Summary List Placement
- I regret not investing in my 401(k) at my first job. Now I encourage young people not to make the same mistake.
- If you’re new to investing, learn the basic concepts – like stocks, mutual funds, and asset allocation – to understand why it’s an important part of your financial plan.
- Don’t be afraid to ask questions or find someone, either a family member or adviser, to help.
- This article is a contributed piece as part of a series focused on millennial financial empowerment called Master your Money.
We’ve all made financial mistakes, and mine has to do with investing.
In my first job, I had the opportunity to sign up for the company’s 401(k) retirement savings plan, but I had never heard of one. I asked my manager about it and he told me it was something for retirement and that my money would be taken out of my paycheck and put into the stock market.
At 22 years old, retirement was something that I could not comprehend, no matter how hard I tried to picture getting old. And the stock market? Was he kidding? This was during the recession so every time I looked at the TV it was going down! I recalled stories of friends not getting jobs and family members losing money in the market.
So, I didn’t sign up for what would have been my first 401(k) and lost out on four years of saving, instead electing to keep the minimal amount of money I was making in a bank account.
In hindsight, this was probably one of my biggest financial mistakes. But, more importantly, I learned from it – and I’m here sharing it with others to learn as well.
Start by learning about common investing terms
What’s the first thing that comes to mind when you think of investing? Is it something negative like I used to think? If so, let’s change that. Investing can seem very confusing and even feel scary, but once you learn the basics, you’ll likely feel more confident in getting started.
If there were any tips I’d give, it would be: Ask questions. Find someone to help you. Start reading. Just start to learn!
To start, it’s helpful to understand the different investing terms. Here are some that are commonly used:
Compounding: Compounding is the effect where the value of an investment increases because the earnings on an investment, both capital gains and interest, earn interest as time passes. This differs from linear growth, where only the principal earns interest each period.
Cash: It’s what you put in your piggy bank and keep in your bank account. Cash has the least amount of risk (unless someone swipes your coin jar). But you may not be earning money by just holding onto that cash. No risk, no reward, as they say.
Bonds: Call it the “middle man” of investment types. Bonds are generally on the lower end of the risk spectrum. When you buy a bond, you’re lending the issuer (it can be a company, government, municipality) money. How that money is paid back is determined by the conditions you bought the bond under.
Stocks: Considered among the riskiest of the investment types, stocks also have a sweet side to them: where there’s higher risk, there’s potential for higher returns – if you’re game for riding the ups and downs of the market.
Mutual funds: Take all those investment types, pool them together and you’ve got yourself a mutual fund. Mutual funds let you pool your money with other investors to purchase a collection of stocks and bonds that you might not be able to buy on your own.
ETF: An Exchange Traded Fund is a fund that tracks indexes like the S&P 500. An ETF trades like a common stock on a stock exchange – experiencing price changes throughout the day as they are bought and sold. Most ETFs don’t try to outperform their corresponding index, but simply attempt to replicate its performance.
Next, understand the basics of strategy
If you don’t feel comfortable figuring out your strategy alone, tap someone to help. This can be a family member, friend, or a financial adviser who can help you look at the big picture. Your strategy will comprise the right investment mix for you. To get the most out of this discussion, go into it knowing the terms below.
Asset allocation: Like the saying goes: “Don’t put all your eggs in one basket.” Well, asset allocation is just that: putting your money into a combination of investment types – like stocks and bonds – to help spread out the risk.
Diversification: This takes asset allocation one step further by spreading your money among different investment types. There are different companies, industries, and business sizes for each investment option on the market, helping you spread out your risk even more.
Rebalancing: Rebalancing is an essential part of managing your portfolio. Your mix of investments will likely change over time, depending on how your different investments perform. It’s important to periodically review your asset allocation, to make sure it still aligns with your goals – if it no longer aligns with your objectives and your timeline, consider rebalancing.
Inflation: You know how old folks say how “back in the day” a dollar would go so much further in life? Inflation is the overall increase in the price of goods and services. It lowers the value of your money over time, which means a dollar isn’t the same as “back in the day.” If you think this way, you’re not alone.
Once you have a solid foundation, it’s time to think about your goals
Investing can be a powerful way to reach a goal that is more than three years away, as you’re giving your money time to potentially grow before you need it.
For many people, retirement is a goal they are already investing for. If you have a retirement savings account like a 401(k), 403(b) or IRA (Individual Retirement Account), then you are already an investor. If you don’t have one and you’re employed – check with your employer. Or look into an IRA, which is not tied to an employer.
If you have a long-term goal other than retirement, you may want to consider a brokerage account which allows you to buy and sell investments like the ones mentioned – stocks, mutual funds, ETFs, and more.
Kelly Lannan is vice president of Young Investors at Fidelity Investments and a member of BI’s Money Council.
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