If you’ve managed to build up an emergency fund, are actively paying down your debts, saving for retirement, and still have extra income, it’s time to start investing! The biggest question once you’re ready to do this is “how do I get started”?
You likely have a bank account with checking and savings. It may be nice to see your balances steadily increase as you earn more income and spend less money, but your money won’t truly grow just sitting there. It’s imperative to know that investing does involve risk, risk that can potentially lose you money. However, over the long term, taking the safe route of not investing and letting your money sit in the bank is the riskiest play of all.
Why? That’s because of this thing called inflation I’ve talked about in a previous post. You know how when you go to the ice cream shop with your grandma, she says something along the lines of, “$3 a scoop! Back in my day, it cost us a nickel!” Well, that’s inflation. Prices continually go up based on how much your dollar is worth over time. That’s why there’s a huge debate about minimum wage in this country. With the cost of living perpetually growing, wages need to match up.
Accounting for Inflation
What does this have to do with the money sitting in your bank account? The longer it sits there not growing interest, the less valuable it becomes. Inflation typically goes up 1% each year, but has historically averaged 3%. Even in a high yield savings account that pays more interest, your money isn’t keeping up. Aside from your emergency fund and fixed expenses, you’re shooting yourself in the foot by keeping all your cash in the bank or under your mattress.
Letting your money go to work in the stock market is not as scary as it sounds. Despite common misconceptions about the market, your money is generally safe and will grow over time. Since the 2008 financial crisis, it is easy to understand why people, and specifically millennials are cautious of investing for reasons not limited to:
- Many of us were still in grade school, college, or fresh in the workforce.
- Seeing all the despair of the recession understandably makes you distrust the financial institutions that brought about the downfall.
- We see our parents and grandparents suffer and lose the financial security they had worked for their whole lives.
Though such a devastating collapse is daunting, investing in companies is how people build wealth. Mark Zuckerberg (Facebook) and Bill Gates (Microsoft) have massive amounts of shares in the companies they’ve built. As two of the wealthiest people on earth, most of their wealth comes from those same shares. Only a fraction of it is cash. The stocks become liquid cash when they choose to sell shares off.
Start Sooner Rather Than Later
You may believe that you can only invest once you have thousands of dollars to get started. I know this is what I thought for the longest time until I did research. This cannot be further from the truth! FALSE. You can invest for less than $100 down! Just getting started will make you want to learn as much as you can about growing your money. You don’t have to be an expert. Not to mention, you’ll take advantage of compounding interest, a rare instance where time is on your side.
Stud vs. Dud
Now, if you want to own stock in a company like Amazon, a single share will currently cost you $620…yikes!! This is the type of information that deters people from investing at all. Buy one share or one month of rent? Not to mention, that share could take a dive and you could lose money. It will also be tough for that single share to double in growth unless you wait a long time.
However, looking at Amazon’s stock price over the last 10 years, it was $35 in 2006. That’s just 10 years ago! If you had invested then, you’d have 17x your money today, 10 shares for $350 in 2006 could be worth $6,200 today. Now, who wants to start investing?
Those are some great margins. However, if you wanted to buy into the stock now, you probably wouldn’t be too optimistic about the same profits, especially if the price drops to $520 like it did in August 2015. You may get worried. You’ve put down lots of money upfront and there’s potential for loss. Yet, this is a company that has nearly tripled in value the last 3 years.
Let’s take a look at a popular stock that hasn’t actually lived up to the hype. In June 2014, GoPro had an IPO (initial public offering) of $24 a share. An IPO is when a private company makes their shares available to the public. After climbing to $90 a share in October of the same year, the stock has currently dropped to $13!
This goes to show you the volatility of individual stocks. Volatility reflects how susceptible a stock is to changing prices. You may think you’re buying a legendary stock like Amazon, but then you get a GoPro. It still may not be a bad time to buy it while it’s low.
The point is: Picking individual stocks is tough and should not be your first taste of investing. It’s impossible to predict the success of Amazon and the flop of GoPro. You don’t get the dessert before the appetizer. If you’re not aware of how the market works, you’re more likely to lose than win. Let’s introduce you to the appetizer.
What’s that Stuff They Say on the News?
If you’ve ever heard the terms S&P 500, NASDAQ, Dow Jones, these are the market indexes that the stock market is tracked by. S&P 500 stands for Standard & Poors 500. For you, that 500 means something because it tracks the top 500 companies across a variety of industries in terms of value.
You’ve got the Apples, Googles, Coca-Colas, and Proctor and Gambles in the top tier of these companies because they are worth hundreds of billions. Toward the bottom, you also have the comparably smaller (still freaking huge) Staples, Nordstrom’s, and H&R Block. Guess what. You can invest in all these companies at the same damn time!
Index Funds and ETFs
Investing in index funds is a way to diversify your money. What are they? Index funds are a good start for a novice investor. Since the funds track the index they’re in, there are no management fees. When you don’t have a bunch of money to begin with, you hate to lose money off the top to fees for a fund manager. Kind of the same way you hate to tip a waiter with bad service, but it’s an unwritten rule in this country. With index funds, you truly get what you pay for with no gimmicks except… you get taxed on your profits.
Take the Vanguard Total Stock Market Index Fund, which tracks the entire stock market. You’re not just putting all your eggs into Amazon, but spreading them out amongst the entire stock market. That means if for some reason, Amazon goes out of business, you’re not too worried because you are diversified.
