When I was a new investor, here are three things I looked into:
Index Funds. I would definitely stay away from picking individual stocks when you’re just starting out. After all, you don’t start out surfing 20-foot waves. You have to learn to get comfortable in the water first. One way to dip your toe in the investing water is through index funds. An index is a collection of different stocks by a certain set of parameters (like a particular industry, or size of a company). When you buy an index fund, instead of buying stock in one company like Apple or Tesla, you are basically buying a little slice of many companies. Index funds are less risky because if one company fails within the fund, you have all the others to prop it up. Fun fact: mutual funds are managed by professionals who pick stocks for a living and they can’t manage to outperform index funds.
Target date funds. Target date funds are packages of stocks and bonds that change depending on how close you are to retirement. So, when you first buy target date funds, they will have an asset allocation more on the “high-risk-high-reward” side of the spectrum— so, more stocks, less bonds— and as you get older, the asset allocation will shift to be less risky, which makes sense, right? You don’t want to risk losing a big chunk of your retirement savings on the eve of your retirement. Investing in target date funds is a way to make sure your portfolio is appropriate for where you are in your investing journey, without having to be hands-on. If you want to learn more about how to buy these, check out my conversation with author Ramit Sethi where we did a deep dive on all things target date funds.
Robo-advisor. There’s no shame in the robo-advisor game. And for a little Nictionary note here: robo-advisors are a feature offered by many brokerages, and it’s just a fancy term for a computer program that will invest for you based on your goals. Robo-advisors are a really good way to enter the market as a new investor. To set it up, you need to first create an account with a brokerage, find their robo-advisor program and then answer a survey where there are no wrong answers. On this survey you will be asked about your retirement goals, how much risk you feel comfortable taking – things like that. Then, you transfer some money to that brokerage account and boom! The robo-advisor invests your money for you based on your goals, and you don’t need to buy the stocks yourself. And as an added bonus: investing with robo-advisors is cheaper than working with a human financial advisor, because a robo-advisor isn’t trying to send their kids to private school.
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