As a Millennial, I’m guessing you’ve been told countless times that you need to start investing. You’ve been told about the advantages of starting early and how you’ll be set-up for success just by starting. And that stuff is completely true. The problem is, no one ever told you exactly how to invest when you’re just starting out.
This post provides the 5 guidelines I use to manage my investments. More importantly, it will help you to start investing in a way that creates good savings habits so you can start to build wealth without even thinking about it.
Before we dive in, it is important to keep in mind that there are hundreds of popular different investment strategies and each one will argue why it’s the best and all of the strategies suck. A lot of these strategies are sold by glorified salespeople who get rewarded handsomely when you use these strategies (and a lot of the time it isn’t in YOUR best interest). Most of these investment strategies are not even intended for people just starting to invest because brokers and advisors make such little money working with you that it isn’t worth their time.
Thankfully, I will gladly give my time to help you get your investing career started, the right way. I also don’t have any conflict of interest so I can let you in on the investing guidelines (read: how investing actually works) that no salesperson will ever give to you straight. Just like I outlined on the Start Here page of this website, I am here to get you results. Plain and simple.
For those of you who like to read and research: the guidelines that follow are largely based around Burton Malkiel’s research that was popularized through his book, “A Random Walk Down Wall Street” and the Efficient Market Hypothesis that was developed by the Nobel laureate, Eugene Fama.
Don’t worry if you aren’t familiar with either of these concepts – I will explain the key points throughout this post so you can get the gist. If you want further explanation on anything discussed in this article, send me a quick email or leave a comment below with your questions and I will get back to you within a day or two.
Alright, enough jibber-jabber, let’s get to it.
1. Pick A Custodian With Low Trading Costs
When you’re just starting out this point has an enormous impact between you having a positive or a negative return. The typical commission, or cost to purchase, that you are charged for a stock, ETF, or mutual fund ranges from $5 to $24 if you use one of the popular discount-brokers such as Charles Schwab, Fidelity, E*Trade or TD Ameritrade. However, all four of these firms offer a wide variety of commission-free mutual funds and ETFs (hint – this is what you’re looking for). In most cases, the minimums to open an account at discount brokers range between $500 and $1,000 dollars (or a monthly deposit of $100) and generally they do not charge any annual fees for having accounts with them.
As a new investor, I have to strongly discourage you from working with one of the large advisory firms, such as Merrill Lynch or Ameriprise, because the fees you pay tend to be much higher than if you use a discount-broker. It is common for these large firms to charge you $50-$100 per year (per account) just for having an account with them and a lot of advisors at these firms require you to have $250,000 or more in investments just to take you on as a client. While these firms may be a good fit for you later on in life, the fees really dampen your wealth-building efforts when you are just starting out.
Also, the robo-advisors, such as Betterment and Wealthfront, allow you to receive professional management of a diversified portfolio of ETFs for a very low annual fee. Based on the data, research, and missions of these companies, both of them are great options because they are affordable options that give you top-rate portfolio management. I have no problem saying you should consider using these companies because the value they provide to you as an investor is second to none.
2. Passive Management Beats Active Management
The research that my investing guidelines are based around largely focus on the fact that no person, group, or investment company can consistently outperform the index they are compared to. When I started at my new job last fall, I had the chance to attend an advisor conference put on by the investment company we use, Dimensional Fund Advisors (DFA). The keynote speaker, Apollo Lupesco, gave an unforgettable metaphor that summarized Burton Malkiel’s book.
I’m paraphrasing, but the metaphor went like this: Think back to your college days when you would go out partying with your group of friends. Every group of friends had that one person who would get so drunk that the 3-block walk home became a struggle. Now imagine you hit the pause button on life and asked everyone you were with where the person’s next step would be.
If you laid out all of the potential next steps, you could reasonably assume that the next step will be within a certain area around them. Meaning you know he can’t end up 20 feet ahead of you in one step. But the next step could be forward, backward, either side, a combination of those, or the person could just fall flat on their face.
The main take away is that no one knows which direction any particular stock, or the stock market as a whole, is going on a short-term basis. Over the long-term, most people assume that the stock market will increase in value – just like your friend finally making it home – but no one can predict what the path it takes to get there will look like.
You can implement this passive investment strategy with funds like the Vanguard Total World Stock ETF (VT) or the Fidelity Four-In-One Index (FFNOX) that are diversified and have extremely low annual expenses. Instead of just buying one fund, you can also buy similar funds that track specific indices of both the US and International stock markets. For simplicity’s sake, one investment is an easier, but still effective, place to start.
