, the longer it's compounding the greater the returns.
Historically the S&P has returned 10%. Are there years when it plummets? Yup. Are there years when it's cranking? Yup. If you keep investing though, it averages out and it doesn't take too long before you have a handsome next egg.
Get a book like Suze Orman's updated, The Road To Wealth. Easy to read and I find that she's really good at explaining why in addition to offering solid advice.
Good luck!
posted by Ruthless Bunny at 4:06 AM on January 20, 2016 [1 favorite]
JD Roth is right on the money. Read more on each of his points at Bogleheads.
posted by Dashy at 5:57 AM on January 20, 2016 [1 favorite]
posted by Dashy at 5:57 AM on January 20, 2016 [1 favorite]
I agree that you absolutely can do this yourself if you want to (and everything else jdroth said). However, there are people who don't want to do all the research to get started and that's fine too. I think there are good uses of fee-only financial advisors and that is one of them.
If you do decide to get an advisor, a few things:
- "fee-only" is probably what you're looking for. This is a person who will charge you a flat rate for ongoing investment management and advice. You should not have to pay commissions or anything else. You can probably find someone who will charge you 1% or less on the value of your account.
- There is a huge variation in quality of financial advisors. Look for someone with a CFP or CFA designation.
- Nthing index mutual funds. These are funds that track an index and you can get broad coverage to all areas of the market by using them. ETFs are essentially the same thing as index mutual funds, with the main difference being that ETFs trade and are priced throughout the day on a market and mutual funds are traded and priced once a day (this should make no difference from your perspective).
- If you are using mutual funds, make sure the entire cost of the fund (called the expense ratio) is very low (no more than 1%). You should NOT pay a front-end load. If someone is trying to put you in a fund with a front-end load, you should ask them to suggest an equivalent ETF (which do not have front-end loads).
- Make sure your advisor will only use low-cost, highly liquid investments for you. There are lots of products out there right now (alternative funds, non-traded REIT's, etc.) that are very high cost with questionable performance and if the product is also illiquid (i.e. does not trade daily), then it will most certainly be something you don't need or want. I have yet to see a product like this that I think is a good choice for most everyday investors. If they try to tell you that this product can do x or y that you can't find anywhere else, don't believe the hype. In all my years studying them, I've yet to find a product like this where the so-called benefits can't be replicated by something low-cost, liquid and transparent.
Something like Wealthfront may work for you. In the industry they're called robo-advisors and they will charge you a very low fee, put you in passive index funds and rebalance on a set schedule). You won't get any personalized advice from them (e.g. tax planning things), but that may be fine for you.
Ben Carson has worked in the finance industry for years, is a huge advocate for investors, and has some great advice on how to choose a financial advisor, vetting your sources of financial advice and real financial advisors.
(IANA financial advisor but I've worked in the industry for a long time)
posted by triggerfinger at 7:35 AM on January 20, 2016 [1 favorite]
If you do decide to get an advisor, a few things:
- "fee-only" is probably what you're looking for. This is a person who will charge you a flat rate for ongoing investment management and advice. You should not have to pay commissions or anything else. You can probably find someone who will charge you 1% or less on the value of your account.
- There is a huge variation in quality of financial advisors. Look for someone with a CFP or CFA designation.
- Nthing index mutual funds. These are funds that track an index and you can get broad coverage to all areas of the market by using them. ETFs are essentially the same thing as index mutual funds, with the main difference being that ETFs trade and are priced throughout the day on a market and mutual funds are traded and priced once a day (this should make no difference from your perspective).
- If you are using mutual funds, make sure the entire cost of the fund (called the expense ratio) is very low (no more than 1%). You should NOT pay a front-end load. If someone is trying to put you in a fund with a front-end load, you should ask them to suggest an equivalent ETF (which do not have front-end loads).
- Make sure your advisor will only use low-cost, highly liquid investments for you. There are lots of products out there right now (alternative funds, non-traded REIT's, etc.) that are very high cost with questionable performance and if the product is also illiquid (i.e. does not trade daily), then it will most certainly be something you don't need or want. I have yet to see a product like this that I think is a good choice for most everyday investors. If they try to tell you that this product can do x or y that you can't find anywhere else, don't believe the hype. In all my years studying them, I've yet to find a product like this where the so-called benefits can't be replicated by something low-cost, liquid and transparent.
