So You Want To Be An Investor
Are you wanting to "get into the market" or "become an investor", but you're not sure where to start?
IF YOU HAVE A 401(K) OR OTHER WORKPLACE RETIREMENT ACCOUNT, YOU ARE ALREADY AN INVESTOR.
Surprised? Most people don't realize that their retirement accounts are simply a big bucket labeled with the way taxes are applied, with INVESTMENTS inside.
Let's review a few tips to make sure you are investing well.
1. USE TAX FAVORED ACCOUNTS FIRST
- You cannot underestimate how much taxes will affect your investments over time. 401(k) plans offers pre-tax contributions that give you an immediate tax benefit. A Roth 401(k) or Roth IRA offers tax free withdrawals in the future, but requires contributions with money you have already paid taxes on. HSAs have tax benefits as well. All of these options will save you money on taxes in one way or another, and should definitely be used first!
2. HAND SELECT YOUR FUNDS
- Make sure you go in and personally choose your investments. You should read the fund prospectus for everything you invest in (gasp?!). I know it is long, but at least look at the first page so you truly know what you are investing in. You can also look up a fund on morningstar.com to learn more about it. Consider reading the Boglehead's Three Fund Portfolio for a super simple method.
3. PAY ATTENTION TO EXPENSE RATIOS
- I cannot say this enough. There are multiple studies out there that have found that the number one predictor of a fund's future performance is its expense ratio! Expensive funds will put a major drag on your returns. Shoot for <0.05%. This will likely be index funds.
- In its most basic form, asset allocation is your stock to bond ratio. Jack Bogle (founder of Vanguard) suggests you own your age in bonds. Whether you choose to slightly increase your percentage of bonds (more conservative investing) or decrease it (more aggressive investing), you should be tracking your overall ratio.
5. AVOID INVESTING IN SINGLE STOCKS
- This is gambling. You may think you can time the market and predict the future of a specific company, but you can't. Smarter people than all of us have been trying and failing for years. You should never have more than 10% of your net worth invested in a single stock.
Want to take a deeper dive into investing? Read the books Boglehead's Complete Guide to Investing and The Simple Path to Wealth.