Last week I wrote about how we need to re-frame the way we think about investing and really about the subject of money. So many people I know don’t actually start the process of investing, don’t want to think about money, and/or are intimidated by all of the jargon that is out there. it is like a foreign language to many. And let’s be honest learning a new language and vocabulary can be extremely difficult.
Despite that fact we learn new vocabulary every day. Whether it is to figure out how to use technology, understanding a new favorite television show, etc. We need to re-frame our thinking about money and think of it like learning a new vocabulary. So after thinking about it for a while I came up with some questions that you may ask yourself as you are starting the investing process. These are not the only questions out there but they might help you get started or even maybe re-think your current situation. I know that I am constantly re-evaluating my current strategies.
Investing Questions to Ask
Question 1: How much money should I save? Personally, I think this a no-brainer question. The true answer should be as much as you can, as long as its 15% and above. I wrote about this a while back, but I think 15% is the bare minimum. Now I know some will argue that people can’t save that much nowadays. I think that is true for some people, particularly those who live in poverty, which is why I am for an additional layer of retirement on top of social security (another post for another time). However, I don’t necessarily buy that for a bunch of my friends who go out to dinner or take trips or whatever when they have debt and kids and the like. They are choosing to spend their money other places. That is fine, but don’t complain that you don’t have the money to do so. We all have choices to make and one chooses not to save when they have the means too I don’t have a lot of sympathy for them later on.
Question 2: How can you save for retirement? For most people this answer comes in the form of a retirement plan at work. If you have one available to you start investing now or increase your investments to at least 15% of your income (GROSS INCOME BTW). If you don’t have anything available you can easily open up an IRA or Roth IRA at a major brokerage firm like Fidelity, Vanguard, Schwab and other places. All you need to do is fill out some paperwork and your account will be open in a matter of minutes.
*If any of my students are reading this and you are starting your first jobs…don’t wait to invest. Don’t WAIT. DO IT NOW, like NOW. There is no justification for you not to do it. I don’t care about your student loans or whatever. A lot of you have bought new cars and the like when you got jobs. You are choosing a car over your future. No excuses. Invest NOW!
Question 3: What is your risk tolerance? For a lot of people this can a mysterious question. Most people will invest their money in the stock market. Some people might buy gold or real estate or whatever, but for the vast majority of us it will be in the stock market. I talked about this a little bit in an earlier post, but determining what your risk tolerance can be difficult and this is where you really have to think about things. Does losing money keep you up at night? Are you going to obsess every minute about that money? If you lost 20% of your balance tomorrow would you stay in the market or sell? Answering those kinds of questions determines the answer to the next question. I personally think I have a high risk tolerance. I stayed in during the great bear market in 2007-09. Don’t get me wrong I was scared. Scared to death, but I knew things would be ok. Besides if the economy does collapse it won’t make a difference for any of us. We will all be bartering with each other so money has no value, just skills that we have.
Question 4: What kinds of things do I invest in? Since most people will be putting money into a retirement plan the answer for most people will be individual stocks or mutual funds. I personally don’t like investing in individual stocks that much. I only have .2% of my portfolio in individual stocks. I invest in mutual funds. Now there are all kinds of different mutual funds. I think the easiest way to pick funds, if you don’t have a lot of knowledge, is to go with index funds. Index funds are where you buy a whole index (e.g. the S&P 500) or you basically buy the whole market. Index funds are great because they give you INSTANT diversification. You don’t have to worry about picking this sector or that sector because there are index funds that buy the entire market.
Now there are other index funds that will buy specific portions of the market (e.g. a small cap index fund or mid-cap or whatever) but that is more vocabulary than what I want to cover today.
Question 5: How should you allocate your investments? So you have decided to invest. You have chosen a specific type of retirement account to invest in (ideally you might have multiple accounts…401k, ROTH IRA, etc), you know what your risk tolerance is and you know what kinds of things you want to invest in. So one of the final things is you have to determine how much you will put where. For example, most people recommend that the younger you are or the further away from retirement that you can have more investments in STOCK MUTUAL FUNDS than say BOND MUTUAL FUNDS. Stock mutual funds have more risk to them, they are more volatile, but they also bring a bigger return. Bond funds are much more stable, but you don’t get a lot of growth. And everyone needs growth to make sure their portfolio is keeping up with inflation. So when you are 30 years old you might invest in 90% stock funds and 10% bond funds.
As you get older you might adjust that allocation to be a bit more conservative. So at 40 you might have 70% stocks 30% bonds, etc. The rationale for this is that the closer you get to retirement the more you want to keep your principle that way you don’t have to work as long.
I don’t have a problem with risk so I put 95% of my investments into stock mutual funds and only 5% into bonds. Most financial advisers will think I am crazy. They would tell me WAY TOO MUCH RISK. And they are generally right. However, I don’t mind being super aggressive because I know it will pay off in the long-run. Now that doesn’t mean I won’t lose money and I might lose big, but I do believe that if I keep it that way that it will come back.
As a side note I don’t plan on keeping that much in stocks and bonds forever. But I am a few years away from retirement so I can afford to be a bit riskier.
The Bottom Line: These aren’t the only questions to ask and there are a lot more things to consider, but if you answer these basic five questions and learn some vocabulary around them it makes the process of this money stuff a little easier to understand. It isn’t necessarily more fun, but you have to start somewhere.