Time to Invest?

I came across this interview style article on Money.com interviewing a 28-year old female financial planner. While I wish I could say I am talking about myself, sadly I am not.

This particular advisor, works for Betterment which is an online investing platform based out in New York geared towards tech-savy investors. I am huge fan of Betterment and actually work with some of my clients on their Betterment for Advisors platform. I loved the advice this financial planner offers to people considering investing for the first time. Her advice is short and sweet, just start.

Are you ready to be an investor? If your currently contributing to an employer sponsored retirement plan, the good news is that you already are! Now the question becomes should you invest for financial goals outside of retirement?

Where to Start

Before becoming an investor beyond your 401(k) it’s important to have the following items settled before diving in:

  • Zero credit card/consumer debt

If you’ve only met one or two of the criteria above. I would strongly encourage you to go back and take care of all three items before investing. If you’ve already met all three qualifiers, then congratulations my friend! It’s time to become an investor.

What is Investing?

By definition, investing is committing your your money to a company, project, real estate or government with the expectation to earn a profit. In the investment universe there are two main investment stocks and bonds. Investing in a stock means you own a piece of a publicly traded company (i.e Apple or Amazon) and share in the profits and losses of said company. At a high level the risk level is high but so is the return expectation.

Investing in a bond means you are lending your money to project or government and will receive regular payments, known as coupons, in return. Bonds have a maturity date, which is a predetermined date when that same project or government will give you back the value originally invested. Again, at a high level, the risk level is low but so is the return expectation.

Why Invest?

There are many reasons for someone to become an investor, some may do it for fun and others may do it out of necessity. If you’ve ever heard of inflation, the rising of costs of goods year over year, many people will point to inflation as the number one reason to invest. Its one of the few way to keep up with inflation and preserve your dollar’s purchasing power.

Historically, the annual rate of inflation is around 2.5% which means your annual travel budget of $5,000 will cost closer to $10,500 35 years for now in your retirement years. One way to cover those costs 10 years from now is to invest your money today in an investment strategy with an expected return in excess of 2.5% to keep your purchasing power in tact.

Another reason to invest your money is to create options for yourself in the future. Giving yourself the ability to have options later in life can mean something different to everyone. Some can equate options with having the option to stop working later in life and retire. For others, creating options means having the ability to open up their own business later in life or pick a new career with lower income expectations.

An added bonus to start investing sooner rather than later is the Time Value of Money and compounding interest. My favorite way to demonstrate this phenomenon is the Rule of 72 which shows how many years it takes for value to double based on a rate of return. I’ve outlined how the Rule of 72 works for $50,000 invested today assuming an 8% rate of return.

The Rule of 70 tells us that this value should double every nine years. Based on that logic, the original $50,000 will grow to $1,600,000 in 45 years time. And that is assuming no additional contributions.

Where to Go

To start the investment process, you first need to pick a custodian. The custodian is where you will create your investment account, make deposits and pick your investments.

  • Betterment
  • Schwab Intelligent Portfolios
  • Vanguard Personal Advisor Services
  • Wealthfront

The list of custodians above are known in the industry as “robo-advisors” or online platform that provides automated investment advice. For those not already working with a financial advisor (more to come on that) getting started with a robo-advisor is a great option. A portion of the account opening process is dedicated to understanding you as an investor, your stage of life and future financial aspirations. After answering a few questions about yourself, the investment platform will recommend the best investment strategy to meet those goals.

When looking for a custodian to invest your money, its important to consider their investment minimums and fees. The custodians listed above have different account size minimums you will need to consider before starting. Its also important to understand the fees associated with investing each custodian which includes management fees and fund expenses. Minimizing the fees you pay to the custodian will allow you to maximize your returns as an investor.

What’s an Investment Strategy?

Earlier, I talked about the different between stock and bonds and their expected returns. An investment strategy, in short, is how much to allocate to stocks vs. bonds. I am going to over simplify here but your investment strategy should be based on your time-horizon as an investor, which is the length of time until the funds are needed to accomplish the financial goal.

As am example, if you are investing to purchase a home in five years, your investment strategy should be more conservative and focused on bonds to ensure the funds hold their value when needed. If you are investing for retirement 20+ years from now, you have the ability to be more aggressive in your investment strategy and use more stocks over bonds.

Ask for Help

If you’ve made it this far in the post, I will start by saying thank you for your patience. As you can tell, there is more to that goes into becoming an investor than making the decision to do it. It starts with being in the right place financially, finding the right custodian and picking an appropriate investment strategy.

I am biased, but I think its very important to work with a professional that is knowledgeable in this space and can help you along the way. I view my job as being a financial coach to my clients and help them see the bigger pictures and stay accountable along their journey to financial freedom. If you have any questions feel free to reach out!