Among the goals that many people have for this year, gaining control of one’s finances is sure to be near the top of the list. And, in addition to budgeting and saving money, another aspect that’s closely linked to becoming financially secure is investing.
However, as the internet buzzes with news about the stock market and the various states of high-valued companies, beginners might become a little overwhelmed by investing. So, we asked financial experts and advisors for their advice on best practices for those who are looking to start investing in 2021. Here’s what they had to say:
Start Simple & Pile Up
“The best practice when starting to invest is to keep things simple. Once you have your emergency savings fully funded (typically three to six months of living expenses) and are comfortable with your debt payments, start contributing to your employer’s workplace retirement plan at least enough to get the full employer match, which is essentially free money! If you do not have a retirement plan offered through work, open an IRA or Roth IRA (depending on your tax situation) at a reputable broker. Once the account is open, set up automatic monthly contributions from your bank account and choose a low-cost (check the fund’s expense ratio), diversified ETF (exchange traded fund) or mutual fund to invest in.
Don’t overcomplicate things by trying to determine the monthly amount you invest, as you can always increase it over time. The key is to get started. Investing can be overwhelming, but by choosing an ETF or mutual fund that holds many companies, you are reducing your risk versus owning individual stock in one specific company.”
“One of the most important practices for a new investor — in 2021 or any year — is to not dive in the deep end right away. Start with something easy to understand, easy to maintain and easy to repeat, like dollar-cost averaging (buying the same dollar amount of the same investment each month) into a broad stock market index fund in a 401(k) or an Individual Retirement Account (IRA). A new investor with decades until retirement can take advantage of compounding returns over 20 to 30+ years, and an index fund is an excellent choice for that time horizon. Avoid the temptation to immediately buy individual stocks; buy and sell frequently (day trading); and go all in on a handful of investments. A novice poker player should not sit down at a table full of sharks, and neither should a new investor start with the most competitive, risky or difficult ways to invest.
One of the best ways to succeed as an investor is to make saving a large part of each paycheck a habit. Investments that are allowed to grow and compound over years and decades can bring life-changing results — but not if that compounding is prematurely interrupted. A high savings rate (the amount saved relative to gross pay) may not be as exciting as investing, but it will help navigate the expenses that may otherwise force investments to be sold for some quick cash. Unexpected expenses — like a hospital visit, a tax bill or losing a job — may require a lot of cash on short notice, and the stock market is the wrong place to put money that might be needed in the next one to three years. Building a habit of saving a portion of each paycheck can help reduce the risk around unexpected expenses or dependence on debt, which will allow investments to grow over years and decades.”
Diversify Your Portfolio
“We’re in an environment of elevated uncertainty across the capital markets. Both stocks and bonds appear expensive by many measures. However, with the prospect of future inflation, even holding cash has its risks. In such an environment, the best approach is to diversify. While diversification is always a good idea, hyper-diversification is warranted today. Spreading your investment dollars across several asset classes — but also across a variety of geographies, industries and currencies — is more important than ever. A sprinkling of bonds will help protect against a recession. Stocks and REITs should outpace higher inflation. Foreign holdings help hedge a depreciating dollar. Value stocks could provide downside protection if growth stocks falter.
Beyond the basics, commodities, gold and a small allocation to digital assets could add to returns, particularly if we enter a period like the decade of the 2000s, when stocks generated flat returns for many years. There is no silver bullet to addressing today’s risks of overvaluation; low interest rates; potential inflation; heightened taxes and regulations; a double-dip recession; and other exogenous events. A multi-faceted approach to portfolio construction is warranted, and diversification will be key.”
Invest in Real Estate
“The best investing practice I think renters should implement in 2021 is real estate. The real estate market for residential and commercial is likely to crash due to the forbearance program coming to an end this year. So, for those of you who have the funds to invest, you are going to find yourself with several opportunities to buy up foreclosed properties. We have seen a rise in residential real estate prices over the last few months, as well as witnessing the situation of the commercial real estate market. This is due to businesses having to move their employees to remote working because of the pandemic.
But, remember, the misfortunes of one year can often create new investment opportunities in the new year. However, if you want a huge return, you need to be willing to raise the risks slightly. I would suggest that, when you are making an investment, be sure not to put all your eggs in one basket. Consider diversifying as much as you can to lower your risk exposure. It’s wise not to take too much of a risk at first and I would recommend you invest for a minimum of at least five years. If this isn’t possible for you, I would suggest that you wait until you can and, in the meantime, put your money in a savings account.”
Invest in What You Consume
“One of my favorite ideas in investing is to contrast your investments with your lifestyle and expenses. If you spend most of your money on a particular product or part of your lifestyle, why not benefit from it, as well, by investing in the companies that collect the money? For renters, this means benefiting with the companies that see higher profits if residential rents and the housing market gains. In this theme, there are real estate investment trusts (REITs) — like AvalonBay Communities (AVB) and Equity Residential (EQR) — that own apartment properties, collect the rents and pay great dividends out to investors.”
“Investment prices don’t always move in the same direction as the overall economy. This might not have seemed apparent right after the COVID-19 pandemic struck in mid-February as the overall economy and the stock market took big hits. But, just about five weeks later, the markets began a rally that lasted several months. Investors who tried to cut losses and exited the market likely did so at the wrong time and missed out on the beginning of the upturn. Unfortunately, this is not uncommon. Investors who overreact to market declines often find themselves on the investment sidelines just when a new rally begins. Rather than being reactive in this way, you may be better off sticking with a long-term investment strategy and buying and selling investments only when it makes sense for your situation, such as when you need to diversify your portfolio.”
