I just got a new job that pays more than my old one, and I have no intention of changing my lifestyle to fit my new increased income. I have absolutely no economic experience or knowledge, but I want to do whatever it is really smart people do with their money to make it magically turn into more money.
I’m open to suggestions and advice, but I actually have a factual question. Who can I talk to on a professional level that will give me financial investment advice? Are investment companies something different from banks? How do stock brokers and investment consultants and such get paid? Would anyone be willing to work with me, having only a few thousand dollars at most I’m able to invest with?
Many full-service investment firms (Schwab, Fidelity, etc…) offer managed investment services where they will take your money and invest it for you. Most will not want to bother dealing with only a few thousand dollars, though. The fee schedules can vary; some are paid a percentage of your account value each year, some are paid a fixed fee, some are paid on commissions derrived from what you invest in, the list goes on and on.
Investment firms are usually different from banks. However, the lines have blurred substantially over the years and many of the larger banks now have investment services divisions. And some investment firms now offer some banking services.
IMO, if you’re looking to invest a few thousand dollars initially, you’re probably going to have to teach yourself to invest. You probably should learn anyway, if only to get the basics down and to make sure any future investment planner doesn’t take advantage of you.
There are places that will work with you if you have hundreds, not thousands or millions. Look for discount brokerages. I don’t know if Schwab and Edward Jones are considered discount, but those are two I thought of. They’ll invest it. You’ll pay some kind of fee, I think, for buying and selling, but not a maintenance fee.
Keep in mind that most instruments don’t even want to spit on you if you have less than a grand, but once you get into the five or six figure range things begin to open up.
My dad has been a financial advisor for 35 years. He now has his own small company with himself, two or three brokers, and two or three support staff. He basically handles his clients’ portfolios based on each client’s needs and desires. He’s got little old ladies with old pension payments and he’s got millionares who ride the stock market. He’s a licensed stock broker, and also has connections with banks, insurance companies, mutual fund companies, and pretty much every other way anyone would want to invest money. He charges lower fees and commissions than the Charles Schwabs and the Prudentials, he gives each client a more personalized approach (he knows every one of his hundreds of clients’ phone numbers by heart), and he’s not under pressure from a gigantic faceless conglomerate to sell certain products that a client does not need. He will often have a new client come in (or at least he did when he was still taking new clients) and talk with him for an hour, and in the end, tell the guy “You don’t want me. With your outlook and goals, you should just put it all in a bank,” whereas the guy at Merrill Lynch will say “Sir, our company has the perfect product for you!”
But he’s working at capacity, and takes new clients only on referrals. And he’s 1000 miles away from you. The point here is that the companies with the flashy commercials aren’t the only option, and there is a way to get the advice and help you need while supporting your local economy.
On a more serious note, with that little money to invest, you are not going to get an honest to goodness investment professional to spend much time thinking about your needs and crafting individual advice. I would suggest reading some books on investment, like items from the Motley Fool, and working with an internet based discount brokerage. I use Scottrade, though I don’t have much going at the moment.
My own personal advice to you is to forget about trying to do what the “smart” people do. If you try to do what they do, you are going to be directly competing with them, mano a mano, and you won’t come out on the winning side. For the amateur investor, it’s better to simply grab onto the bumper of the car Mr. Smartypants is driving, and let him do the dirty work. That means buying index funds, that will just follow along with the market. You can also get bond funds that collect a large number of bonds of a particular length.
Assume the net income increase you now have as an expense and put it into a cash savings account. (In other words, if you net take home pay increased from $1,500 to $2,000 a week and you have no intention of changing your lifestyle, put that extra $500 into a cash savings account in your bank.). Do not touch it for 90 days.
In those 90 days, do what you are doing now. Ask questions. Talk to people. Research online. The 90 days is breathing room for you, and the economy. Become educated before you decide where and how to invest. The 90 day grace period you give yourself will give you greater dividends than if you start investing right now. Your long-term ROI will be much greater as an educated and informed investor than if you start out right now and learn as you invest. It also offers you a cash safety cushion just in case your personal economic life, and/or the economy in general, takes a drastic turn.
Kudos to you for not increasing your spending as your income increases. This requires making the conscious decision to do it as well as constant diligence to maintain. People have this tendency to spend more money just because they have more. Their expenses will slowly creep upwards if they don’t put their foot down and stop it.
This is what I did back when I first started investing. I put my savings in a 1 year CD to force myself not to touch it. Then I read up on everything I could. It was a nice feeling to know I had all that money and I could put it into anything I wanted. It also made me nervous which is why I wouldn’t let myself near it for a year.
