Investing can seem extremely intimidating, especially if you’re a young, new investor. Most of us aren’t taught how to invest in school and the financial news makes it seem like you have to be a genius to figure everything out. Is this fear keeping you on the sidelines? Don’t worry. Investing can be much easier than you think. There are four simple but very effective investment tips for 20 somethings that every millennial should consider so they can start investing in the New Year.
1. Index funds
Building a stock portfolio from scratch can easily become a full-time job. You need to research the market to find good stocks, figure out the best time to buy, and stay glued to your computer in case unexpected news shakes the market. It’s no wonder that many millennials don’t want to get involved.
With an index fund though, you can skip all this work. An index fund is a type of investment portfolio built to track a certain market. For example, an S&P 500 index fund follows the performance of the S&P 500, the stocks of the 500 largest companies in the United States. When you buy an index fund, you’re combining your money with a large pool of other small investors so you can build this large portfolio of stocks. Then, the portfolio is managed by a professional manager who has the one goal of tracking the index.
Buying an index fund isn’t just one of these easiest investments tips for 20-somethings. It might also be one of the most lucrative as well. Some investment professionals, like John Bogle, founder of Vanguard, believe that you can earn more long-term this way because you’ll be paying less in fees every year than if you tried to create your own portfolio or hired an investment manager to follow a more complicated strategy.
Investing in stocks can be a little scary because you never know how much you’ll make. If you want something more predictable, a Certificate of Deposit could be a good choice. CDs are a type of investment account offered by banks and credit unions. When you buy a CD, you agree to leave your money with the bank for a set amount of time, usually between 6 months to 5 years. During this time, the bank will pay interest on your deposit every month.
These investments are very safe and predictable. Your deposit is FDIC insured so you can rest assured your money is safe. Most CDs have a fixed interest rate so you’ll also know exactly how much you’ll earn from your investment. Basically, a CD is as safe as a bank account but earns more. In exchange, your money is locked up for the length of the CD. If you need to take out money before then, you’ll most likely have to pay a penalty.
If you want to start investing for your retirement, it could be a good time to open an Individual Retirement Account (IRA). An IRA isn’t an actual investment. It’s an account where you hold your investments, like stocks, index funds, and CDs. The reason it makes sense to open an IRA is because these accounts have a number of tax benefits. They delay taxes on your investment gains so you earn more each year plus offer a tax deduction, depending on the type of IRA you open. We cover these deductions in more detail here.
It shouldn’t cost anything to extra to invest through an IRA. When you buy an investment from your bank or brokerage firm (the company that sells you stocks), just tell them you want the investments to be put in an IRA. The convenient part about these retirement plans is that you open them outside of work. It’s not like a 401(k), which you can only open if your job offers one.
Keep in mind — before you start investing in an IRA, these accounts are meant for retirement. You’re supposed to keep your money in these accounts until you turn at least 59 1/2. If you need to take out money before then, you will owe taxes and penalties on the withdrawal.
4. Target-date funds
As you get older and closer to retirement, your investment strategy should change. You should start moving money out of riskier, high-earning assets like stocks, into safer, more predictable assets like CDs and bonds (a debt investment in which an investor loans money to an entity — corporate or governmental). You want to make this shift because you have less time to recover from losses, plus will have more money saved up that you need to protect.
If you want an investment that automatically takes care of this adjustment for you, you can invest in a target-date fund. These are managed investment funds, similar to index funds, with the goal of building a portfolio for you with a set retirement date. For example, if you want to retire in 2055, a 2055 target-date fund would manage your portfolio for your entire career so you have the right balance of investments.
While these investments are very convenient, they can be a little expensive. It might be more cost effective to meet with an investment advisor every few years and make the portfolio adjustments yourself. However, if you want the easiest possible investment, it’s hard to beat a target-date fund.
David is a Certified Financial Planner who writes about financial planning, investing and taxes.