Last week, in my 27 learnings post I said:
Start investing young. Compound interest is your future self's friend. If you haven't started yet, don't panic - just calmly and deliberately set aside a few hours in the next week to open a Roth IRA and a Brokerage account and get started.
I promised I would expand on this statement with specific action steps, so here we go!
For many of you who are already investing your money and happy with how you're doing, this post is irrelevant and you can close this window right now and go do something else.
I am writing this post for students, recent graduates, and people under 30 who don't have an investing strategy. But really anyone who has money to manage may benefit.
HOW TO START INVESTING TODAY
For people who have little/no experience investing, it can seem daunting, exciting, scary, and all of the above. I know that's how I felt when I began.
When I first started investing in college, I just picked stocks that seemed cool and then lost thousands of dollars. Talk about learning my lesson the hard way. I was just gambling. Might as well have been in Vegas.
I knew there had to be a better way. And as I began researching and reading, I learned the big secret that the finance industry doesn't want you know: You can beat the returns of most professional money managers without lot of time, research, or knowledge of individual stocks.
For people who are looking to play poker or double their money every year - this post is NOT for you.
This post IS for people who want their money to grow steadily for the long run with very little time, effort, or the risk of losing it all. It won't be glamorous, and you won't get rich quickly, but your future self will thank you.
Starting is always the hardest part, so the point of this post is to get you to take the first steps, and then you can change things up in the future as you develop your own philosophy and appetite for risk.
Here are the first steps you can take right now:
Open two accounts: A Roth IRA and a Brokerage Account. I use Schwab and I love them, and other people seem to love Vanguard.
Deposit as much money as you are okay not touching until you retire into your Roth, and put as much as you are okay not touching for 5-10 years in your brokerage. It's okay if your deposits are small for now.
Now that the money is in your accounts, the question is how to invest it? Across the myriad of philosophies that exist, there is some recurring wisdom:
First: Diversify, across sectors, across markets, and across time.
Second: money managers are a racket. At least for most regular people, and especially the audience for this post (students and people in their 20s or early 30s who haven't started investing). The natural growth of the stock market beats most managers most of the time.
Third: fees are your enemy, and eat away more of your earnings than most people realize. Even when money managers do keep up with the stock market, their fees destroy your returns, especially when compounded over time.
Based on the assumptions above, which I fully subscribe to, you can very quickly and simply invest your money in a relatively low-risk way that will maximize your returns with minimal effort. Please note when I say "low-risk" I mean in the long term. Putting your money into stocks is always risky in the short run, so please don't invest money you will need access to in a short term time horizon unless you're more advanced. For good long term growth, all you need to do is invest in 3-5 funds that will diversify you across sectors and markets. You will naturally diversify yourself across time, as you continue to regularly deposit money into your accounts. Less really is more when it comes to investing.
But what funds you ask? Here's what I recommend: Invest 60% of your money in a fund that tracks the US Total Stock Market. Invest 30% of your money into a fund that tracks the Total International Stock Market. And Invest 10% of your money into a fund that tracks the Total Bond Market. You can adjust these allocations based on your inclinations and appetite for risk, but for now don't over think it, this is a good place to start.
I am going to get real specific to ensure that you take action today. If you are using Schwab, you'll want to use Schwab funds since they are low fee and zero commission on trades:
Invest 60% into SCHB, which tracks the US Total Stock Market Fund.
Invest 30% into SCHF (~20%), SCHE (~5%), SCHC (~5%), which collectively track international and emerging markets.
Invest 10% in SCHZ - which tracks the Total Bond Market.
If you're on the Schwab platform, all of these trades will cost you a total of $0.
If you're on Vanguard, you can achieve the same effect with 3 funds instead of 5.
Vanguard Total Stock ETF (VTI) - 60%
Vanguard Total International Stock ETF (VXUS) - 30%
Vanguard Total Bond Market ETF (BND) - 10%
Finally, set up an automatic monthly transfer from your checking account to your IRA and your brokerage. Figure out an amount that feels doable, but try to save 20% of your gross paycheck if you can. Hell, you're young, life is still cheap. Can you do 30%? Even if you have a small/no paycheck, please take the step of setting up an automatically recurring monthly transfer from your checking to your Roth and another one from your checking to your brokerage. You can always revise it upward in the future.
Every three months, go and reinvest all your new cash which automatically deposited in your accounts. Try to re-balance your allocations to keep them steady. This is also a good time to reevaluate your financial position and revise your automatic transfer amounts upwards if you can.
That's all! Congratulations you are now investing for the future.
Not too hard right?
From time to time I will do more posts on investing targeted toward students, people under 30, and new investors. So if there is a topic you want to know about, or something you are confused about, let me know in the comments or email me.
FOOTNOTES FOR PEOPLE WHO CAN'T READ A LOT:
- Investing doesn't have to be time consuming, difficult, or high risk.
- You can grow your $ steadily and beat most money managers. Here's how:
- Open a Roth IRA and a Brokerage Account on Schwab and seed both of those accounts with money you are okay not touching for a long time.
- Invest 60% of your cash into SCHB, which tracks the US Stock Market
- Invest 30% into 3 international funds - SCHF (20%), SCHE (5%), SCHC (5%)
- Invest 10% into SCHZ, which tracks the US Bond Market
- Set up automatic transfers monthly from your checking to your Roth and Brokerage.
- Every three months reinvest the new cash, and revise your automatic transfer amount if necessary.
General Disclaimer: this 3-5 fund approach and/or the suggested allocation may not be suitable for everyone! But if you're in your 20s and just beginning, it's a good place to start. That being said, other smart finance people might disagree with me and I would highly encourage you to do your own research as well. I will say with confidence that I believe in this approach, and that a lot of stuff in the world would have to go very wrong for this strategy to lose you money over the long run.