Starting to Invest as a Young Professional
I am 26 years old. As a young guy, I had to start from scratch to build up my assets and investment portfolio. From your first stock trade to your retirement assets, starting young is key to building net worth for the long run and it is a lot easier (and cheaper) than you might realize.
Allocating Income to Investing
First, you need to put money into investing. Contrary to popular belief, you do not need a large lump sum to open an investment account. While some brokerages do require that, most will let you open up an account with no minimum if you agree to make a monthly contribution.
The easiest way to do this is with an automatic deposit or transfer. Most employers allow you to split your direct deposit between multiple accounts. If you can do that, designate a fixed amount or percent of income to automatically deposit in your brokerage account. It can be $20, $50, $100, 5%, 10%, etc. It is up to you to decide what you can afford, but make it a point to put something in the account every payday.
If you can’t use direct deposit, most online banks or brokerage firms allow you to set up a recurring withdrawal. The method varies by bank and brokerage, but it only takes about fifteen minutes to setup.
I prefer the direct deposit method because I forget about the money being part of my discretionary income.
Types of Investing
No matter what your financial situation is, invest in a retirement account. If you are not yet, start today. Do not justify some reason you don’t have to put money into retirement yet. The power of compound interest and starting early makes this a must.
In addition, most employers give you a match to put money into a 401(k) account. Take 100% advantage of any match. If you don’t, it is like leaving free money sitting on the table. If you do not have this option, you can invest in a Roth IRA or Traditional IRA account through your brokerage. (Just remember that there’s no such thing as the best Roth IRA rates, because an IRA is an investing vehicle, not the investment itself.) If you’re self-employed, you could also consider setting up an individual 401k.
Long Term (Passive Investing)
If you are already taking advantage of the tax benefit of retirement accounts and want to invest more, the easiest and safest way to invest is with a passive investing strategy. This is a “buy and hold” method to picking investments.
If you are into value investing, Warren Buffet’s investing style, this is the way to do it. For passive investments, you just buy something and forget about it.
Active Trading Account
This investment method has more risk and takes much more time to manage than passive investing, but it can yield better returns if you are really good. For investors starting out, I suggest getting a strong grasp on passive investing before active investing.
With active investing, you have to monitor your companies, the markets, and spend time assessing your investment prospects regularly. It is time intensive and a lot of work.
Picking a Broker
Find a discount, full service broker that has low cost online trades. You want access to their research, the ability to trade a list of mutual funds or index funds for free, and the ability to make automatic deposits into your account. Automatic investments are a plus, but you may put that on your requirement list depending on your needs.
I use Charles Schwab for my brokerage needs and have been thrilled with their customer service. ShareBuilder is a popular brokerage for people looking to do automatic investments in small increments.
Where to Invest
This is the most subjective part of starting to invest. There are several different camps for how to start out. I will give you two of the easiest and most popular when deciding on investment options.
Target Date Funds
A target date fund is a mutual fund that is managed by investment professionals for someone with a specific retirement date in the future. I have most of my retirement funds in a “Target Date 2050” fund for people in their mid to late twenties.
These funds are incredibly easy to use but some people dislike the fees and/or management style.
Warren Buffet said that if he did not have his money in Berkshire Hathaway, he would be in index funds. They track a specific index, such as the S&P 500 or Russell 2000. S&P 500 index funds seem to always go up in the long run.
There are risks, but those are market wide risks that you would likely get in any investment. They are low cost and easy to use.
How did you get started in investing? Or are you at the getting started stage? Please share your thoughts and experiences in the comments.
You can visit Eric at Personal Profitability to learn all about investing, budgeting, and making finance easy and stress free.