3 Investing Questions & Answers
Welcome to another reader question(s) article. If you missed any of the prior Q & A, you can access all investing reader questions here.
Following are investing questions from three 20 something’s who are wondering about the how and where of investing.
1st Investing Question
Tyler of Poor Student asks, “What is the best investment for a student (besides the education that we are working so hard to get)?”
First off, congratulations to you for thinking about investing in college. Most college student’s (myself included, back when I was in college) are more interested in partying and fun than investing for the future.
Tyler, since your blog is from Canada, I’m assuming that you attend university in Canada, where education is usually paid for by the state. Lucky you!
That said, there are three housekeeping items to take care of before beginning to invest. Readers, keep these caveats in mind as your read the final two investing questions.
Before beginning to invest:
1. Get rid of all debt (except maybe some student loan debt). We’re assuming you don’t have any mortgage debt, but if you do, that type of debt is okay.
2. Make certain you save up some ready cash for emergencies. Depending upon your personal situation, you’ll need $1,000 or more for unexpected expenses. A good rule of thumb is to have about 6 months of living expenses in cash in a savings account.
3. Another question to ask yourself is; “Will you need cash to pay for a car or condominium or home within the next five years?”
If the answer is yes, then you don’t want to invest any money in the stock market which you will need for a down payment or other expense within the next five years.
Investing in the stock markets is risky in the short term. Any money you will need during the next 5 years should not be in the stock market, but in a more stable money market or savings account.
Moving on, let’s assume you have some money available that you don’t anticipate needing for the next five years or more and you don’t have debt.
Now, you are ready to invest.
Open an account at a discount investment brokerage account and start putting a small amount into an all-world stock index fund such as Vanguard Total World Stock Index Fund (VTWSX), or another similar fund, each month. Continue your regular contributions, called dollar cost averaging, through the ups and downs in the global stock market. This simple step will start you on the path to building wealth over the long term.
And a final reminder, do not invest any monies in the stock market you will need within the next 5 or so years. The stock market is too volatile for any short term money.
2nd Investing Question
Natalie of Debt and the Girl.com asks, “What is the best investment you can make in your 20s?”
Invest in yourself and your education.
As Tyler mentioned in the last question, an education is very important. Those with higher education tend to earn more money over their lives. You don’t necessarily need a traditional college degree, even a vocational or trade will boost your lifetime earnings.
Look at this graph which shows those with a high school or less education level earn significantly lower wages than those with greater education.
Second, get rid of all debt but mortgage debt. You cannot build wealth if you have credit card or high interest rate debt. After all, if you’re paying 19 percent credit card interest and only earning 8-9 percent return on your investments, you’re losing money.
As we advised Tyler, build up an emergency fund before considering investing. A great place to keep your emergency savings are in U.S. government I (inflation protected) bonds. These safe government-backed investments are certain to protect your cash from investing.
Place your investments in a retirement account.
If you have an income (or your spouse does), open a retirement account. If your company offers a 401(k) or other workplace retirement account with a company match, this is a wonderful way to begin investing in your 20’s. The company match is free money and if you don’t invest in the company 401(k) (at least enough to get the company match), then you’re missing out on FREE money.
If you don’t have access to a workplace retirement account with a company match, then open a Roth IRA at a discount investment broker (see more about this in the next question).
These are retirement accounts, but they don’t tell you what to invest in. Many people confuse “where” to invest (ie the type of account) with “what” (ie stock and bond index funds) to invest in.
Fund your retirement account with diversified stock and bond index funds. Take this Risk Quiz to help you decide what percent to put into safer bond funds and what percent to put in riskier stock market funds.
Then invest regularly in low cost diversified stock and bond index mutual funds, in percentages in line with your risk tolerance.
If you are more risk averse, you’ll have a greater percent in bond index mutual funds and less in stock index mutual funds. And vice versa.
Read more about how to set up an investment portfolio in this FREE micro book, “How to Invest and Outperform Most Active Mutual fund Managers”.
3rd Investing Question
Mom of Mom Makes Cents.com asks, “Are online discount brokers (like E*Trade) a good starting place for new investors with little capital? If not, where would you recommend someone start?
Also, any resources for someone stepping out of debt and wanting to step into the next phase?”
Mom is asking about the “where” of investing. The previous investment questions dealt with the steps to take before investing and transitioned into the “what” to invest in. We also began dipping our toes into the “where” of investing.
But, what if you’ve decided you’re ready to invest? Where do you open an investment account?
The short answer to Mom’s question is “Yes”, invest in a discount brokerage account. I haven’t used E*Trade myself, and have accounts with Fidelity, Vanguard, Schwab, and TD Ameritrade. Most discount brokers will meet your basic investing needs by allowing you to buy index mutual funds and ETFs with low or no commission. I don’t recommend one over the other.
The one advantage of Schwab is that they allow the small investor to open an account with $1,000 (or less if you open a 529 Education account, custodial account, or set up regular investments from your bank account into your investment account) whereas some of the others require larger initial deposits. Other than that, I’d suggest you look around the websites, or just pick one.
Which discount broker you choose is less important than getting started with investing when you are young. That way your money will have plenty of time to compound and grow.
As for resources, I’d suggest you educate yourself about investing a bit. My favorite investing book is The Elements of Investing, by Malkiel and Ellis. It’s a 100 page primer with most of what you need to know about investing.
More Investing Advice and Resources
And if you would like to leave the investing and portfolio management to others, both of these companies offer low cost investment management services; Jemstep and Personal Capital. These online companies offer low cost advice and are great for the beginning investor. And even if you haven’t begun investing yet, their blogs offer informative investing articles.