Investing

How to Start Investing

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When you start your adult life with your first job, you might feel like your rent, utilities, and food take up the bulk of your income. If your budget allows for saving and investing, there's no time to start like the present.

Chances are, if you're thinking about investing, you have some questions and need to learn about a few things. One way to start is to ask yourself a few questions like:

  • What are my financial goals?
  • What is my risk tolerance?
  • How do I want to invest?
  • What investment products are right for me?

Let's explore these questions and discuss how you can start investing.

Identifying Financial Goals

People invest for all types of reasons -- but preparing for the future is one of the most prevalent. While there are no guarantees when it comes to investing, it's common to aim for long-term returns. For example, many people invest in an attempt to grow their savings to fund retirement. But retirement isn't the only reason you might want to maximize your savings.

Some common milestones or financial goals include:

Emergency Fund

If the past few months have taught us anything, it's that circumstances can change without warning. What would you do if you had an unexpected expense, such as car repairs or the deductible on a visit to the ER? A recent study from Pew Research Center found that less than half of middle-income Americans(48 percent) have enough “rainy day” funds set aside to cover three months of expenses.1

What would you do if you lost your job or had your income cut? According to the Bureau of Labor Statistics (BLS), over 20 million Americans lost their jobs in April 2020, and as of September 2020, the American unemployment rate was 7.9 percent. While these figures show that we're starting to recover from the initial job losses caused by the COVID-19 pandemic, unemployment is still higher than it's been since 2011.2

Funneling money into an emergency fund can provide a safety net for small and large unexpected financial challenges. A general rule of thumb is to have enough savings to cover 3-6 months of expenses.

Getting Married

Saving for a wedding is another common savings milestone. While you can always make and maintain a budget, expenses can add up quickly. According to an annual survey from The Knot, a wedding planning service, in 2019, the average day-of cost of a wedding, including the ceremony and reception, was around $28,000, although day-of expenses can be significantly higher in major metropolitan areas.

Buying a Home

Buying your first home is another prevalent milestone. According to data compiled by the Federal Reserve Bank of St. Louis, in Q2 of 2020, the average cost of a home was $368,000.3 A 20 percent deposit on an average priced home would be $73,600. Even if you take out a Federal Housing Administration (FHA) mortgage with lower deposit requirements, you still need to put down at least $12,880 (3.5 percent) plus costs.

Retirement

When you're 23, retirement seems so far away it might as well be Narnia. But retirement will be on your horizon before you know it and starting to save early is a good strategy.

The 4 percent rule is a common strategy for retirement planning. Put simply, when you retire, you add up all your investments and withdraw 4 percent, with annual withdrawal adjustments for inflation. This means that if you want an annual income of $40,000, you need to have $1 million in your retirement funds.

Starting your retirement fund early allows time to save and can assist in riding out the peaks and troughs of the stock market.

Creating a Risk Profile

Once you identify your savings goals, your next step is to evaluate your risk profile. When it comes to investing your money, that means how willing you are to make investments that have a higher risk for the potential of a higher return.

Mike Gnitecki, a firefighter from Longview, Texas, who has been using self-directed trading since high school (with his parents' permission, of course), shares:

"It was challenging to truly grasp all of the risk involved, particularly with holding onto losing trades (always a bad idea!)"

Some of the factors that might contribute to your risk tolerance include:

  • Your goals or milestones
  • Your age
  • Your investment time frame (i.e., are you close to retirement?)
  • Your other assets and overall net worth
  • Your capacity for losses

Your risk profile is personal. It is a complex process of analyzing your personal financial situation and balancing it against your goals and objectives.

Identifying Risk Tolerance

In most cases, you complete a questionnaire to evaluate and identify your risk profile. The questions are often multiple choice to gauge how much risk you're willing to take with your savings and investments.

You might be tempted to answer these questions like you think a smart investor would, but this actually defeats the questionnaire's purpose. The questions aren't designed to guide your specific investment choice, but to identify and help you understand your tolerance for risk.