“One of the biggest challenges with starting to invest is staying consistent. The secret is to automate your investment contributions. Whether you’re contributing to a 401(k) or another type of brokerage account (IRA, taxable account, etc.), set it up so that every time you get paid, money will automatically be withdrawn to be invested. This will help keep you on track. Think of this just like paying your rent. Perhaps you have that automated so you never have to worry about it. Do the same thing with your investments, and you’re sure to make progress.
Want to take it one step further? Boost your contributions every few months. For example, maybe you start by investing 5% of your income. Three months from now, try boosting this to 6%. Chances are, you won’t even miss that extra money. Over time, small changes can add up to big results.”
Apply Dollar-Cost Averaging
“You might have heard of the term ‘dollar-cost averaging,’ but what does it really mean and why is it so important to incorporate it into your investing strategy? Well, it’s a fancy way of saying systematic investing. Think of 401(k) contributions. Each paycheck contributes roughly the same amount to the retirement account regardless of the price of the fund at the time. What makes this simple action of investing equal amounts regularly so powerful is that it is averaging the price over a long period of time, which could lower the total average cost of the investments.
What you don’t want to do is invest chunks several times a year. As much we would love to believe that we can time the market to buy low and sell high, the truth is that we can’t tell the future of market behavior, and the last thing you want to do is buy a large amount at the highs.
Dollar-cost averaging is a great way to be a long-term investor, as opposed to being a trader. It also takes the emotion out of it. Of course, for some, this might sound like a boring way to invest, and in a way it is. But, increasing your wealth doesn’t always have to feel like a rollercoaster. There are other parts of life that fulfill that feeling. Your investments don’t have to be one.”
Protect What You Have First
“When one is getting started with investing while renting an apartment, value is of paramount importance. Many novice investors want to find the deal or biggest potential return. However, they may be a bit apprehensive due to risk associated with the choices they make. What I tell my fresh-to-the-investing-world clients is to put a fence around their fortune to start. What does this mean? Protect what you have first. Get insurance on your income. This is called disability insurance. This is arguably the most valuable asset one has — the ability to earn a living. Properly protect your family (if you have one) with life insurance. Start out with term and grow into more sophisticated options when budget allows. Once these basics are in place, you have earned personal permission to start investing in modest portfolios in the market.”
Be Aware of Your Investing Type
“For people who would like to try investing for the first time, one of the best practices is to determine your investor personality, which is basically your personal preference when it comes to the treatment of gains and losses, especially risks. This is important because there are a lot of investment options out there and, really, you are free to choose whichever you like, but that wouldn’t be wise. What will be wise is for you to choose the investment that suits your personality because investments are usually long-term commitments that you need to be comfortable with. If you are a risk-averse person, you do not want to end up with a high-risk investment that you chose carelessly because that will keep you up every night.”
Ask Experts for Help
“My best investing advice for beginners is, if you’re not an expert, just ask someone for help. You don’t have to do this alone, and a financial advisor can help navigate any uncertainty you have. While it may be tempting to ask someone you know, the best course of action you can take is to ask a professional. Make sure to check out any advisors first, though, and ask whether they are a fiduciary. Also inquire about their certifications. Looking for certified planners is the best thing you can do to get the best advice available.”
“My best advice is to think long-term. Depending on the investment that you choose to allocate your funds into, it’s important to look at it from a long-term gain perspective of thinking. Do due diligence with your research, and seek out long-term investment opportunities to maximize your profit while minimizing risks.
On top of this mindset, choosing investment assets that compound over time is a great way to protect yourself from the volatility of the economy. Real estate properties, the Forex and the stock market are great places to start when it comes to investing in assets that variably compound over time. You also have to consider the amount of capital you’re willing to invest compared to what would be readily available for your fixed and miscellaneous expenditures.”
Look for Flexibility & Diversity
- Thomas J. Brock, Finance Professional & Financial Expert, Annuity:
Let’s take a clear example: “Marcus is a fiscally responsible and gainfully employed 26-year-old. He is a renter, and he is saving a steady amount of income each month — on top of a liquidity reserve he diligently accumulated. Marcus is ready to invest. Given his long horizon, the optimal approach for Marcus is to implement a passive, low-cost strategy focused on growth. I advocate he acquire exposure to the global universe of publicly traded stocks.
Specifically, he should invest in three distinct ETFs in the following proportions: 54% in a fund tracking the Russell 3000 Index (U.S. market exposure); 34% in a fund tracking the MSCI EAFE Index (international developed market exposure); [and] 12% in a fund tracking the MSCI EEM Index (international emerging market exposure).
Marcus could buy a single, worldwide ETF to achieve the desired exposure. But, three distinct funds will provide him the flexibility to adjust his asset allocation as conditions dictate.
Please note, the proposed strategy reflects a 100% stock-based growth strategy. Given Marcus’ long horizon, this is completely appropriate. However, if he wishes to allocate some capital to less-volatile assets, I suggest he carve out 10% to invest in an ETF that tracks the Bloomberg Barclays Aggregate Bond Index. Over time, as Marcus ages into his 40s, it may be wise to increase the bond allocation. On that note, as Marcus’s investment acumen grows, he may wish to explore more complex — but also potentially more efficient — portfolio structures, which could include a mix of stocks, bonds, a myriad of alternative investments and cash.”
Most importantly, start by asking yourself what exactly you want from the investments you plan on making, and then research the best ways to do so.
Looking to make a change? Perhaps it’s time for a new rental apartment that better fits your lifestyle goals for this year. If so, head over to RENTCafé and check out your options.