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Advice For Someone Just Starting Out With Investing

Posted: Brandon Arns

“What do I do with my money?” It’s a question I’m starting to get more and more frequently. Most of my peers (late 20s give or take a few years) are at a stage in life where they are starting to settle into their career, have paid down some debt and are now saving a portion of their income. Whether that’s through a retirement account, like a 401k, or an outside savings account, many are now faced with the decision of what to do with their money.

Unfortunately, few have had any formal teaching in investing concepts and there are so many differing opinions and conflicts of interest online, that it can be confusing to try and learn by yourself. Investing is somewhat like dieting, in that the advice depends on who you ask. Some believe low carb is the best diet, some believe in low fat, etc. Similarly, in investing, if you ask 10 different people for investing advice, you’ll get 10 different answers. I’ve been managing money professionally for several years now, and during this time I’ve come across numerous investing styles, philosophies, and experiences that have all shaped what I think is the best investing advice.

The Best Portfolio is the One You Can Stick With

Not a very sexy answer, I know. I’d much rather have a more concrete answer, like go buy an S&P500 index fund, or buy a target date fund, or diversify your money between stocks, bonds, real estate, commodities, etc. All of these are acceptable answers, but the answer truly depends on the person investing. One of the most, if not THE most, important determinants of your investing success is your personal behavior.

For example, a common bit of advice you may hear is to put all your money in US stocks when you’re young, and don’t look at it. Overall this is good advice. However, most people do look at it, and if they are sensitive about losing money (and who isn’t), stocks can be dangerous. Try to imagine you’ve worked hard for a decade to build up some savings, only to see the value cut in half during a recession. If you panic and sell, it turns out that this was the wrong advice, which is why I believe there is no cookie cutter investment advice that applies to all people.

The previous example demonstrates how advice should be tailored around how risk adverse you are, but there are other considerations such as what stage of your life you’re in, when you need the money and what it’s for, as well as how knowledgeable you are on the subject. The topic is obviously very nuanced, and I need about 100 more pages to fully explain my thoughts on it. But for the purposes of this blog, I’ll offer some basic tips that can at least get someone started.

  • If you are younger, it really does make sense to take on additional risk. This means putting a significant portion of your savings in stock. This is especially true if it’s some sort of retirement vehicle such as an IRA or 401k that you can’t touch for decades.
  • For most, I’d recommend investing in low-cost mutual funds or ETFs. Stock picking is extremely difficult to do consistently and it’s unlikely that you’ll be able to beat an index such as the Dow or S&P500.
  • While I stand by the advice above, trying to pick individual stocks can be a good way to learn about and get comfortable with investing. IF you can be disciplined, it doesn’t hurt to set a small amount of money aside to “play” the stock market. Go ahead and buy some of your favorite companies like Amazon or Disney. You must recognize that this is akin to gambling, and there will be lots of ups and downs, but it’s better to make your mistakes while there isn’t as much at stake.
  • If you have absolutely no clue what to do, what stocks and bonds even are, and don’t have an interest in learning, that’s ok! You can invest in target date funds and probably beat most of your peers anyway. You have likely seen target date funds in your 401k if you have one. These are the funds that end with some year such as 2050, 2055, and so on. That number corresponds with when you think you might retire. Simply invest your money in that fund, and it will choose the mix for you.
  • Know what the money is for. If you think you are going to use your money to buy a house in the next couple of years, you probably shouldn’t own much stock. The last thing you want is to think your savings are safe, only for the market to crash and your down payment with it.
  • If the situation above applies to you, there are many ways to invest that are safer. The best options for this situation would either be a high yielding savings account through a bank that is FDIC insured (today yielding around 1.5-2%), or a short-term bond fund. Don’t confuse the word bonds with safe however. There are plenty of bond funds that have quite a bit of risk as well.
  • Avoid some of the simple pitfalls.
    • Be aware of the fee a fund charges, and what its competitors charge.
    • Don’t get too caught up in a fund’s name. This sounds silly but its true. The ticker and fund name absolutely have an influence on people. A name like “Russell 2000 Ultra-Dividend Boost 3x” (made up) or a ticker like “YOLO” (not made up) might sound cool but probably isn’t appropriate for you.
    • Don’t trade too often. As of this week, trading fees have essentially disappeared, so this advice is weaker than it used to be. However, unless you’re a professional trader, excessive trading is likely going to cost you a lot more than the trading fee anyway.
    • If someone comes to you with a stock tip, run the other way.

Most important to investing is to be humble about what you think you know, because the market has a way of humbling you in a hurry. I didn’t include any specific funds in the advice above because there are literally 1000’s, but I can certainly help narrow it down for you. If you have any questions about investing, please feel free to email me at brandon@wjwealth.com.

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