Unfortunately, I’m more of a do-it-yourself investor so I wouldn’t be able to recommend any financial advisors for you. I do know you will need more then a few thousand before any of them will give you good, personalized advice. I can recommend a few sites if you ever decide to learn to do this on your own but that’s about it.
The default advice: put the money in a Vanguard (i.e., low cost) S&P 500 Index fund. Set it up with Vanguard that they deduct $500 (or whatever amount it is you have to invest) automatically from your bank account monthly.
I’ve been doing my own investing for 15 years. I learned the hard way that you can’t beat the market. Matching the market performance is actually better than 70 - 80% of the mutual funds out there. Why not try to find a mutual fund in that out-performing 20 - 30%? Because it changes every year and there is no way to predict which ones are going to out-perform.
Thanks for all of the advice. I’ve decided to let the extra money build up in my bank account for a few months while I take the time to get a little better educated on my options.
I used to advise institutional investors. understanding the markets could be the most important financial decision you make.
my advice: go to vanguard or fidelity and buy $1,000 dollar no load S&P fund, $1000 of a treasury fund and $1000 of a fund that looks ‘interesting’ to you (or just 1 of these 3).
you will pay 100x more attention and learn about how markets work than any arm chair investing or Schwab type advice will ever give. nothing like even a tiny amount in the market to make you learn. when you have some experience, savings then a broker’s advice might actually be valuable. or you’ll at least not be taken to the cleaners.
These are two really superb pieces of advice right here. Vanguard was founded by John Bogle the dude who invented index funds (or at least made them practical.) Unlike most other mutual fund companies, Vanguard is owned entirely by its own funds. So they work for you and are highly incented to keep costs down.
Also, check out the BogleHeads Forum, which has tons of useful information, from beginning to very advanced investment theory. (Personally, I’m of the keep-it-simple-stupid school and keep everything in index funds, though with the market in the shitter I might venture into individual stocks soon.)
Also, if you don’t have one already, look into opening a Roth IRA (you can do this through Vanguard as well.) You can put a few thousand bucks a year in, and the gains are tax free if you don’t touch them until you’re a fogey. You can then put whatever’s left over into funds in a regular account.
Most of Vanguard’s funds have a $3000 minimum to open. They have the STAR fund which only requires $1000 and I believe is a fund of funds. Otherwise you make a very good point. If you have actual money on the line you’ll pay infinitely more attention to your choices then the armchair investor playing with funny money.
If you want to keep it in a bank account until you have more then I recommend looking at some online banks. They’ll pay 8x more interest then your average brick and mortar bank. I hear ING mentioned quite often here.
This is the right answer for me (and probably you) for many reasons, but the most important is this:
I don’t have the time or dedication to be a good stock picker. Investing in index funds gives you market-level returns without all the time spent educating yourself. Instead, you can just do what you already do best (your job, your personal life, etc.). With index funds, you only need to decide what your time frame is. 20 years? Go with a stock index fund that mirrors the S&P 500 and/or the Russell 2000. 5 years? Go with a bond fund.
Lot of good advice, but let me offer up a few beginning points:
First thing’s first: open up a savings account. Online there are many good ones-- ING, E-Trade, etc. You’ll get north of 3% right now-- not much, but more than you’ll get just having the money lying around.
Set up a savings plan. Using automatic deductions at paycheck time is best-- this way, you never see the money in your checking account.
If you haven’t already, pay off any high-interest debt (credit cards, mainly). You still need to save money while you’re doing this-- always save something– but no matter what you save or invest, you’ll never make more money than you’ll pay out in credit card financing.
You need a savings cushion. The rule of thumb is three months of your net salary. This way, you can handle emergencies, unemployment, etc.
Ensure you fully-fund your retirement. 401K, IRA, Roth, etc. At a minimum, you must fund to whatever level your employer matches you at (otherwise, you’re throwing away free money).
Do you have dependents? Be sure to fund adequate life insurance. Flexible spending accounts for health care may also be a wise idea. Also, many states offer college tuition savings accounts to put money away for their children’s education.
Finally, once all of that is taken care of, you’ll have a stable foundation to begin looking at investing for fun & profit. Just doing those six things above will put you in a better place than (IMHO) 90% of Americans.
If you haven’t already planned to do this, use the increase to completely fund your 401(k) to get the matching max from the employer, then a Roth IRA, then fund the 401(k) up to the limit. That’s the standard money-columnist advice and makes sense to me. Then whatever’s left over after that can be used for building emergency funds, and other investing.
Any professional advice you seek can be used to direct those retirement accounts as well as non-retirement investing. I’m presuming your 401(K) will have enough choices to satisfy most retirement goals (ours has a dozen or more, as well as a way to invest in any Fidelity mutual fund) and obviously your Roth could be with any of the big investing houses.