You definitely won’t double your money in a single year, but will likely see a modest 6-10% return on your investment i.e. You invested $10,000 and you made 600-$1,000. Now, for this specific fund, you would really need $10,000 to get invested… “Uh wtf, I thought you said this was cheaper than individual stocks.”
This is an expensive fund to get into, but most funds start off with a $3,000 initial investment. Still, if this is too high and you just want to get the ball rolling with extra cash burning a hole in your pocket, you have the option to purchase exchange traded funds (ETF). ETFs are freaking awesome. They trade like an individual stock, with their prices constantly changing, but they’re also like the index funds because there are little to no transaction fees.
Looking at the ETFs on Vanguard’s website, you can buy one that invests in stocks of emerging markets like China, Brazil, and Taiwan for as little as $35 a share. This way, if you wanted to dabble in this market, you don’t have to throw down $1,000 or more.
Know Your Risk Tolerance
As you can see, these investments don’t have the glitz and glamour of sexier investments with higher returns. When you play it safe, you minimize your risk. If you’ve ever turned on CNBC and seen an old, bald guy yelling about the stock market, that’s Jim Cramer. His advice to young people is to invest in index funds so they are protected from ups and downs of the market. Pretty smart guy. Listen to experts.
Do you ever watch those house flipping shows on HGTV? The people flipping a home pay all cash for the house up front – $250,000. That’s a lot of money to be putting down! Like, where can I get some of that? They invest $100,000 to renovate and improve it, then put it back on the market for $500,000, turning a $150,000 profit.
Reality TV makes it look so easy, but it’s not. This is a post for another time, but you see what I mean. Having that much capital to invest takes time. The buyers take on loads of risk and have their money tied up in an expensive house until a deal gets closed, which could take months. They are bold enough to take on big risks and in turn get potentially big rewards. Flip the coin, and they could lose money.
Sorry for the tangent. I just want you to understand that there are risks in any investment you take on. Given the financial sense of index funds, the risks are minimal compared to individual stocks and real estate. Yes, they’re boring and don’t have the returns of dealing drugs or selling sold out Taylor Swift tickets, but getting started with index funds will only grow your interest in investing.
Once your money is in the market, you have skin in the game. You want it to grow. You want to succeed. You may be good with keeping all your money in these types of funds. Plenty of people are satisfied with this strategy and go on to retire early.
If index funds peak your interest and you decide to learn more and go for the big fish, stock picking takes more expertise and time, and still may not give you a better return. There are TV channels, websites, radio shows, magazines, and other media sources dedicated to picking stocks. You could consume information 24/7 and still not know a fraction of what’s going on.
That’s not to say that people aren’t successful in stock picking, but even Warren Buffett, one of the richest guys in the world, made a bet against individual stock picking back in 2007 and is winning!! That’s right. He bet hedge fund managers that an S&P 500 Index Fund would outperform bright, Ivy educated, finance pros picking individual stocks over a 10-year period.
This blog isn’t for trying to pick stocks that are going to potentially beat the market. Sorry to disappoint. It’s for people who want to be smart with their money and make sound decisions for the long-haul. If this is someone like you, keep reading.
Where to Open Investing Accounts
There are tons of places to open brokerage accounts for investing. Your checking or savings account at your bank links to your brokerage account and direct deposits the money. If you watch television, there are tons of commercials on these companies. You see commercials for TD Ameritrade, Scottrade, Charles Schwab, E-Trade, the list goes on and on. I personally use Vanguard and Betterment. I’m not endorsing these products; they’re just what I use. They all really do the same damn thing.
Since I do read tons of blogs, subscribe to newsletters, and listen to podcasts, pretty much everyone universally suggests using Vanguard for its low cost fees. For the purposes of this example, it’s what we’ll use. You can set up your account by going to their website. Just like anything else you sign up for, they ask you for your personal information, social security number, first born child, etc.
Opening a Vanguard Account
If you do decide to use Vanguard, knowing exactly how to buy Vanguard funds or ETFs is a bit tricky. They have recently made it easier to navigate. If you want to buy funds, once you set up your account, log in, and link your bank account, go to:
- Buy and Sell
- Buy Vanguard Funds
- Search for the fund you want or browse a list. List will show you minimum investment.
On the same page, you can find ETFs and individual stocks.
- Buy and Sell
- Trade Vanguard ETFs (non-Vanguard ETFs)
- Look up symbol for the ETF or stock you want.
- Decide how many shares you’d like to purchase.
- You can choose if you’d like to buy it at the current price or automate it to buy at a lower price if it goes down.
You click through a few terms and conditions on your purchase and boom, you’ve made a stock purchase!
You are likely feeling a mix of nervousness and excitement. This is good. You should feel this way. If you’re sticking your toes in the water, you’ll have your doubts and take longer to commit. But if you decide to jump in, you’ll force yourself to adapt and swim through the anxiety. You’ll want to take action to become a better investor.
Empowering millennials to take responsibility of their money is what The Adaptable Adult is all about. Use the unlimited resources that surround you and don’t be afraid to make mistakes. They happen. At the same time, use your same world of resources to make smart, informed decisions. Only you know your risk tolerance.
Disclaimer: The Adaptable Adult is not a financial advisor. We are merely a blog obsessed with developing knowledge on personal finance. The Adaptable Adult is not responsible for any losses or damages incurred from investing. Past performance is not indicative of future returns. For professional advice, consult with a licensed financial expert.