Where should a first time investor start?
I'm 32 years old and I make $40,000 a year. I'm trying to plan for retirement early and want to start investing. I already have a Roth IRA, but I'm researching ETFs, index funds, and stocks. Looking for guidance so I have a better idea of what to invest in at this point in my life. What portfolio should I use in my investments?
Joshua Escalante Troesh, CFP | MBA
You can invest in any of the investments you listed, as well as others, through most investment accounts including your Roth IRA. At your age, and with over 30 years until you retire, you should consider investing heavily in a broadly diversified stock portfolio which includes both U.S. and international stocks. With three plus decades to go, you only need bonds in your portfolio to help you sleep at night and for rebalancing opportunities. In other words, after doing your research, choose a bond percentage which makes YOU feel comfortable that you have enough "safety" in your portfolio.
Beware Portfolio Advice From Books, Magazine, or the Internet
Beware of the one-size-fits-all rule of thumb portfolio advice you get from books, magazines, or online. While many are good as a starting point, they will not be optimal for your goals. Rules of thumb are often written to legally protect the author and by definition any portfolio you read online or in a book cannot be appropriate to your exact situation because your situation is unique to you.
While good is good enough in the beginning, you will at some point want investment advice tailored for your situation and goals. Getting professional advice doesn’t have to be expensive. Our Financial Financial Launch program is designed for young professionals and is just $35 per month.
Build an Emergency Fund Before Investing
Your investments should start after you have a cash buffer in savings of 5% to 20% of your gross income (your personal situation will determine where in this you fall, but if you have good insurance and a stable job, it can be on the lower side of this number). Investing without a cash buffer is dangerous for your investments, because it increases the chances you will need to raid your retirement accounts to deal with a major unexpected expense. This would significantly reduce your savings due to unnecessary taxes as well as a 10% penalty from the IRS.
Once you have that cash buffer, here are three places to look for starting a retirement account.
1 - START AT WORK
If you have a 401(k) at work, check to see if your employer offers a match. If yes, invest in your 401(k) first. A match means your employer is giving you free money, which will incredibly boost your retirement savings. Contribute at least enough to get the match. (For you a 3% match would mean contributing at least $100 per month). You will hear a lot of bad 'advice' from gurus and experts about when not to invest in your 401k. This article gives a good overview of why advice to not invest in your 401k is bad advice.
2 - CREATE YOUR OWN
While you have already started your Roth IRA, others may not know it’s possible to create your own retirement account. If you don’t have a 401(k) or the investment options in your 401(k) at work aren’t great, you can invest additional money into your own Individual Retirement Arrangement (IRA) account. You can easily open up a retirement account at numerous organizations including with us through our Launch program, with a discount brokerage, or directly with a fund company. Most will allow you to invest in a wide range of investments with low fees. Generally, mutual funds and ETFs should have expense ratios between 0.05% and 0.25% depending on the types of investments they hold.
3 - GET COMPREHENSIVE HELP
Many clients of financial advisers express they wished they had hired the adviser earlier in life to help get a jumpstart on wealth building; but also to get advice on buying a home, managing debt, buying an investment property, and other major life events. If you would like more personal help, please schedule a meeting with us or reach out to another fiduciary, fee-only, and comprehensive financial adviser.
When you interview the advisor, if all the adviser does is manage your non 401(k) investments, avoid them. Starting out you won't have enough money saved up to make their fees worthwhile. And they may encourage you to skip the 401k match so they have more money to manage. Instead you want a person who will advise you on your 401k, budgeting, career planning, insurance contracts, tax planning, debt management and other elements of your finances.
You also want to beware of ‘financial advisers’ who sell life insurance, annuities, or other financial products on commission. While there are plenty of good people who sell these products, there are a lot of predatory practices associated with the commissioned sales of annuities and other financial products.