Something like Wealthfront may work for you. In the industry they're called robo-advisors and they will charge you a very low fee, put you in passive index funds and rebalance on a set schedule). You won't get any personalized advice from them (e.g. tax planning things), but that may be fine for you.
Ben Carson has worked in the finance industry for years, is a huge advocate for investors, and has some great advice on how to choose a financial advisor, vetting your sources of financial advice and real financial advisors.
(IANA financial advisor but I've worked in the industry for a long time)
posted by triggerfinger at 7:35 AM on January 20, 2016 [1 favorite]
A lot of this - the method you choose, whether you go with an advisor, what type of advisor, all depend on your own personal style.
Investing, and the rate of return you go after, is a lot like cycling or driving a car. The speed you go is analogous to your rate of return. The faster you go, the more risk. There are a lot of ways to make (or protect) your money, you need to find one that lets you sleep at night.
My two cents is to go with the fundamentals. Check out "the Intelligent Investor" by Benjamin Graham.
(IANA financial advisor. IANYL, but I am peripherally involved in this world)
posted by LegallyBread at 7:38 AM on January 20, 2016 [1 favorite]
Investing, and the rate of return you go after, is a lot like cycling or driving a car. The speed you go is analogous to your rate of return. The faster you go, the more risk. There are a lot of ways to make (or protect) your money, you need to find one that lets you sleep at night.
My two cents is to go with the fundamentals. Check out "the Intelligent Investor" by Benjamin Graham.
(IANA financial advisor. IANYL, but I am peripherally involved in this world)
posted by LegallyBread at 7:38 AM on January 20, 2016 [1 favorite]
I am going to assume that this is about personal finance and not "investing" in the sense that it is not really about making money as a capitalist but more about saving intelligently for retirement. If this is the case you could do worse than this: https://timedotcom.files.wordpress.com/2015/12/151224_inv_indexcard.jpg?quality=75&strip=color&w=1100
posted by Pembquist at 10:20 AM on January 20, 2016 [1 favorite]
posted by Pembquist at 10:20 AM on January 20, 2016 [1 favorite]
You might try looking for a local stock investing club near you as well. How it works: people pool their funds, research stocks, and buy shares as a group. And if you find something interesting that speaks to you but not to the group, you can always pick it up for yourself. I've been a member of a club for some years now and we've had some good years and bad years, but it's way better than socking it away in some low-yield CD.
The National Association of Investment Clubs can be found at BetterInvesting.org
posted by fifteen schnitzengruben is my limit at 9:41 PM on January 20, 2016
The National Association of Investment Clubs can be found at BetterInvesting.org
posted by fifteen schnitzengruben is my limit at 9:41 PM on January 20, 2016
For further reading, especially regarding the 'low-cost index fund' strategy and the rationale behind it, try 'A Random Walk Down Wall Street'.
posted by toska at 9:45 PM on January 20, 2016 [1 favorite]
posted by toska at 9:45 PM on January 20, 2016 [1 favorite]
Response by poster: Thank you everyone. I'll admit that I did not understand a lot of your answers bc I don't understand the terminology or method in which to follow your advice and set up the accounts but I'm going to do my research and start learning. Thanks for all the links and reading suggestions.
I will take people's advice and get a one time fee based financial advisor to get started but how do I go about finding someone good and trustworthy? Is there a website that has reviews of them or something? I will learn as much as I can first before seeing someone so that I can actually understand their advice since this is all alien to me and very intimidating.
posted by CheeseAndRice at 9:53 AM on January 21, 2016
I will take people's advice and get a one time fee based financial advisor to get started but how do I go about finding someone good and trustworthy? Is there a website that has reviews of them or something? I will learn as much as I can first before seeing someone so that I can actually understand their advice since this is all alien to me and very intimidating.
posted by CheeseAndRice at 9:53 AM on January 21, 2016
how do I go about finding someone good and trustworthy?
Right now I'm doing index fund style investing on my own. If I ever throw in the towel and decide to go with a fee only advisor, this was going to be my starting point:
http://www.garrettplanningnetwork.com/about
posted by dave*p at 10:46 AM on January 21, 2016
Right now I'm doing index fund style investing on my own. If I ever throw in the towel and decide to go with a fee only advisor, this was going to be my starting point:
http://www.garrettplanningnetwork.com/about
posted by dave*p at 10:46 AM on January 21, 2016
This thread is closed to new comments.
posted by gorcha at 11:57 PM on January 19, 2016