Start Investing in Four Steps

In the last few posts, we’ve explored investing, mutual funds, and ETFs. Understanding these will help you effectively save and invest. But you need to take four steps (and make four corresponding decisions) to start investing and building serious wealth.

1. Choose an account type. Decide the type of account you will invest in, aligned to your financial goals. We talked about this decision when we explored saving and investing money.

If you don’t have an investment account for retirement, start there first. If you already have a retirement account and are looking to invest even more - congratulations! You’re ready for a general investing account that will allow you to build even more wealth.

Common account types include:

  • Retirement accounts, like a 401(k) or 403(b) offered through your employer; or a retirement account that you manage, like a Roth or traditional IRA.

  • General investing accounts, which don’t offer specific tax advantages but are also more accessible than retirement accounts

  • Educational investing account, like a 529 college savings account

Select the right account type so you can get your money in the market, growing for you. Make the best decision you can and move forward to identifying where you’ll invest. Here’s even more on the difference between an IRA and 401(k) to help you explore your options.

2. Select a financial institution. This company will service your account, report investment performance, and help you make trades and access your money. I invest with the low-cost industry leader, Vanguard. The company is client-owned, and every strategic decision they make is focused on lowering investor costs and fees.

Financial institutions provide a service, and rightly charge fees and make money. I urge you to select a company, like Vanguard, with a low-cost reputation.

3. Pick your investments. I do not recommend investing in individual stocks, but instead ETFs and/or mutual funds. Warren Buffett, considered one of the best investors in history, speaks regularly on the power of investing in an index like the S&P 500. Don’t reinvent the wheel or think that you can do better, start with a market-matching fund like the Vanguard S&P 500 ETF (ticker symbol: VOO).

Eventually, you’ll want to create a portfolio of investments - picking a few different investments to balance your risk. We’ll explore that in the future, as it is important. But, I subscribe to the KISS principle: Keep it simple, stupid. Start with one, maybe two, mutual funds or ETFs you’re comfortable with. You can add to them over time to balance your portfolio.

Look carefully at the fees associated with your investments, particularly the expense ratio. Examine the 10-year performance (don’t be excited or dismayed at 1- or 5-year results). Some investments may require a certain minimum amount before you can start investing. Don’t get discouraged; start saving diligently and you’ll be there before you know it.

If you’re interested in going beyond the fundamentals, I have even more detail on how to choose funds for your retirement account for you to explore.

4. Fund your account automatically. This is the final and most critical step to building wealth. Don’t just open the account and hope for growth. Decide how you’ll continue to fund it. I strongly recommend a regular, automatic transfer timed with your payday. Start with whatever you can afford today, and aim to steadily increase it over time.

Automatic investing will ensure you’re always paying yourself first. Let’s quote Buffett one more time: “Do not save what is left after spending, but spend what is left after saving.”

019 - Warren Buffett.png

You may be curious about the role that financial planners can play. A great planner can serve as a valued advisor and help you build wealth, but beware advisors that are tied to a type of investment or institution - how unbiased can they be? Read more about what planners do here.

That’s it! Those four steps (and corresponding decisions) will put you on a path to create real wealth. Is there more complexity we could examine? Sure. But, the basics will put you ahead of most that are hesitating to get started due to lack of knowledge or analysis paralysis. Don’t let that be you. Are you ready to get started? Let me know!

xoxo, Ms. Financier

What the Heck is an ETF?

I know, I know...the financial industry loves acronyms! ETF stands for Exchange-Traded Fund. Like mutual funds, ETFs allow investors to buy many companies in a single share. I like this better than individual stocks, remember?

The biggest difference between the two is how often they can trade. Nerdy, I know. Mutual funds are priced once each day, after the market closes. In comparison, ETFs act like stocks and trade throughout the day. They often have lower fees than mutual funds. We love lower fees - it means we get to keep more of our hard-earned money.

In our last post, we explored the Vanguard 500 Index Fund (ticker symbol: VFINX). That mutual fund currently has an expense ratio of .14%. For every $100 you invest, you’re charged 14 cents. Let’s compare that to the Vanguard S&P 500 ETF (ticker symbol: VOO); it has an expense ratio of only .04%, so you’ll be charged only 4 cents for every $100 you invest. That’s an extra dime in your account for each Benjamin invested - pretty good.

So, why would anyone ever buy VFINX when VOO is similar, with a lower expense ratio? First, many employer-sponsored retirement plans don’t allow ETF or stock investments, and only permit investing in mutual funds. Additionally, many regular investors don’t understand ETFs and are ignorant of their differences from mutual funds.

Here’s what to watch out for when picking ETFs:

What's the expense ratio? Keep a close eye on what the expense ratio is, and compare it to other similar ETFs. Recall, the expense ratio is how much the company that manages the ETF charges you. An average expense ratio is around .44% for ETFs (lower than .6% average for mutual funds). These recurring fees make a meaningful difference in your wealth over the long term. Vanguard’s average expense ratio is consistently lowest in the industry, letting you keep more of your hard-earned money.

Are there other fees? Since ETFs are traded like stocks, you’ll want to understand commissions you’ll pay to buy or sell, and investigate any other fees associated with the investment, like account service fees. Vanguard account holders can trade ETFs commission-free.

What's the 10-year return? Just like a mutual fund, compare how the ETF performed over the last decade, compared to the S&P 500? If it didn’t come near the S&P 500, it may not be worthy of your hard-earned money.

So that’s an ETF, in a nutshell. Fidelity also has a useful article on mutual funds compared to ETFs if you’d like to learn more. In the next post, we’re going to explore exactly how to get started, now that we have all this information about investing. I’d like to know: What are your favorite ETFs? Are they new to your portfolio or are you a long-term fan?