The Young Professionals Guide to Investing
The list of excuses when it comes to not investing are endless, especially for those busy young professionals immersed in their careers, which is why we compiled the young professionals guide to investing. Everything from “it’s too complicated” and “too risky” to “I don’t have the time to worry about that now.” However, the irony of each excuse is that the biggest risk actually lies in not saving and investing at all, especially early on in life.
Before diving into the “how to” when it comes to basic investing it is important to fully understand the counterarguments to the top excuses for not investing.
Investing Doesn’t Have to Be Too Complicated
It’s true, likely a very small percentage, if any, of the people reading this, ever took a personal finance course in high school, college, or grad school. Schools just don’t teach personal finance, period. But we can’t dwell on that as an excuse. Investing can seem daunting at first, but basic investing doesn’t have to be rocket science. In fact, many of the best investment strategies are incredibly simple. Warren Buffet, the greatest investor of a generation often recommends to “never invest in a business [you] don’t understand.”
In short, if you don’t have a Ph.D. in investments don’t overcomplicate things and start simple. Invest in a broadly diversified basket of asset classes (i.e. stocks and bonds), keep costs low, and hold them for a long period of time.
Read More: Four Investment Myths Revealed
Investing is Inherently Risky (But the Alternative is Riskier)
There’s no sugarcoating the fact that investing comes with risk. That simple fact is the reason that when investing you have the potential to get more back than you put in (i.e. your ROI or Return on Investment). But simply because something is risky doesn’t mean we shouldn’t attempt it, especially when the risk of not investing can be far riskier over the long-term.
Take, for example, $1 in 1950 kept in cash, invested in bonds, and invested in stocks. In 2014, that $1 investment in bonds is now worth $50. The $1 investment in large company stocks is now worth a whopping $1,101 (yes, there’s a comma in that number now), while the $1 kept in cash is worth a measly $10. What’s riskier the inherent short-term market fluctuations or the long-term erosion of your money if left on the sidelines?
Investing Doesn’t Have to be Time-Consuming
As busy young professionals, you don’t have the time to spend hours sifting through mutual fund prospectuses and researching “hot” stocks in desperate pursuit of the next Apple or Google. The solution? Don’t. Investing doesn’t have to be time-consuming and in fact, many of the best investment strategies require very little work, because they are essentially a long-term focused strategy that involves getting things set up and then letting the power of the market and compound interest take hold over the course of years and decades, not minutes and days.
Read More: Active Decisions in a Passive Investing World
Flip on CNBC for even a few minutes and it is hard not to fall prey to the idea that investing should be sexy and to be good at it requires being first best, or the smartest. Next time you flip on the TV, keep this in mind: CNBC and other financial media are paid by advertisers. Advertisers like channels that have lots of viewers and the surest way to get lots of viewers is to be sexy and entertaining. Both, sexy and entertaining, should never be used when it comes to your hard investment dollars. If CNBC simply announced each day that you are best off being well-diversified, keeping it simple, and keeping costs low do you think they would sell a lot of ad time (i.e. be in business)? No.
Both, sexy and entertaining, should never be used when it comes to your hard investment dollars.
Understand the Difference between Saving and Investing
Saving and investing are intertwined, but they are not the same. Saving is the process of affording yourself the right to invest, by mastering the process of spending less than you earn (i.e. cash flow management). Investing is the process of growing your excess cash over short and long periods to meet certain goals. For example, if you are hoping to buy a home you will need a down payment for a home. By saving a certain amount of money each month you are working towards that goal. By investing that money saved you’re allowing the markets to help in growing that bucket of money to where you need it to be (i.e. 20% of your targeted home’s value).
Get Clear on the Why You Are Investing
For those hockey fans, “why’d you want to play college hockey?”
You might remember the infamous quote from the popular Disney movie, Miracle, based on the 1980 Olympic hockey team’s miraculous gold medal run. The “why” is so important in virtually every aspect of our lives. Why do you go to work every day as a young professional? Why do you save? Sometimes the answers might seem obvious, but it’s important to sometimes take a step back and ask why. This is no different when it comes to investing.
Getting clear on the “why” helps focus our efforts and helps drive us to make the right decision during times of indifference. For example, you might be thinking “I could spend this money on some fancy new clothes?” But if you are clear on your “why,” you’re more likely to save that money into your child’s college plan, because you can more easily make the connection between that money and what it will be used for. Start with why when it comes to investing and the rest gets easier.
Do Your Best to Keep Costs Low
Despite what many in the financial media purport, one of the single best steps to long-term investment success is simply keeping costs low. Mutual funds and Exchanged Traded Funds (ETFs) are two very common investment vehicles that allow individuals to invest in a broad array of stocks and bonds (i.e. diversification), without having to buy hundreds or thousands of different individuals stocks and bonds by yourself. When investing in these type of investment vehicles it is important to ensure that the expense ratio (the cost of investing in that fund) is appropriate for what you’re getting.
Read More: What John Oliver Revealed About the Financial Services Industry
A few general rules of thumb: (1) funds that hold predominately US stocks are typically the cheapest relative to peers, (2) funds that hold primarily international stocks are usually more expensive, and (3) funds that invest predominately in domestic bonds typically fall somewhere in between. As a general rule, typically ETFs are less expensive than mutual funds, but most retirement plans do not offer ETFs.
Learn more about the investment costs with Lifewise here.
Insure Your Portfolio Against Losses in the Long-term
It is impossible to guarantee that your portfolio never loses money, but diversification does act like a type of investment insurance for your portfolio by decreasing the likelihood that your portfolio will lose money over the long-term (think over 5-years). You’ve probably heard the expression “don’t put all of your eggs in one basket” and if so, you’re well on your way to grasping the concept of diversification.
Diversification is powerful way to decrease the likelihood that you’ll lose money over the long-term by investing in a wide array of stocks and bonds both domestically and internationally. Think about an extreme example for a second, if you invest $100 into one company’s stock there’s a chance that the company could be devastated by (insert unlikely event here) bankrupting the company and leaving you with $0. However, if you invest a $1 into 100 companies (and maybe some bonds too) the chances of all of those companies, spread out across the globe, going bankrupt is virtually 0% and even if one or two do in fact go bankrupt it’s likely that over the long-term a majority of the other companies will grow and you will see a return on your investment.
Keep a Long-Term Perspective
One of the biggest risks we face as investors is the risk of letting our emotions push us to doing the wrong thing at the wrong time. For example, maybe our portfolio is down 15% over the last 12 months and we just can’t stand the thought of our investment being less than what we put into it, so we sell our investments and move our money to cash. Over the next 24 months, the market rebounds and what would have been our portfolio goes up 35%. Ouch!!
In times of market turbulence, it is important to keep a long-term focus, especially when it comes to money we’ve set aside for retirement because chances are we won’t touch that money for years and likely decades. When the market gets bumpy keep this analogy in mind. Picture a woman walking up a mountain yo-yoing. If you zoom in on the women all you see is the yo-yo going up and down, up and down, up and down, but if you simply pan back out you’ll notice that despite the inherent ups and downs of the yo-yo (the market in the short-term), the women herself is progressing slowly but surely up the mountain (the market in the long-term).
When you get anxious about the market’s ups and downs, keep in mind that over the last 90 years, the market has averaged a 10% drop (formally known as a “correction”) every 11 months or roughly annually, and yet the stocks have average roughly 9-11% per year over that same time period. The yo-yoing of the market is inherent in the short-term, but so too are its tendencies to move up the mountain.
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