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.”

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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

Mutual Funds: Smarter than individual stocks

We just explored what a stock is, and why investing in individual stocks is an extremely difficult growth strategy. Let me be clear: I love investing as a  way to grow wealth.

But...there's a smarter way than betting on individual stocks, hoping you magically selected the winners from the losers. Mutual funds are one investment vehicle that allow us to buy many, many stocks in just one purchase. I prefer these to individual stocks because you can own hundreds of companies in each share. This helps you avoid one of the money mistakes I've made - investing in one company and losing everything.

However, there’s a twist. All mutual funds are not equal. Mutual funds can be designed to fit different types of investment goals. My favorite are mutual funds that mirror a large, diverse market. One example is the Vanguard 500 Index Fund (ticker symbol: VFINX). In full candor, I prefer Vanguard and most of my million-plus of invested assets are in Vanguard funds and ETFs (we’ll explore those next.) 

One share of VFINX includes just over 500 companies, including Apple, Berkshire Hathaway, Procter & Gamble, Starbucks, Goldman Sachs, and Southwest Airlines. Funds like VFINX are low cost because they don't employ lots of people trying to analyze stocks and beat the market. Instead, this fund automatically includes the 500 largest US companies. This saves you money!

Here's what to watch out for when picking mutual funds:

What's the expense ratio? This is how much the company that manages the fund charges you for their work. An average expense ratio is around .6% - meaning, for every $100 you have invested, the fund rakes in 60 cents. Sounds small - but tiny fees make a meaningful difference in your wealth over the long term. Vanguard’s average expense ratio is .12% - meaning, for every $100 you invest in a Vanguard mutual fund, they charge 12 cents. That’s much, much lower, and lets you keep more of your hard-earned money.

Are there other fees? It can be costly to create fancy, actively-managed mutual funds. So, look carefully for purchase or redemption fees, or 12b-1 fees (marketing or distribution fees.) Ask, ask, and ask again about fees before investing!

What's the 10-year return? How did this fund perform over the last decade, compared to the S&P 500? The S&P 500 is a very common performance benchmark because it includes the 500 largest U.S. companies. If the mutual fund seriously underperformed the S&P 500, it may not be worthy of your hard-earned money.

What are the initial and ongoing investment minimums? Funds typically have initial minimums, or a certain sum of money to start investing. VFINX has a $3,000 minimum for general investors, meaning you first have to save $3,000 before you can begin investing. Don’t let minimums discourage you! Save up and once you get that minimum, invest. On an ongoing basis, VFINX has a very low “additional investment” minimum; you can add to your account in increments as low as $1. So, clearing that initial minimum hurdle is worth it.

It's easy to get overwhelmed. We explored markets and stocks, and are digging into different types of investment vehicles. But, think about it like this: if you stop reading now, pick a mutual fund with low fees and good long-term performance to regularly invest in, you're seriously ahead of the game. Do not let your quest to make perfect decisions paralyze you (or your wealth). In fact, I’ve broken down exactly how to start investing in just four steps.

What other mutual fund advice do you have? Which fund(s) do you own? I look forward to seeing you build your nest egg with smart, low-cost investing! You got this.

xoxo, Ms. Financier