Big thanks to everyone who responded to the last newsletter – it’s really cool to hear how you guys are working to save and change your spending habits!
Several of you mentioned that you’re already doing well on the spending/saving front and would love to move forward to investing, but could really use help understanding how the heck to get started. So, let’s doo eet.
First off, since no two people have the exact same goals, how each person invests should depend on what they want their money to help them achieve. There is no one size fits all, so I can’t tell you “this is exactly what you should do”. Secondly, I’m not a registered investment advisor so couldn’t do that anyway. However, there are general principles that can help you build wealth over the long term (25-35 years) and since that’s what most of you were asking about, that’s what I’ll focus on.
Remember – while the following isn’t a personalized plan, it’s important to just pull the trigger and get started rather than waiting around any longer. Putting this off for another year or two can reduce your future earnings by tens of thousands of dollars! Seriously. With that in mind, here are some overall principles of investing that will get you started on the right path, and a few tools available to you right now to take action with those principles in mind.
- Define your goals– Will you need the money you’re looking to invest in 5 years or 35 years? Will you need to pull it out soon in order to put a down payment on a house, or can you not touch it until you’re in your 60s? These things will determine how aggressive/conservative you should be and where you should put your money (stocks/bonds/cash).
- Diversify– This means don’t put all your eggs in one basket. Don’t just invest in one stock (Apple), one industry (tech), one market (NASDAQ) or one country (‘Murica). All investments carry some type of risk, so make sure to spread that risk across different types of investments (stocks/bonds/cash) and markets (US/International).
- Cost– Seriously you guys – this one is huge. You want to pay someone as little as possible to manage your money. Thanks to the power of compound interest, if you’re paying even 1% more a year than you could be, that can equal a ton of money over 25-35 years. I plugged some numbers into a compound interest calculator to show the difference between earning 6% and 7% interest over 35 years…about $80,000! I don’t know about you, but to me that’s a lot of money.
- Risk tolerance– ask yourself how you react to losing money. When the stock market in 2009 was down 40% from its peak, would you have kept your money in and waited it out? Or would you have gotten sick of watching your losses pile up and pulled it out? Be really honest with yourself when determining which end of the spectrum you fall on. And don’t lie – you’ll only be affecting your own success.
Now that you have an idea of things you should be keeping in mind, what tool(s) can be used to help you invest based on those principles? One hyphenated word: Robo-advisors. And while that name may sound a little scary, don’t worry – they’re actually pretty awesome.
Robo-advisors are “online wealth management services that provide automated, algorithm-based portfolio management advice” (Investopedia). In layman’s terms this means they help automate the investing process, allowing them to reduce costs and pass those savings on to you.
The most well known companies in this space are Wealthfont and Betterment. I personally use a robo-advisor (Betterment) and love it because it’s so damn easy to set up, you can automate monthly transfers, and it takes into account the 4 principles above. Note that you can do all of these things on your own in other (and much more time consuming) ways. But the fact that rob-advisors let you handle it all under one roof and are super easy to use make them my obvious recommendation. Again – it’s all about just taking that first step, and they make it super easy to do.
If you are one of those who’ve been thinking about investing for a while but haven’t pulled the trigger, make this the weekend you do it! Trust me, once you do (and it takes less than an hour) you’ll feel awesome. And as always, if you have any questions getting started or as you’re going through the process, please give me a shout! Always happy to help.