If you have money lounging around in a savings account because you have no idea what to do with it — you’re not alone! I know you’re not apathetic, you just can’t decipher the information through the cacophony of Wall Street. I’ll show you how to navigate the labyrinth of brokerage platforms and products to locate the right investment for you (and avoid pesky Minotaurs!)
Determine how much time you want to spend investing
The first step in figuring out what to do with your savings is to honestly assess how much time you can devote to investing. You’re probably just graduating college and focused on getting your career off the ground and hardly have the time (or the inclination) to read up on the financial news of the day or ponder the implications of the LIBOR rate and how that affects export companies in the United States. Unless you plan to become an expert on evaluating companies, you’ll want to diversify your investments as much as possible so your risk is spread out. It follows the adage, “don’t put all your eggs in one basket.”
Spend your time learning about mutual funds
Mutual funds are the largest and most popular investment vehicle for the retail buyer. On a global scale, the industry has assets of over 24 trillion dollars – and around 14,000 different mutual funds in the United States alone! What makes mutual funds so attractive is their hands-off approach to investing. Professional money managers buy and sell individual holdings within the fund so that it stays diversified and you don’t have to try to time the market.
How do you know which one to invest your hard-earned money into? With so many choices and so much money being thrown around, it’s easy to get intimidated. Every commercial you see with talking babies or internet ad that lurks on the side of every search engine is a brokerage firm touting their product knowledge as being superior or their platform as the cheapest.
Here’s the secret: They’re all the same! Any major brokerage gives you the tools you need to begin investing. Money Under 30 maintains a short list of recommended brokers that feature low minimum balances and fees here.
Keep it simple
Leonardo da Vinci once said, “Simplicity is the ultimate sophistication.” Keep it simple. Put your money into a no-load mutual fund and call it a day. Don’t get caught up in sales charges and share classes that come with loaded funds from financial advisors or brokers. Statistics show that no-load mutual funds outperform loaded mutual funds over a given period.
The magic of compounding interest means that the the longer your money stays invested, the greater the possible returns will be. Fees and commissions are like termites that will eat away at your returns. You’re just beginning to invest, so don’t try to over-complicate things or feel like you need a financial advisor just to put a few grand into a mutual fund. Unless you have serious tax considerations or more than a hundred thousand dollars to invest, do yourself a favor and cut out the middleman.
Determine your risk profile
You’ll just need one other piece of information to get started: a risk profile. You can use online risk assessment tools like this one or this one. These profiles will help you identify whether you are either risk tolerant or risk averse.
If you are risk averse (conservative), it means you don’t want to take chances with money and are satisfied with the lower returns associated with taking less risk. If you identify as risk tolerant (aggressive), it means you’re more willing to accept the possibility of loss or withstand high fluctuations in value in order to receive potentially higher returns.
Many people may tell you to be aggressive since you’re young and can afford loss, but if the thought of your money changing value keeps you up at night, it’s perfectly okay to err towards conservatism. If you’re unsure about investing aggressively, ask yourself if you are comfortable with the idea of losing 20 percent or more of your portfolio in a single year. If the answer is no, you may want to take a look at more conservative options. The SEC provides some good additional information about determining your risk tolerance.
Mutual funds that appeal to conservative investors are going to be heavy in bonds, treasuries, and other fixed income products. Aggressive mutual funds will be geared towards stocks and come in various flavors with titles like “large cap growth,” or “small cap value.” If you’re unsure, a good start may be a balanced fund that has a mix of both stocks and bonds in their portfolio.
Buy your first fund
If you’re ready to get that savings account money working for you, consider checking out no-load mutual funds by Vanguard or T. Rowe Price. They have some of the lowest expense funds available and a strong track record of consistent performance.
A warning to the unwary investor about index exchange traded funds, or ETFs. You may come across information that espouses the merits of index ETF’s for the beginning investor on the basis of low expense ratios, but this recommendation should come with more than one grain of salt. These products are not actively directed by portfolio managers and may be subject to higher risk. The biggest downside to these ETFs is the lack of distinction between good and bad investments. They are merely baskets of stocks that include both outstanding companies as well as under-performing ones.