Your risk tolerance can also change. For example, you might think that you can psychologically handle a loss but feel differently if it happens. Or, as you (and your investments) mature, you might find that your risk tolerance increases with your capacity to handle a loss or decreases as you get closer to retirement and want to protect your savings.

Ways to Invest

When you decide to invest, there are a few options for you to consider. There isn't a right or wrong answer for the best way to enter the investing world. Each choice has pros and cons, and your decision should be based on your knowledge, needs, and expectations.

Financial Advisor

A financial advisor is a trained and experienced professional who holds the appropriate licenses to help you make decisions about what to do with your money. They can help you evaluate your risk tolerance and capacity, identify financial goals, and create a plan to help you achieve them.

While a financial advisor typically has expertise, they earn money through fees, which can cut into your returns.

Robo-Advisor

A robo-advisor is a digital platform that provides an automated, algorithm-driven financial planning service. Robo-advisors can reduce your guesswork, especially if you're new to investing.

Rachel Foley, a New York-based marketing associate, says:

"I started investing in my senior year of college (2019). At this stage of my life, I went with a robo-advisor. I'm not dealing with large amounts of capital, and I'm investing in the market as a whole. I also think using an app and visualization tools has helped me better understand where I truly stand financially between my liabilities, investments, and cash."

When using a robo-advisor, you complete a questionnaire to evaluate your risk and goals. Then, the robo-advisor uses advanced algorithms to manage your account, building, monitoring, and rebalancing a diversified portfolio based on your goals.

Some robo-advisors have fees, but they're usually substantially lower than what a personal financial advisor would charge.

Self-Directed Trading

You can also consider self-trading, especially if you're knowledgeable about the stock market and have some experience. You also might want a more hands-on experience with your savings and investments. Self-directed trading allows for maximum customization, and while there are often transaction fees, you will likely save on the fees charged by a personal advisor.

Self-directed trading is more time-consuming as you need to monitor your portfolio and the markets to help you make informed decisions.

Cameron Papp, a public relations professional in New York, prefers self-directed trading but recognizes that it takes more work than the other options. He comments,

"It's great to invest in companies that you love, but you also have to do your homework. Look at the company's quarterly revenue. Are they profitable? Then look at the 5-week high/low of the stock price to determine whether you're buying high or buying low. Buying high isn't necessarily bad if the company (potentially) has a good return."

401(k) Plans and Individual Retirement Accounts (IRAs)

No discussion of ways to invest would be complete without mentioning 401(k) plans and IRAs, two of the most common vehicles people use to save for retirement. Both 401(k) plans and IRAs offer some similar features – including tax benefits. One of the key differences is that 401(k) plans are provided through an employer, whereas you set up an IRA yourself.

Depending on your plan, you might be able to select the types of investment products included in your 401(k) or IRA, or your plan administrator or robo-advisor can make risk-appropriate selections and manage your account on your behalf. Even with self-directed accounts, a trustee or custodian administers your account.

IRAs usually have a wider variety of eligible investment products, but both types of accounts can include several different products including stocks, bonds, mutual funds, and more. On the other hand, 401(k) plans allow greater annual contributions. In 2020, you can contribute $6,000 to an IRA and $19,500 to a 401(k), or $7,000 and $26,000 respectively if you’re 50 or older.4

Investment and Savings Products

We won't tell you what to do with your money, but we can tell you about different options that are often used to start saving and investing, including:

High-Yield Savings Accounts

According to the FDIC (as of September 21, 2020), the national interest rate on a standard savings account is 0.05 percent.5 A high-yield savings account, such as a Money Market account or a CD (Certificate of Deposit), can pay significantly more interest on your balance. Some high-yield savings accounts have different requirements than a traditional savings account, such as minimum balances or required savings periods. Our colleagues over at Axos Bank offer high-yield savings accounts with competitive rates.6

Stocks

Stocks are a type of security that give the investor a share of ownership in a company. There are a couple of ways to potentially build wealth with stocks. You can hold on to stocks until their value potentially increases then sell them if you can make a profit.

Some stocks are designed to pay out dividends. Dividends are payments to shareholders from a company's profits. Most companies that offer dividend-paying stocks make dividend payments quarterly. While the idea of making your money work for you is nice, there's no guarantee that your stocks will create profits or dividends.

