So, I'd like to start investing some money. What do I do?

In My Humble Opinion
1

I’m getting up there in the years and having a hefty 20 under my belt :wink: , I figure this is as good of a time as any to begin investing a little bit of money.

My dad has actually invested quite a bit of money in my name for the last 20 years (I’m a partial owner of his business- he always took my cut and invested it), but most of those were tech stocks and, needless to say, that money went bye bye. I still have some things invested and I know I can use Charles Schwab’s services whenever I want.

Anywho, long story short, I don’t really know much about stocks. I know I can go talk to the folks at Schwab, but I’d like a little background ahead of time. As it stands, I have a minimal savings, but I’ll be working tons more over the month of December and will therefore have more money to save. How much do I need to start investing? (I know I can buy, like, one stock for $20- but how much do I need to actually reasonably begin investing?) Should I go with stocks? CDs? What the heck is the difference? Short term? Long term? And there, my head exploded.

2

The first thing you need to decide is what you want the money to do for you. Money saved for a down payment on a house gets treated different than money saved for the kid’s college, different than your retirement money, different than money for a fun vacation next year.

Here are some factors to consider:

Fees - investing often involves paying transaction fees, Schwab probably charges $10 or so to trade stock. That’s cheap, unless you’re only buying $100 worth, then you just lost 10% of your value in fees. You definitely want your fees to be as low as possible, you don’t get a damn thing for paying a fee. Mutual funds (structured collections of investments) have management fees as well, with actively managed funds being more expensive than “index” funds that merely match various market indexes.

Liquidity - How quickly can you turn your investment back into money? Money market funds are immediate, stocks generally take a day to a few days to transfer, CDs are locked in for the term, you can’t get your money out without paying a penalty. You get paid better for less liquidity, everything else being equal.

Diversification - A diverse portfolio of investments is important to maintain. If too much of your investment is in a single company’s stock, your fortunes ride entirely on that company’s performance. One bad fire, lawsuit or failed product introduction can tank your savings. Buying many stocks (through a mutual fund usually) insulates you from those dangers. When one stock takes a hit, it only represents a small percentage of your total investment. You also don’t get the huge highs of a great performing stock, but are you investing or gambling?

Risk - What are the risks of losing your principal? CDs, treasury bonds, and good corporate bonds are low risk. Fortune 500 stocks are more risky, penny stocks are more risky still. You get paid for taking on more “diversified” risk. Diversified risk is the amount of risk an investment represents, as part of diversified portfolio of investments. You do not get paid for “undiversified” risk, which is the risk you take on by putting all your eggs in one basket, that risk is entirely personal to you and your strategy, the market does not account for it at all.

I’m a big fan of mutual funds, especially index funds if you’re looking for the higher returns of the stock market. Mutual funds are automatic diversification with a small number of transactions and fees. That lets you get diverse with a smaller total investment. Index funds are low cost and you can review them by checking out the indexes in the newspaper. Actively managed mutual funds can also include bonds and a mix of stocks, bonds and other instruments, depending on the funds goals.

I am not a fan of buying individual stock, especially for the novice investor. Your expected returns are no better than the market as a whole, and you take on a heap of risk that you don’t get compensated for. I think people also expect to research the stock and pick up some kind of information that will indicate better than market performance. You won’t. There are hundreds of people researching that stock every single day, each of which knows more about how the market works than you, and by a wide margin. If anybody knows where that stock will go, it’s them, not you, and they’ve already made their trades.

3

Thank you! That was so informative!

I suppose what I’m saving for is important. Hmm. Ok, well, I’ll be leaving for graduate school in about a year and a half and it would be nice to have a little cushion. That said, I know I don’t exactly have much time to sew up said cushion, so I don’t know how that would factor in.

That said, I love travelling. Love doesn’t even begin to describe my desire to travel. In fact, when my friend gets out of the Air Force in 2008 (Sept), we plan on doing some grand vacation. So maybe that is something to plan for? I suppose I just want to make the most of my savings at the moment, because I definitely don’t see buying a house on the horizon any time soon.

I know this all sounds so wishy washy, but I’m 20. Nothing in my life is particularly concrete at the moment, so I’m not sure what I need and when.

