Everyone tells you to invest often and early but how you actually go about it is not as clear. One tool that really helped me crystalize how important investing is to wealth building was the compound interest calculator.
Quick history lesson: the stock market average yearly return has been at 9.74% in the last 20 years. Using this interest to play around with the tool, you can see how much further your money goes with compound interest and leaving your money in the stock market, through its ups and downs. Time in the market beats timing the market. Every time.
Here are some investing 101 insights and terminology that will hopefully help you feel more comfortable and confident investing or considering learning more to make the decision that makes the most sense for you. There are different layers to investing and getting caught up in the jargon can be daunting so below you’ll see a breakdown of high-level terms and concepts to get started.
BROKERAGE
This refers to the institution you are choosing for your investments. I personally prefer Fidelity as I find their user interface very simple and easy to use and their tools and resources very accessible. That said, I have also used others such as Charles Schwab and Vanguard and had no issues with either, I just chose to move my investments where my employer-sponsored 401(k) retirement account was to streamline my finances and make my life simpler.
ACCOUNTS
Once you’ve chosen which financial institution will hold your investments, you then need to think about which account you’re going to open. This can be an individual brokerage account, a ROTH IRA, traditional IRA, etc. There are certain benefits and considerations for each of these accounts and again, Fidelity has been my go-to for the past year and change and I’ve learned a lot from their tools, including an account overview page where you can learn more about each of these accounts before deciding which one to open.
If you are just starting out, I recommend opening a ROTH IRA which is an individual retirement account (IRA) that allows you to fund your investments with after-tax dollars so your money can grow and be withdrawn tax-free at age 59½ penalty free. There are annual maximum contribution limits which can vary each year and the IRS website is a useful tool to check when they change and the limit you can contribute annually.
TYPE OF FUNDS TO INVEST IN
It's easy to think that opening up an investment account means you're automatically investing once funds are transferred but you still need to take the extra step to actually invest within your account and there many types of investments available. These investments vary depending on your risk tolerance and there are things to consider when investing in each.
The way you manage your investments can also differ greatly. If you feel comfortable managing your own investments, you can do it yourself and as with anything DYI, it is the cheapest but can also be a risky way if you're not totally sure about what you're doing or need some guidance to start.
You can opt to go with robo advisors which means you're choosing your overall strategy based on your risk tolerance and you'll get help through an algorithm and a smaller fee. You can choose a financial advisor for portfolio management but be aware of their fee structure as some can charge an AUM (assets under management), or a percentage, based on the value of your investment portfolio and may not be working in your best interest versus flat fee advisors that do not have additional vested interest other than your explicitly stated goals.
You can also invest in a target date fund based on your retirement age, so taking your birth year and adding 65 and then finding that target date fund year in whatever brokerage you chose but I'd be remiss to say that you are not limited to investing in the target date funds offered by your brokerage. For example, if your retirement year is 2050 and you opened your ROTH IRA with Fidelity, you can still invest in the Vanguard Target Retirement 2050 Fund.
Doing your homework and due diligence is a crucial aspect of your financial journey and the more informed you are to know what your choices are, the more prepared you will be to make decisions that make the most sense for you and your goals.
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