When it comes to investing, there is no better time to start than the present and there are a few concepts that reinforce that idea which are dollar cost averaging, compounding and diversification. Together these fundamentals make for greater returns on average when compared to a regular savings account because most savings accounts have rates that are less than 1%. Meanwhile the average rate of return for the stock market has historically been between 7%-10%, and that’s with all the ups and downs.
However I will say that in order to be in a good position to start investing you should have a checking and savings account that have enough funds to take care of your monthly purchases, cover emergency situations and even enough to start an opportunity fund. With those accounts in order, let’s move on to how one can start investing.
Making investments has now become easier and cheaper than ever thanks to the variety of available apps who have forced traditional banks to lower their costs to remain competitive and relevant. Now picking one over the other is up to you but there are benefits to each. These online only investing apps can either take advantage of robo-advisors that take your investing style and risk tolerance and invest for you (i.e Acorns and Betterment) or let you pick the stocks yourself (i.e Robinhood).
However the best place to start looking for a way to invest is the company you’re working at. Most companies offer some sort of investment opportunity usually in the form of a 401k, IRA or in my case, as a government employee, a 457b. These accounts allow you to invest through an investment firm that your company has partnered with. In the case of a 401k, you might find that you’re lucky to be working with an employer who offers to match your investment. In my opinion, you should always aim to get the match because that is free money that will be adding up to larger returns in the future.
While looking at these different account, you might feel like you’re trying to comprehend a foreign language. Well I’m here to give a quick run down of each account and how they benefit you. Looking at these accounts as a whole, you are putting the investment firm in charge of picking which funds to invest in based on your investing style so when times are good or bad they will manage the account for you and adjust accordingly. This is similar to the formula used through online investing accounts.
So if you’re someone who is either starting up their investing accounts or if you’re one one who is about to retire you’ll need to keep in mind that any investment is most likely subject to some sort of tax and there are some key facts to keep in mind. You will find that there are two types of tax deferred options. The first is getting your taxes deferred upfront whenever you fund your account. With this option you will end up paying taxes when you decide to tap into those funds. 401k’s, IRAs, and the government 457b account all fall under that category. On the flip side, accounts such as a Roth IRA, your deposits are taxed and taxes are withheld when you withdraw. One way to hack this system is to roll over your 401k or IRA into a Roth IRA when you are approaching your retirement years. This way you will pay less when you transfer smaller amounts than you would taking out the whole sum all at once.
Most of the accounts mentioned thus far generally deal with bonds and ETFs or exchange traded funds, which are groups of company stocks or industry specific stocks (such as technology or agriculture) that are lumped together. This is the ideal investing option when planning for long term success. The alternative would be to pick each stock individually, which presents its own set of challenges if you want to be successful. Most people end up getting focused on the short term performance of stocks which leads to poor choices like buying at a peak or selling at a loss.
There are people who do make a living off of something called day trading which is the practice of buying and selling stocks with a quick turnaround. The main principle that day traders follow is called “timing the market.” This practice can lead to huge profits but it’s not a way to get guaranteed returns and the chances of success are really low. If you’re into individual stocks you will really have to look at the company in terms of their overall business. You will need to take a look at their fundamentals which boils downs to how a company makes a profit and that strategy does take a lot of time and energy. Now if you wanted to own a share of Apple or Microsoft then by all means go for it, those companies don’t seem to be going anywhere anytime soon but they also have slower rates of growth which means less returns. When compared to an up and coming company, there might an opportunity for better returns but that’s where we see the risk rise.
However, I’m sure that not many people are thinking about taking risk these days. For many, staying afloat financially is of the utmost importance because we are living in a time of uncertainty. To those who find themselves in that position, it is totally understandable to take your mind off the future and focus on the present. If you are one of the lucky few who are able to work and have made a financial cushion for yourself then there is an opportunity here. Much like the financial crisis of 2008, the markets have fallen to bargain prices. With any extra cash or perhaps with the stimulus that we have or will receive we can make an investment for our future. Because if there is anything we can learn from history is that after every downturn a period of growth is almost certain to come.
If anyone is interested in learning more about personal finance there are a few resources that I recommend. Obviously the first would be to take a course on finance either through university or an online learning platform. However for a few bucks you can buy a book, like these:
- One Up on Wall Street by Peter Lynch
- I Will Teach You to be Rich by Ramit Sethi
- Principles by Ray Dalio
If you’re looking for something around the price of on the house, online financial resources can be found as well such as these sites: