As a beginner, start by investing in your company’s retirement plan.
A 401(k) is the most common type of tax-advantaged retirement account offered by employers. The earnings in that investment account are not taxed until you withdraw your funds (as long as you wait until retirement).
You usually have an option for which funds to invest in, but most retirement plans come with a default that tends to be the most sensible choice for most workers.
Companies will usually match 50% to 100% of every dollar invested up to a limit of around 2% to 5% of your salary.
For instance, let’s say your employer matches $0.50 for every dollar you contribute up to 5% of your salary. If you make $45,000 a year, and you invest $2,250 in 401(k) contributions, your employer will contribute $1,125.
To take full advantage of this benefit, contribute the full limit your employer will match. Most folks with steady paychecks can budget around reducing take-home pay by 5% or so, and not doing that is like walking away from free money.
Investing isn’t a get-rich-quick scheme. Generally, you don’t get extraordinary results without taking extraordinary risks. Don’t try to get lucky. Stick to the method that’s proven to have the most stable outcomes: Invest in index funds with low fees.
Stock index funds are a type of mutual fund. Mutual funds can be divided into two categories: actively managed funds and index funds.
Fund managers actively manage funds by choosing their own stocks. By comparison, an index fund automatically includes stocks to track the performance of a stock index, like the S&P 500.
If you want a safer investment, invest in index funds. Actively managed funds haven’t been proven to do better than passive index funds. In fact, for the past 15 years until 2016, nearly 90% of active managers failed to perform better than the S&P 500, according to a report from Index Fund Advisors.
Actively managed funds also charge higher fees. The fee amount — calculated as an “expense ratio” — for actively managed stock funds is a little under 1%. Compare it to the average expense ratio for index stock funds which is 0.2%, according to Investopedia.
There is no proof that low-expense funds will perform worse than high-expense ones. So invest in funds with low expense ratios (i.e. lower fees).
You could also choose to invest in socially responsible funds (SRIs), a type of mutual fund that invests in companies that treat their employees well; promote women, BIPOC and LGBTQ employees; and are environmentally conscious.
Socially responsible funds are fairly new, but experts expect them to be a good long-term investment because they focus on businesses with sustainable practices.
Here are some popular socially responsible mutual funds:
• SPDR SSGA Gender Diversity Index ETF (SHE).
• Vanguard FTSE Social Index Fund Admiral (VFTAX).
• iShares MSCI KLD 400 Social ETF (DSI).
• Change Finance U.S. Large Cap Fossil Fuel Free ETF (CHGX).
• Vanguard ESG U.S. Stock ETF (ESGV).
• PAX World Balanced Fund (PAXWX).
Visit SocialFunds.com for more information about socially aware funds and their fees.
During the financial crisis of 2008, many investors sold their stocks and refused to reinvest for years after. Consequently, these investors lost out on gains when stocks eventually tripled in value.
Emotions get the better of people, and it’s easy to get swept up in the middle of a crisis. It’s called “recency bias.”
Recency bias is the phenomenon of making short-term decisions based on immediate events. For example, if you see your portfolio drop several thousand dollars, your first instinct might be to panic and pull out.
Recency bias will lead you to believe that your funds will keep dropping. However, the market is volatile and unpredictable. Jumping to a general conclusion based on a snapshot of time can derail your financial goals.
The most sound long-term investment strategy is to put your savings in an index fund and keep it there.
To minimize recency bias:
• Avoid looking at your investments: Daily fluctuations matter little in the grand scheme of things, but it can be discouraging to see your investments dip on any given day. Checking on your investments occasionally is a smart thing to do, but it’s unnecessary and stressful to monitor them daily.
• Limit information intake: Try to set a schedule for how often you check financial news, especially during times of market volatility. This lets you filter out the noise and see the full picture before making any big financial decisions.
Prepare for your biases by slowing down and being mindful of your investment decisions. See yourself into retirement and trust that a slow, consistent strategy will help you reach your financial goals, regardless of the present circumstances.
A common myth is that you need a lot of money to start investing. That simply isn’t true.
You could decide to invest as little as $10 per week. Automated micro-investing apps make it easy to open an account without a huge minimum investment.
Automate your investment is important for two reasons:
• Putting your investments on autopilot lets you invest on a regular basis without having to think about it.
• Automating your investments will also help you avoid mindset obstacles, such as recency bias, that may sabotage your long-term financial plan.
If you work for an employer with a retirement plan, have them deduct your investments automatically from paychecks. For a non-employer investment plan, nearly every mutual fund company and stock brokerage make it easy to set up automatic contributions from your bank account.
Investing can be complicated, and putting your investments on autopilot requires a sound plan. A financial planner or advisor can help you do that — but this assistance doesn’t have to cost a lot of (or any) money.
Robo-advisors like Betterment, Wealthfront and So-Fi are becoming increasingly popular for making investing easy and accessible to everyone.
Through the power of machine learning, robo-advisors can recommend low-cost funds aligned with your financial goals. You can either have the app purchase these investments for you at a small fee, or you can use the advice as a guide to help you invest on your own (free of charge).
Finding a live financial advisor or planner can be beneficial if you have more complex financial concerns, like saving for a family or blending your savings with a partner.
We recommend working with a fee-only financial planner, who charges you a flat fee (hourly or percentage of assets). Avoid working with someone who is paid by commission (or “loads”), because they’re incentivized to recommend investments that might not be in your best interest.
Also, be sure to ask a financial planner if they like index funds. If they say no, reconsider working with them.
These search engines can help you find fee-only financial planners in your area, including those who specialize in LGBTQ financial planning:
Finding a financial planner who understands and prioritizes your personal and financial interests is important. If you’re seeking financial help, choose an advisor carefully.
Alani Asis is a personal finance writer who is on a mission to help young audiences become financially literate and find financial freedom. You can find Alani on her site “Intuition by Alani,” where she talks about saving, earning, side-hustling and living your best life.
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