April 26, 2023 by Ben Slavett (‘25)
A rise in investing amongst our generation may be seen by some as democratizing wealth building, while others may be more focused on pointing out valid concerns with the risky behaviors, misinformation, and gamification of investing on subreddits like Wall Street Bets (WSB). Investing can be a great way to grow your wealth over time, but it does take time. When starting investing, it can be a bit overwhelming and confusing, so I sat down with a financial advisor, Andrei Belov, CFA of Shade Tree Advisors to break it down into 8 easy steps.
Start with a plan: Before you start investing, it’s important to have a clear plan in place. Think about your goals, your risk tolerance, and your timeline for investing. Are you investing for retirement, for college, or for some other goal? Your plan should take into account all of these factors.
Understand different account types: there are 4 main investing account types–those being brokerage accounts, education accounts (529), Individual Retirement Accounts (IRAs), and employer-sponsored retirement plans (401k), each having different pros and cons.
A brokerage account is an account where you can hold, buy, and sell stocks and ETFs (exchange-traded funds). This account offers flexibility but little in the way of tax benefits. The second account type is an education account. An education account allows parents and children to invest money to spend on higher education. This type of account gives you great tax benefits but limits how and when you can spend your gains.
The last two are very similar, both being retirement accounts, with IRAs being ones you can set up by yourself while employer-sponsored plans, the most popular being 401ks, are ones you set up with your employer. These accounts come in two types, Roth and traditional. Roth accounts allow you to invest your post-tax income and withdraw it at a certain date tax-free, while traditional IRAs and 401ks allow you to contribute money pre-tax and postpone paying taxes until you withdraw your money. Both types are great choices with similar pros and cons. The biggest cons are the constraints of the maximum amount you are able to invest, and the fact that you must wait to withdraw your money until retirement age. Notable pros include amazing tax benefits and flexibility within the accounts.
Diversify your portfolio: Diversification is key to minimizing risk in your investments. This means spreading your money across different asset classes, such as stocks, bonds, and real estate. Within each asset class, you should also diversify further by investing in different companies and industries.
Invest for the long term: Investing is a marathon, not a sprint. The most successful investors are patient and disciplined. Don’t try to time the market or chase after hot stocks. Instead, focus on building a well-diversified portfolio and holding onto your investments for the long term.
Keep your emotions in check: Investing can be emotional, especially when the market is volatile. However, it’s important to keep your emotions in check and not make rash decisions based on fear or greed. Stick to your plan and don’t let short-term market fluctuations derail your long-term goals.
Do your research: Before investing in any company or asset, make sure you do your due diligence. Research the company’s financials, management team, and competitive landscape. Understand the risks and potential rewards of each investment before you commit your money.
Minimize fees and commission: Some may choose to invest in individual stocks while others may choose to invest in index funds–which are collections of various companies’ stocks within a certain asset class or region. The most popular of these index funds are the S&P 500 and its iterations. Index fund companies like Vanguard, Fidelity and iShares packet these companies together for a small fee (~1%) and allows you to feel the benefits of diversification without investing millions of dollars. While these fees may look small, they can add up over the course of your investing career so it’s important to be aware of what gains you are sacrificing. You may also opt to use a commission-free brokerage, with one of the most popular being Robinhood. Others include Vanguard, Fidelity, and Charles Schwab.
Start early and be consistent: Einstein once said “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” This is definitely true when it comes to investing. It is important to start early and invest through ups and downs in order to make stable, reliable returns.
The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, or financial advice.