Over the years I’ve decided to become wealthy. In that pursuit I’ve learned a lot about investing. Friends and even a few colleagues of mine have asked me how to start investing. There isn’t a simple answer because it depends on you and your goals. You’ll have to make the decision to start, to learn, and to invest.
I knew I wanted to invest when I was in college, even before I started my very first full time job. The biggest problem was I didn’t know how. Now that I know more, I can understand how it seems like it’s out of reach for the average person. Over the last few years though, there has been a rise in companies that provide new ways to invest that make it easier for beginners.
The most basic form of investing is long term investing. When you start investing, I think it’s important to start with a foundation, so I always tell people that a long term investment strategy is a good choice because it requires less work, research, and maintenance. It’s also a good retirement and long term saving strategy.
How much do you need to start investing?
The first thing most people will probably ask is how much does it require to start? Most people think that it requires a lot of money. You can invest a lot if you have money available. You should probably keep emergency savings though. If you can’t afford it, you can start with with something like $25 per month. The nice thing is that if you continually add money, your account will grow rapidly and even $25 per month will become $300 per year.
There are services mentioned below below that can automatically invest any amount you want, when you want it. Setting up an automatic deposit or making a plan to save monthly will not only help you save but it will also improve your returns. Since the stock market fluctuates over time, putting money in at automatically every couple weeks or monthly can create a lower cost basis and increase returns.
How to start investing in ETFs
When I first started I thew some money into an account and bought a couple stocks. I ended up selling them for about a 4% gain over the course of 9 months. That first stock pick did okay, but it didn’t beat the S&P500, one of the stock market indexes. I didn’t do enough research and you need to do some research if you’re going to buy individual stocks. I should have put my money into an exchange traded fund, or ETF.
ETFs are funds that are traded on the stock market. They incorporate many different stocks and manage the amount of each in their portfolio. You don’t have to worry about picking individual stocks, and the return is generally better than random stock picking. Two of the most popular funds are SPY and VOO. Both funds follow the S&P500 index. If I had known the benefits of purchasing an ETF I would have made a much better return.
The good and the fees
The best part about ETFs is that they are by design diversified. As I mentioned before, buying an ETF is like buying small parts of many different stocks. This means that if one company isn’t doing well it won’t have as much impact. Besides diversity, ETFs also have an upside in that many of them also have dividends. The dividends from the stocks within the ETF are passed on to you. With the SPY ETF, the dividend in 2019 was 2.25% and for VOO the dividend in 2019 was 2.27%. That alone more than makes up for the expense ratio. A healthy dividend is always nice to have.
The downside to ETFs is that they charge a percentage per year. This fee is the expense ratio, the amount the fund charges for their managing of it. SPY has a 0.095% expense ratio while VOO only has a 0.03% expense ratio. Some ETFs have expense ratios up to 2% or even higher. When looking for funds to invest in, you want to ensure that the fee is reasonable. I typically don’t invest in funds with more than around 0.50% or less for an expense ratio. Vanguard makes quite a few low fee ETFs.
If you’re interested in starting with ETFs you have a couple choices in how to start investing. You can start with a robo-advisor, which will make investing virtually automated. If you’re more hands on, you can buy ETFs using online stock brokers.
Invest in ETFs with a robo-advisor
There are a lot of new sites offering robo-advisor style services. You invest a dollar amount into the account and they will invest a certain percent into stocks or bonds based on your preferences you decide when setting up the accounts.
The biggest advantage of robo-advisors is that you select the strategy, between conservative and aggressive. A conservative strategy will be a higher percent in bonds, while aggressive will be growth oriented with a higher percent of stocks. The more aggressive, the more risk. Robo-advisors will also periodically readjust your portfolio automatically back to the required percentages if the market is doing good or poorly. Automatic re-balancing helps improve gains during market fluctuations.
The two services I am most familiar with are listed below. Both services work in very similar ways but with a few differences.
The Betterment website has a lot of great tools that help you understand the best way to invest based on your goals. This can be to gain wealth, make a large purchase, or saving for retirement. You can determine exactly what percent it invests into stocks and bonds. With Betterment, you pay a 0.25% fee per year, on top of the fees for the ETFs that they invest your money in for you. The total fee can be up to 0.35-0.50% per year depending on what funds it invests your money into.
The automated investing that SoFi provides also allows you to pick the amount of risk you’re okay with. There is a limited amount of pre-defined options for dividing between stocks and bonds. With SoFi automated investing, you also don’t pay a yearly fee. Instead, SoFi is the manager of some of the ETFs. Notably the ones they use for the stock market index funds. Since their management fee is based on the ETF itself your overall yearly total for fees ends up being around 0.15-0.35% per year.
Invest in ETFs using online stock brokers
If you’d rather have full control over the ETFs that you purchase them using a brokerage account and not a robo-advisor. Most brokerages have switched to commission free trading, so there are no fees to place trades.
To get the most out of manually setting up your investment strategy you’ll have to ensure the proper percentage of stocks and bond ETFs. You’ll also have to make sure to check every so often and re-balance it to ensure you’re still on track with your percentages. This requires a bit more work then the robo-advisors.
This is in both categories because they have both an active investing account and an automated investing account. The active investing account is great for beginners because you can buy fractional shares of popular stocks and ETFs. It doesn’t matter how much you invest. If you want to invest $25 into Amazon stock you can. The downside of SoFi Invest is that there is very minimal information on stocks, so you have to look them up on another site to see things like earnings and cash flow data. They’ve also got a great no-fee high interest checking account that I use.
The nicest thing about E*Trade is the amount of information that they have on different stocks and ETFs. In fact, it’s so much information that it’s a bit overwhelming. I actually like the amount of data they provide and I use them as my main stock brokerage now that they have $0 trades. Besides having a slightly bloated interface they do have the ability to enroll in their dividend reinvestment plans. This is nice when you want to put that $5 in dividends back into a $200 stock, since you’ll receive just a portion of a share, and they’ll do it automatically.
Originally Robinhood was the only one in the list that had $0 trading. However, over the last year or so most of the big brokerage firms have switched to free trading as well. Robinhood is a very simple application, originally on the phone but they now have a desktop one as well. They do not provide nearly as much information as E*Trade when it comes to data on stocks. You also cannot participate in a dividend re-investment plan.
These are just the places I have used personally. There are plenty of other places you can start investing though, so take some time to decide before you pick one.
Choosing what works for you
I encourage everyone to take a look at the options and decide what is the best option for you. A lot of the decision is based on whether or not you want to manage the accounts. If you’re not someone who wants to follow the stock market and doesn’t really care for all the technical details, a robo-advisor is a great way to invest without having to worry. Others will want to know all the data possible, get the lowest fees, and manage it themselves. Both ways will work and the most important thing is to make sure your money is working for you.