Bonds

Bonds are debt securities, which, put simply, means that when you buy a bond, you lend an organization money in return for a specified interest rate over the life of the bond in addition to repayment of the principal. Corporate bondholders receive the equivalent of an IOU from the issuer of the bond. But unlike equity stockholders, the bondholder doesn't receive any ownership rights in the corporation.

However, in the event that the corporation falls into bankruptcy and is liquidated, bondholders are more likely than common stockholders to receive some of their investment back.

Corporate bonds tend to be categorized as either investment grade or non-investment grade. Non-investment grade bonds are also referred to as "high yield" bonds because they tend to pay higher yields than Treasuries and investment-grade corporate bonds. However, with this higher yield comes a higher level of risk. High yield bonds also go by another name: junk bonds.

Mutual Funds

Mutual funds are investment strategies that allow you to pool your money together with other investors to purchase a collection of stocks, bonds, or other securities that might be difficult to recreate on your own. This is often referred to as a portfolio.

The price of the mutual fund, also known as its net asset value (NAV) is determined by the total value of the securities in the portfolio, divided by the number of the fund's outstanding shares. This price fluctuates based on the value of the securities held by the portfolio at the end of each business day. Note that mutual fund investors do not actually own the securities in which the fund invests; they only own shares in the fund itself.

Exchange-Traded Funds (ETFs)

An exchange traded fund (ETF) is a type of security that involves a collection of securities—such as stocks—that often tracks an underlying index, although they can invest in any number of industry sectors or use various strategies. ETFs are in many ways similar to mutual funds; however, they are listed on exchanges and ETF shares trade throughout the day just like ordinary stock.

Are You Ready to Get Started?

Taking your first steps into investing and long-term saving is essential in preparing for the future. We hope this article has provided some of the information you need and useful references to help you make informed choices for your financial future.

References:

1. Family incomes are based on 2018 earnings and adjusted for differences in purchasing power by geographic region and for household sizes. Middle income is defined here as two-thirds to double the median annual family income for all panelists on the American Trends Panel. Lower income falls below that range; upper income falls above it. https://www.pewsocialtrends.org/2020/04/21/methodology-32/

2. 1940 to present - https://data.bls.gov/timeseries/LNU04023554&series_id=LNU04000000&series_id=LNU03023554&series_id=LNU03000000&years_option=all_years&periods_option=specific_periods&periods=Annual+Data
1929-1939 - https://data.bls.gov/timeseries/LFU21000100&series_id=LFU22000100&from_year=1929&to_year=1939&periods_option=specific_periods&periods=Annual+Data

3. U.S. Census Bureau and U.S. Department of Housing and Urban Development, Average Sales Price of Houses Sold for the United States [ASPUS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/ASPUS, October 15, 2020.

4. Axos Invest and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

5. National rates are calculated based on a simple average of rates paid (uses annual percentage yield) by all insured depository institutions and branches for which data are available. Data used to calculate the national rates are gathered by RateWatch. Savings and interest checking account rates are based on the $2,500 product tier while money market and certificate of deposit are based on the $10,000 and $100,000 product tiers for non-jumbo and jumbo accounts, respectively. Account types and maturities published in these tables are those most commonly offered by the banks and branches for which we have data - no fewer than 43,000 locations and as many as 80,000 locations reported. The deposit rates of credit unions are not included in the calculation.

6. Securities: Not FDIC Insured - No Bank Guarantee - May Lose Value Cash: Not FDIC Insured - No Bank Guarantee

Axos Invest, Inc. Investment advisory services provided by Axos Invest, Inc., an SEC registered investment advisor. All rights reserved. For information about our advisory services, please view our ADV Part 2A Brochure at https://www.adviserinfo.sec.gov/Firm/150953, free of charge. Brokerage services are provided by Axos Invest LLC, a member of the Financial Regulatory Authority (FINRA) www.finra.org and the Securities Investor Protection Corporation (SIPC) www.sipc.org. All investments involve risks, including the loss of principal invested. Past performance of a security does not guarantee future results or success. Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type.

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