Investing Right Out of the Gate

A smart investor

Investing is usually not very high on the priority list for new grads or young people in general.  There are other more important things to think about such as finding a job, looking for a place to live and finding some Joneses to keep up with (aka leasing a fancy luxury car, getting a nice big screen TV or two and, of course, getting an iPhone 6 Plus because the regular iPhone 6 just won’t cut it).

Many new graduates have told me that they just don’t have the time and money to invest.  They don’t want their take home pay to be any smaller, mainly because many are stretched to the limit as it is.  And they don’t want to spend time investing because they are turned off to the prospect of learning about stocks, bonds and all that jazz, though I would argue that spending some time to secure your future is well worth it.

Here’s what I say to those people: you actually don’t need much money or time to be a great investor.  I like to think of investing as becoming a better basketball player.  If you don’t know the first thing about basketball, but decide you want to put in a little time each day to get better, you will be a better player than half of the people on the planet within a month.  That’s because most people don’t even try and basketball is one of those things which is easy to learn and difficult to master.

If you decide you want to join the NBA, that will require considerably more work and is probably not going to happen unless you perform and practice at a high level from a very young age.  If you’re in your 20’s and just think about how hard it will be to make the NBA, you will get discouraged and not even try to play basketball at all.  Similarly, many beginner investors just think about how hard it is to make billions of dollars like Warren Buffet or Carl Icahn and give up starting all together, which is a huge mistake.

People early in their careers should realize there are only a few things to remember when starting your investing journey, and they don’t cost much time or money:

1. Start early.  In my opinion, this is the most important factor to become a successful investor.  Even if you start early and do something dumb, you’re still better off than the person who started investing late because you know what not to do.  But don’t be like that.  Start early and start smart.  Time is your biggest friend and your biggest enemy when it comes to investing, and you need as much of it on your side as you can.
2. A 401k is a great place to start.  While not as “guaranteed” as traditional pension plans once were, a 401k can potentially be better for your retirement if you use it correctly.  And the best way is invest early and keep increasing your contributions.  The goal is to max out your contribution, as this will decrease your taxable income which can potentially be very favorable during tax time by making you eligible for even more deductions and credits.  And since the contributions are pre-tax, you won’t feel as big a pinch in your paycheck.  A contribution of 10% of your salary does not decrease your take home pay by 10%, but 7 or 8 percent depending on your tax bracket.  Add on the matching contributions that many employers give and your returns will be pretty stellar over the long term.
3. Make simple investment choices.  There are tons of companies to invest with who all have tons of investments to choose from.  There are stocks, bonds, mutual funds, ETF’s and many other types of investments.  I believe this is what turns most people off to investing because humans don’t do well when there are lots of choices.  401k plans usually offer a much more palatable number of choices, but even this can be too many for some.  For young people just starting out, it’s pretty simple.  You’re saving for retirement, which is probably a few decades away.  Since you have time on your side (see step 1), you want to be aggressive, so a mutual fund that follows the S&P 500 or the general stock market is a great place to start.  They usually have low fees and will keep your money growing.  As retirement gets closer, you determine how much less risk you want to take and adjust from there.  But an S&P 500 fund is a great place to start.

I sincerely believe that following just these three steps will make you a great investor.  But I will add a fourth step which is to keep on learning!  Read an investment book or two and follow some quality blogs.  You want to be the best investor you can, so it takes a little bit of work over a long period of time to get there.  These three steps are a great start, but the investing world changes every so often and it’s important to keep up with that as well.