Learn what kind of investor you are. Understand your Risk Tolerance and Time Horizon. Consider the taxable implications and benefits of your investments. You may surprised at how easy it is to invest, and the best time to start is now.
What kind of investor are you?
First, understand your investor style by deciding if you prefer the help of an advisor or if you rather simply pick investments yourself. Often young people have heard stocks can be a super way to invest, but they don’t feel comfortable winging-it on their own. This type of new investor may find a lot of value in being able to talk one on one with a qualified financial advisor. Others get a kick out of following the morning financial report on a local TV network or an online stock app. If so, this investor may be more of a DIY (Do it yourself) type who would be comfortable working directly with an online broker.
Define your Risk Tolerance and Time Horizon
Along with understanding the type of investor you are, you must also define your Risk Tolerance and Time Horizon. Risk Tolerance is your ability to accept the consequences of volatility or change in the market. An example would be, are you willing to take on more risk for the potential of more return or would you feel better if your investments had only a small potential for earning a return, but less risk of loss. Risk Tolerance is also related to an investors Time Horizon. An investors Time Horizon can be dictated by but not limited to specific time constraints, goals, and age. It would make sense that a young investor has more time until they need to access their retirement accounts, but if a young investor is risk adverse, they are not a good fit for an aggressive strategy. Talking with an advisor about your Risk Tolerance and Time Horizon is an important part of deciding on your investment strategy. There are a variety of Risk Tolerance Questionnaires which may help to define a persons comfort level, but really talking out your feelings can be equally as important.
Understanding stocks verses mutual funds
Buying individual stock is the purchase of shares in a specific company. As an example, you can purchase one or more shares of Apple stock. Mutual funds allow you to buy fractional shares of stocks that are grouped or pooled together. Mutual funds help to create a diversified purchase strategy. Again, using Apple as an example, think about what would happen to the value of your individual Apple stock if a newly launched Apple product is not received well by the public? Your single stock purchase may lose value. However, if you invest in a mutual fund or ETF (exchange traded fund) which includes not only Apple, but other prominent companies too, your investment value is better protected from decline due to potential bolstering of value from the additional companies.
Choose an account type regarding taxable implications
Are you looking to receive a tax deduction for investing? Do you want to defer paying tax on earnings your investments may make? Are you hoping to withdraw money down the road on a tax free basis? These are questions which have a big impact on which type you choose like an IRA, Roth IRA, or Individual account.
When preparing your own taxes or meeting with your tax professional; if you find you are in need of a tax deduction, if you are eligible an IRA (Individual Retirement Account) is a great choice. An IRA also is a tax deferred account which means as the account grows it is free from tax. However, it is important to understand that when you are eligible to take money out (distributions) of your account after you have attained age 59.5, you will be required to pay tax on the money distributed.
Like an IRA a Roth IRA grows tax deferred, but you do not get a tax deduction upfront. The tax benefit comes at distribution time. Everything you have put into your Roth IRA and any qualified earnings come out tax free. You may want to ask yourself, do I anticipate taxes going up or down over time? If you feel you may pay more in tax during your retirement years, you may want to take advantage of a Roth IRA.
An individual account does not benefit from upfront tax deductions nor does it grow tax deferred, but the beauty of an Individual account is there are no strings attached regarding contributions limits or age restrictions for distributions.
What’s your investment budget?
New investors often ask, how much do I need to get started? “The amount of money you need to buy an individual stock depends on how expensive the shares are.” (O’Shea, 2020). You can invest a lot or a little, depending on what you buy. Some brokers may have account minimums and you will also need to check this out. Share prices can very quite a bit depending on several factors like public recognition and perception of the company, the companies earning capabilities, and dividend paying practices. Well-know companies may cost $1000 or more per share, but many quality companies shares can be purchased at reasonable and workable prices of less than $100. If your budget does not allow you to make a large stock purchase, you may opt for investing in an ETF (Exchange Traded Fund). ETFs like mutual funds are pooled funds (collections of various individual stocks). ETF’s are passively managed often tracking an index and mutual funds are actively managed. “Mutual funds typically come with a higher minimum investment requirement than ETFs” (Pareto, 2020).
Get started today
The longer you wait the more opportunity you miss. With investing, time is your friend. The market will experience volatility periods, but the more time you have to recover from down markets, the better off you will be long-term. So if you can, start investing early and let time and the power of compounding interest help you along. “Thanks to the power of compound interest (the investing magic that allows investment earnings to earn interest of its own), time is the most powerful variable a young investor has on his or her side” (Tweddale, 2020).
First, consider if you need some help and guidance of a financial advisor or recognize yourself to be a Do-it-Yourselfer. Next, decide if you can stomach the volatility of owning individual stocks or if you are more suited to mutual funds or ETFs, then choose an investment vehicle IRA, Roth, Individual, or other based on your tax objectives. You will certainly need to budget for investing. If you can make consistent monthly contributions to your account, this too will help. The bottom line, take advantage of time and start investing in your future today.
About the Author
Author, Marianne Martini Nolte, Certified Financial Planner ™ practitioner, provides fee-only, fiduciary, independent financial services. Her firm, IMAGINE FINANCIAL SERVICES (IFS) is a registered investment advisor offering advisory services in the State of California and in other jurisdictions where exempted. Marianne’s focus is serving women and generations X, Y, and Z. This article is intended as a high level view.
All written content is for information purposes only. Opinions expressed herein are solely those of IFS, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to other parties’ informational accuracy or completeness.
For more in depth information, please reach out:
Marianne Martini Nolte, CFP®
Imagine Financial Services
Phone, (760) 472-5155
O’Shea, A. (2020, November 09). How to Invest in Stocks: A 6-Step Guide for Beginners. Retrieved December 09, 2020, from https://www.nerdwallet.com/article/investing/how-to-invest-in-stocks
Pareto, C. (2020, August 28). Mutual Fund vs. ETF: What’s the Difference? Retrieved December 09, 2020, from https://www.investopedia.com/articles/exchangetradedfunds/08/etf-mutual-fund-difference.asp
Tweddale, A. (n.d.). If You Still Don’t Believe In The Power Of Compound Interest, You Have To See This. Retrieved December 10, 2020, from https://www.moneyunder30.com/power-of-compound-interest