At this point your budget is in good shape and you would like to invest your hard-earned money! Let’s start with the basics.
I’m taking a step back here, but it is worth reiterating. Make sure you have enough saved in an “emergency fund” before investing. A few months of expenses should do the trick. The reason I say this is that you should try to avoid selling your investments for short-term cash needs. This allows you to preserve your investments and maximize long-term returns.
There are several asset classes out there to invest in and I would argue they all have their merits. Examples of these assets include stocks, bonds, real estate, commodities, precious metals…the list goes on. For now I’m going to keep it simple and discuss stocks.
While it is important to have a diversified portfolio inclusive of several types of assets, my personal belief is that it is more important to get started earlier and adjust as you go, rather than waiting to have the “perfect portfolio”. The main goal is to get you started on your path toward increased financial freedom. It’s like the old saying goes, “it’s time in the market not timing the market!”.
In my own personal portfolio I invest in ETFs, which are also known as “Exchange traded funds”. I am oversimplifying here but most ETFs (usually those that are passive) intend to track a collection of stocks. Rather than picking specific companies, passive ETFs attempt to mirror the return on a basket of stocks.
Let’s take the S&P 500 for example. This represents 500 of the largest companies in the United States based upon market capitalization. If you look on any major financial news source, they will most likely report what the S&P 500 index is priced at currently. By investing in an ETF that tracks the S&P 500, you would be able to track the performance of the 500 largest public companies in the United States. Warren Buffet has argued on several occasions, along with the famous founder of Vanguard, Jack Bogle, that “index investing” is a phenomenal way for the typical investor to invest in equities.
I won’t go through all of the details but some of the benefits of index investing include diversification, lower costs, liquidity and a greater likelihood that you will track the returns of the market. The goal of many asset managers is to outperform the market for their investors. The unfortunate reality is that too often performance falls short of the “benchmark” due to costs of trading and investing in companies that do not meet expectations. By tracking the market, you are eliminating the need to pick individual stocks and can invest at a rather low-cost. In my view, ETFs deserve a place in every investors portfolio.
So how do you start? My recommendation is to set up an account, taxable should be fine, with any major discount brokerage house. Some of the major firms in the business are Vanguard, Fidelity, Charles Schwab, etc. These firms offer great ETFs at competitive pricing that should provide you with the necessary building blocks to get your started. If you don’t know which ETF to buy, start simple by purchasing an ETF that tracks the S&P 500. It’s not perfect, but it’s a great place to start 🙂
Just remember, the key to long-term investing success is to not let your emotions get the best of you. Set up a plan, stick to that plan and allow your money to grow over time; it’s that simple!