Never invested before? Why not start now?
One of my favorite comic cartoons is of a retiring individual sitting in a financial advisor’s office and the caption says something like this “I retire on Friday and I haven’t saved a dime. Here’s your chance to become a legend!” As you can imagine the look on the advisor’s face is priceless. As comical as the cartoon might be, unfortunately, this is the truth for retirees that failed to put together an investment plan. I’d like to offer a few tips on how to get started with investing:
- Start Early – The sooner the better. When you’re starting out as an investor time is your best friend. The longer you have to invest the more time you have to realize the potential effects of compounding returns. As a younger investor you have a much longer investment time horizon and are able to take on more risk in reward for potentially higher returns. I understand if you are young your income might be limited, but even $25 or $50 a month can really add up overtime. You could easily free up that much money to invest by preparing your own lunch everyday instead of going out to eat.
- Make it automatic – Many of our clients have an automatic bank draft set up to go into their investment account on a bi-weekly or monthly basis. Doing this allows you to not have to think about writing out a check, it just happens. This way you don’t have to make the choice to invest the money or spend the money impulsively on something you may not really need. As your income increases, increase your contributions.
- Talk to an advisor – Investing can seem overwhelming and complicated; don’t let that hold you back from starting. Consulting with a professional who will take the time to explain investment options, understand your goals, define your risk tolerance and create an investment plan specifically for you can be key. Sure, there are many “do it yourselfers” and that’s ok. An advisor isn’t for everyone, but most people want a captain to turn to when the waters get rough.
- Diversify – I’m sure you’ve heard the term “don’t put all your eggs into one basket”. Building a diversified investment portfolio is an important step to help in becoming a successful investor. We look at 4 major asset classes when constructing portfolios: stocks, bonds, alternatives such as real estate or commodities and cash. The percentage of funds allocated into each asset class varies for every investor.
- Be a long-term investor – Do not expect to become rich overnight when it comes to investing, in fact if someone is promising you a get rich quick investment turn around and run the other way! Compounding of returns takes time and patience you’ll have up years and down years, but if your investments are being managed correctly you should have more up than down. Also, do not panic over short-term volatility and let emotion blow up an investment. Take time to remember why you made the investment. If the same fundamental reasons are still there it’s probably wise to continue with the strategy or perhaps buy more of the investment. If something is fundamentally wrong with the investment it may be time to go another direction.
- Take advantage of workplace benefits – Does your company offer a 401k? Do they offer a match? Many companies are offering company sponsored retirement plans like a 401k to stay competitive with potential employees. If you work for a company that offers a plan start participating. You can defer a percentage of your paycheck into the plan and be eligible to receive a company match. Don’t just defer and forget though. Make sure your money is going into appropriate investments offered inside the plan and not just sitting in the default money market account. Typically, 401k plans will offer a line-up of mutual funds and it’s the employee’s responsibility to elect the funds they want to invest in.
- Educate yourself – Hiring a good advisor can help with this step, but I would take it a step further and do your own research. Take the time to understand the difference between stocks, bonds, mutual funds etc. This will help you become a more confident investor and hopefully help you become passionate about the investments that you make.
Investing can be intimidating or I’ve heard some people say it’s only for the rich, but I would beg to differ. Take the steps today to get started even if you’re in your later years it isn’t too late to start.
Any opinions are those of Shaun Peterson and not necessarily those of Raymond James. 401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Matching contributions from your employer may be subject to a vesting schedule. Please consult with your financial advisor for more information. Diversification does not ensure a profit or guarantee against a loss. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Every investor’s situation is unique and you should consider your
investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.