4

I don’t have any experience with Schwab. Everyone in my family invests with Vanguard. I highly recommend them for many reasons: lots of experience, very low fees, a spotless record on ethics, and lots of user-friendly information on their website.

Some funds have a minimum limit (it’s typically around $1000); others don’t. Also, places like e-trade let you trade in any amount you want. You don’t have to buy whole number values of shares in a stock or bond; you can get fractional shares.

The thing to think about is whether a certain investment makes sense. Suppose you put $500 on a fund that averaged returns of 4%. You’d expect to earn about $20 per year. So if the the fee for that fund were $30 per year, then that investment would be a net loss of $10.

Briefly, a stock is a share of a company. If you own one share in a company with a billion shares outstanding, you own one-billionth of the company. Some stocks pay dividents, which are portions of the company’s profits. Those that don’t pay dividends are growth stocks; people buy them in hopes that the share price will go up.

Bonds come in lots of flavors, but the idea is fairly simple. Someone (a government or corporation) is in debt. They sell bonds to raise money. If you buy a bond, you earn interest on it from the government or corporation.

CD’s also earn interest. The difference is that with a CD, you know exactly how much interest you’ll earn. With government bonds or corporate bonds, the interest rate fluctuates based on the decisions of the Federal Reserve. CD’s are insured by the federal government, so you can’t possibly lose money on them, even if the bank goes bankrupt.

Generally speaking, bonds are safer than stocks, but have lower yields. In others words, when the economy goes up, stocks do better. When the economy goes down, bonds do better. Almost everyone will recommend that you split your investments between the two.

I will second Cheesesteak on investing in mutual funds rather than indvidual stocks.

5

Good start by Cheesesteak, so let’s move forward.

Savings plans should start with 3-6 months of ready cash for emergencies. You should be able to cover all of your normal expenses. This should be in cash (money market, CDs, or other highly liquid, interest bearing cash accounts).

After that, or even simultaneously, you should set up retirement accounts. The value of compounding returns over long periods of time cannot be over-emphasized. The earlier you start, the better. As a 20-year old, your mix should be mostly stock funds, with a mix of market capitalizations and nationality. This will also save you with current taxes, as contributions to a retirement fund are not taxed, and neither are any gains in a retirement fund until they are withdrawn.

After these two items, then you can have fun. Consider things like timelines - saving for a vacation in the next 6-12 months - stay away from anything that fluctuates wildly. Saving for a new car in 3-5 years. You can take a little more risk, but should keep at least have your investment in cash or cash equivalents. Saving for the child you haven’t yet had to go to college in over 18 years. Stocks and mutual funds for you, but be prepared to move them to a tax-advantaged plan when you actually do have a little carpet crawler.

That’s just a basic financial plan that most any decent planner will tell you: save for emergencies and save for retirement first.

That fact that you are doing this at 20 is a great thing! Wish I had started that early.

6

Good advice so far. One thing that I’d add about diversification is to try and diversify geographically as well. You should try to allocate a significant portion of your equity allocation to companies outside the US. Additionally, you should do some research on indexing vs. active investing. I’m a big proponent of indexing for domestic large-cap (Dow Jones, S&P 500) stocks. The markets are so efficient that it’s generally not worth paying the higher fees for active management. After fees, most active managers underperform their indices.

7

One possibility is that many of the major mutual fund companies have a program under which you may have fees waived if you sign up for a program of automatic investment every month. Typically you will set it up so that the fund company will automatically debit your checking account every month and invest the proceeds into a fund that you specify.

This has the advantage of forcing you into a regular program of investing. I’ve had this set up so the withdrawal was the day after my salary was direct-deposited, so that the money effectively just disappeared without any opportunity to spend it.

I don’t know if Schwab offers the same thing, but they may have a variation that could meet your needs. If not, there’s no reason not do go directly with a fund company.

Good luck.

8

I second Vanguard. Between Ivylad and myself, we are invested in five different mutual funds that required only $1000 each to open. I’m in Global Equity and a REIT fund. I don’t know what he’s in. They’ve consistently grown.

