We're getting back to basics this year, and that means addressing the most commonly asked questions by novice investors who are usually too embarrassed to ask. By the time you're in your 30s or 40s and you can finally afford to use a broker to manage your investments going forward, you may feel compelled to blindly follow any and all advice they offer. After all, they do have fancy degrees and designations and speak in a lingo that you can't keep up with, so naturally you trust their advice.
There are no stupid questions when it comes to investing, because in all honesty sometimes the simplest questions are the toughest ones for the pros to answer. And if more people asked questions, maybe the stock market crash in 2008 would not have hit so hard.
So in this new series, I will look to address the most common investing questions asked by new investors (some I have answered in earlier entries), but I hope to keep this section in perpetuity so please SEND ME YOUR QUESTIONS HERE and we can keep the party going!
How early should I start investing?
The short answer at any age is: as soon as possible. Granted if you are 15 years old and have an after school job, the sense of urgency to start investing is much less than say at 40-year-old worker who is married with children. Think of investing first and foremost as dedicated savings for retirement rather than playing the stock market like a game with the intent of funding a large purchase or striving for a goal of some kind. Most brokerage firms have what are called targeted retirement funds, which approximate the year in which you will retirement and the weights shift accordingly for these without you really having to make any major decisions - this is a set it and forget it option. Some investors want (and should) take a more proactive role in their investing decisions (and this site is for them!) but really the answer to this question has a lot to do with your age, risk tolerance, what your long-term and short-term goals are, and the date when you plan to retire.
Should I open an investing account for my kids?
This can ONLY be a good thing for them in the long run! However, this should be separate from a 529 College Savings Plan - this is a separate thing entirely. Trades should be executed on the part of adults, but a great strategy is for you to come up with a list of stocks that your kids already know and like. Some examples include: McDonald's (MCD), Nike (NKE), Disney (DIS), Netflix (NFLX), Coca-Cola (KO) or Pepsi (PEP). By the time your kids retire, these stocks will have had 50+ years to grow and those will be some incredible returns. I also wrote another article about how you can turn investing into a fun game for your kids to incentivize good saving habits.
What kinds of investments can the average person buy?
Stocks (or equities) are my area of expertise and so I always recommend stocks to new investors: they are easy to trade, easy to understand and easy to monitor performance and valuation metrics. If individual stocks seem too intimidating, I always recommend mutual funds, index funds or ETFs (exchange traded funds) so that you can have broad exposure to a variety of sectors and stocks with minimal research.
Bonds can also be bought or sold in brokerage accounts, but the concept is a little different. This is when you as an individual loan money to a corporation (or government municipality if these are municipal bonds) at a fixed interest rate. These tend to offer lower returns over time than stocks so, but there is less risk associated with bonds since 1) they are based on a creditworthiness of the bond issuer, 2) the interest rate is a guaranteed payment no matter what the market is doing and 3) typically bondholders have priority in receiving payment over equity holders. Bonds should not make up 100% of your portfolio, but they can be used as an important hedge in the long-run. Just keep in mind that bonds are not as liquid (or easily converted to cash) as stocks since they must be held for a certain duration.