3. Global Diversification Is A Necessity
Have you ever played the game Land Mines? It used to be on every single Windows computer by default and that is how I wasted time in my young days. It drove me crazy because I would be so close to winning, but then I would inevitably hit the land mine and lose. Investing in a single stock, or even a handful, leaves you exposed to this “land mine” effect, where if another Enron scandal happens, you’re left with nothing and good luck getting any of that money back.
Diversification steps in to reduce this land mine effect. Some argue that diversification can be adequate when you hold 12 stocks that cover the different sectors (like financials and utilities), but for the most part diversification involves owning thousands of different companies, both domestic and international, as well as the various forms of bonds.
The various continents and countries of the world are continuously becoming more and more intertwined due to technology and globalization (think about how many countries sell Coca Cola products). This means that it is becoming increasingly important to invest globally because who knows which company or country the next big thing comes from (i.e. the selfie stick). A company in China can easily sell its products directly to consumers in the US, and around the world, for a very affordable cost.
Please, please, please don’t go and try to research the 12,000 or so publicly traded companies around the globe. You can be diversified by purchasing a global fund, or by purchasing an assortment of ETFs or mutual funds that cover the various sections of the market.
The key takeaway here is to avoid investing solely in the US stock market. While the US is where a lot of companies consider home, the companies scattered throughout other countries can also add a lot of value to the global economy.
4. Invest Consistently
Do you remember your first day of Driver’s Ed? Going into it you were so excited about being able to drive, but if you were like me once you actually started driving you were freaking out when you were going 20 mph with no other cars around you.
Now think about your daily commute to work.
You wake up, get ready, and get in your car and you don’t even think about how you drive because it has become such a habit for you.
I swear to you that saving money consistently, whether it is $20 per week, $150 per month, or any other amount, will become a habit just like driving a car did. The key here is to set-up automatic transfers (and purchases of your investment) that begin to occur just like how your rent, student loan payments, and other bills are pulled from your checking account. After a month or two, you won’t even think about the money leaving your bank account and guess what?
You just developed the habit of saving! Once you can develop this habit, managing the rest of your finances becomes a whole lot easier.
5. When Everyone Else is Screaming, Stay Calm
I use to watch Bloomberg every day at the office. It was fun to stay up on the news and discuss with my coworkers. But then I realized that everything I was watching was either “OMG THE MARKETS ARE CRASHING” or “THE MARKET CAN’T STOP GOING UP”. It seemed like it had to be one or the other every single day!
The stock market is a game that no one will ever officially win, because how do you define winning? If you can accomplish and do everything you want in life with a return that is substantially below what the market returns, did you win? Absolutely you did, but your opponents (other investors) will say you didn’t because you didn’t beat the market. So while everyone else is reacting to news and panicking, just stay calm, stick to your plan, and have faith that you will get to where you want to go.
This is the aspect of investing where the average investor shoots themselves in the foot. Reacting to news means you’re already behind, so what typically plays out is the average investor sells their investments at the bottom of the market, and by the time they muster up the courage to put money back into the market they end of buying at the top of the market.
This goes against the whole, “buy low, sell high” saying that everyone and their mother loves to quote. When you’re just starting out, it’s easy to panic when the market moves. Natural even. But whenever you are freaking out, just ask yourself this question, “When I need to use these funds for <insert whatever goal your saving for> 30 years from now, is it probable that the market will be higher than it is today?”.
If you can answer that question (custom-tailored to your situation and time frame obviously), then you can stick to your plan. When you stick to your plan you don’t worry about the short-term increases or decreases because while everyone else is playing the short game you are playing the long game. The long game always wins out.
Where Do You Go From Here?
All of this comes down to accepting that you can’t outsmart the stock market. I used to think I could pick good investments that would go up and I’d be on my path to a long, wealthy life. And I still do. However, now the large majority of my money is invested in various low-cost, diversified portfolios that project to get me to my individual goals based on my risk-tolerance and how much I can save.
If you want to know how I manage my investments using these 5 guidelines, send me a message by filling out the form below and I will give you the details. If you’re ready to get started investing, just remember to apply these 5 frameworks:
- Pick a custodian with low trading costs
- Passive management beats active management
- Global diversification is a necessity
- Invest consistently
- When everyone else is screaming, stay calm
These guidelines will help you to not only begin investing, but to invest the right way. If you can use these guidelines to start investing right now, even if it is $10 per week, do it. My challenge to you is to start investing, and add $25 to whatever amount you think you are comfortable investing each month
What is the biggest takeaway from this article that you can take action on today that will help you become a successful investor? Leave your comment below!