Investing requires discipline. Like clockwork, every paycheck I put something in my Vanguard account. I think I missed one when it was a really tight month, but overall, you must be consistent. You’re starting young, that’s good. Keep at it and you’ll be a mulit-millionaire by the time you’re 40.

I look at investing as long term. It’s not my money yet, I’m sending it out there to work. It can stop working when I do.

I wouldn’t mess with stocks. Mutual funds are good, and Clark Howard recommends index funds.

9

Give it to me. I promise to keep it safe.
Mwahahahahahahaha!!!

10

I’ll second (third? fourth?) the recommendation that you pick a family of no-load funds - like Vanguard, and diversify within that. I’m no expert, but I have a hard time imagining REITs and energy funds not doing well in the near to long term future.
Also, diversify AND reallocate to retain whatever gains you make. For example, say you go 60% stocks, 30% bonds, 10% cash, every 6 months reallocate your assets to get back to that 60/30/10 ration.

11

uh - ratio of course.

60/30/10 is a pretty widely accepted general guide for folks some ways away from retirement. And you can do it entirely thru funds - stock funds (stocks)/bond funds (bonds)/ and money market funds (cash).
Within the first two you can diversify as well. Maybe an S&P 500, a small cap, and an international stock funds.
And maybe intermediate, short term, and REIT funds.

But reallocation is important (and as AFAIK, the best months to reallocate are Jan and July.) Generally 1 - maybe 2 categories of assets will do well in any market - but rarely if ever will all 3 do well. That is why you diversify. But then when one of your investments does well, you reallocate to your desired percentages, to insure that you will not lose those gains should market factors change and anothger category takes over.

A simple way to build up your investment vocab is to listen to Bob Brinker or another of those investment radio shows on Sunday afternoons.

At your age, the most important thing is to start saving some amount. Get in the habit, and do it regularly. And as your income increases, increase your savings.

12

As for those tech stocks that “went bye bye” – if you still have the certificates or account, make sure you check it again. Many of those stocks are back near or above pre-crash levels now.

13

If you’re 20 and smart enough to think about this sort of thing, you’re way ahead of most people, since time is the best thing you have going for you. Consider the power of compounding - if you were to invest $2000 a year in the market for ten years, and never contribute another dime, stopping at age 30 - you would have far more at retirement than someone who started at age 30 with that same $2000 a year but never stopped contributions till retirement. Diversification is key, you can’t be diversified with just mutual funds. Individual stocks, bonds, real estate, etc. Even “risky” investments in aggregate will reduce volatility overall. Typically those who wait too long to think about retirement cause further grief because rather than contributing more money, they “swing for the fences” trying to make up for lost time. What you are looking for is a “Get Rich Slow” scheme, and that means getting into the habit of investing, paying yourself first, living within your means, etc. Boring stuff, but interestingly “getting rich” is almost assured if you avoid classic pitfalls, like gambling, drugs, promiscuity, etc. Good Luck.

14

I agree with this. For the equity part of your portfolio, for the amount of money you’re likely to have, index funds make a lot of sense, and are a good place to start. Once you have more, you should spread out geographically. Once you have even more, you might want to balance risk also.

Something that has just become available from my 401K provider are funds targeted for people planning to retire in a certain number of years. They’ve got 5, 10, 15 and 20 years out at least. These funds automatically rebalance into lower risk investments as you get closer to retirement. It’s what I’ve been doing with my other retirement investments anyway, but this makes a lot of sense.

One more thing, a little way out. You need to accurately assess how good you are at managing investments yourself. Sometimes it makes sense to get a financial advisor who sees the market more clearly than you do, and has time to look at the market every day, not just when you have a spare moment at work. They charge, but sometimes it is worth it. I thought Google was too expensive at $175 - happily I listened to my advisor and not me. You do need to be on the lookout for people trying to sell you what their company wants them to sell, though.

15

I’ve done very well with mutual.com. Nice guys, made lots of money for me. Can’t ask for more.

16

Sorry, that’s mutuals.com

17

I like the simplicity of the armchair millionaire philosophy.

http://www.armchairmillionaire.com/
I wish I had more money to put into index funds. I have done it with a smallish amount and they’ve done quite well.