If you're anything like me, then the idea of starting an investment portfolio is a little foreign and scary to you. I can name all of the Gilmore Girls boyfriends and the actors who played them, but ask me details about interest rates and I will get away from you faster than a James Van Der Beek CBS sitcom gets canceled (sorry JVDB). If that sounds like you, don't feel bad — but don't give up.
After all, financial literacy is something that's missing from American education. Most of us are at a loss when it comes to this very important part of our lives — and that lack of education seems to be hitting women especially hard. According to a recent study by the Financial Industry Regulatory Authority, Millennial women tend to be less financially literate than their male peers. Only 18 percent of Millennial women demonstrated high levels of financial literacy, compared with 29 percent of Millennial men. We need to change those numbers.
But how to crack the code of the ever loud and confusing stock market? We talked to some experts in the field about putting together a stock portfolio when you are a beginning investor. Here's your nine-step plan to starting an investment portfolio.
After all, we want you to end up like this:
And not this:
Step 1: Get a clean slate
Before you can start investing, you need to make sure you have some emergency funds set aside. Joshua Duvall of Capital Financial Services tells Bustle that you should include establish a fund of cash in your checking or savings account that can pay for 3-6 months of your expenses should you lose your job or have an emergency. You'll also want to make sure you’re managing your debt properly; high interest credit card debt or large student loans can inhibit you from experiencing financial freedom if you don’t deal with them early on.
Step 2: Set up your financial goals
Once you're ready to start putting together a portfolio, there are a couple of very important questions you need to ask yourself, according to Duvall.
- What is this money going to be used for (retirement, buying a house, rainy day, wedding, etc…)?
- When am I going to use this money (next year, five years, 10 years, etc)?
- How much risk am I willing to take with this money (conservative, moderate, speculative, etc)?
The answers to those questions will help outline an investment strategy that makes sense for each individual case.
Step 3: Make sure your investments match your goals
Jamie Hopkins, Assistant Professor of Taxation at The American College, tells Bustle that once you have developed your goals, you need to pick stocks, bonds, mutual funds, and alternative investments that match those goals. If you want to reduce volatility and want more guaranteed growth, look at bonds. If you're looking for long-term gains look more at stocks.
Also, don't try to do everything in one day.
"Do not buy all of your stocks at the same time," Hopkins tells Bustle. "Buying all of your investments at the same time makes you highly subject to price-risk. Instead, buy your investments over time, which is also known as dollar-cost-averaging. This helps reduce the risk of buying all your investments when they cost the most."
Step 4: go online, or get an advisor
One of the big questions when starting an investment portfolio is to whether you should work with a financial advisor or go solo. With all the resources available online, paying for a financial advisor may seem a little silly, but sometimes, it really is necessary to get guidance from an actual human.
LearnVest’s in-house Certified Financial Planner Lauren Lyons Cole says you should consider working with an FA if you recently came into a lot of money, have an aging parent, or if you have more than $250,000. Or if you just feel better about having a financial advisor to answer all your questions then you should do it, but it will cost (way) more than opening an online account. CNBC has some great tips on finding the best financial advisor for you.
If you do decide to take the online route, then you need to choose the right online brokerage firm. Registered Online Investment Advisor Matthew Pixa says you should be wary of any places that say "full service" means you will have to pay full commission on every trade you make. You will also have to pay more on semi-independent firms such as LPL, Raymond James, and Edward Jones.
You might want to look for an online discount brokerage like TD Ameritrade, TradeKing, E*Trade, or Fidelity. All of these will still give you access to high-quality research. MarketConsensus.com ranked the best online trading sites for investors.
You can also be completely independent and void of any support and purchase stocks directly through a company itself. Sites like DRIPInvestor have lists of companies that allow direct-buy of stocks.
Step 5: Diversify
In other words, don't put all your eggs in one basket. Sam Seiden, Chief Education Officer for Online Trading Academy, tells Bustle that you have to diversify your portfolio because even in the best of markets, not all stocks go up at the same time — and some can even head downward while most stocks are skyrocketing.
"If you have too many stocks in one or two sectors, such as banking, raw materials or energy — or if you have your money in only one or two stocks — and that sector or those few stocks nosedive, your portfolio will, too," he said.
Step 6: Learn about stock metrics
Hopkins says you have to pay attention to stock metrics in order to ensure that your assets are performing well and meeting your goals. This means paying attention to how your underlying companies are performing year to year by keeping track of the company's earnings, total returns, and debt-to-equity ratio. So how the hell do you do that? Luckily, all this information you need to understand has been summarized by most major news outlets (Yahoo Finance, Google Finance, MSN Money, your brokerage) into single, small profiles that are updated consistently. Mint also has a great breakdown of how to read stock metrics.
Step 7: Consider mutual funds
If you want to make it a little easier on yourself than picking the stocks yourself, consider a mutual fund or a Roth IRA. Hopkins says mutual funds can be great for first-time investors because the mutual fund company basically does all the selecting for you. Mutual fund companies sell mutual funds geared towards specific goals and outcomes, such as high growth funds or long-term investment funds.
When considering mutual funds, be aware that there is a cost to purchasing them. Pay attention to the fees associated with a mutual fund, because in many cases, broker sold funds are more expensive and underperform direct sold mutual funds.
Duvall says a Roth IRA is a good place to start for most young people looking to invest in the stock market. You can contribute $5,500 this year (2014) and the money grows tax-deferred. When you take it out after age 59 ½, you get to receive it tax-free.
"For a novice, I wouldn’t recommend trying to pick individual stocks. That takes a lot of expertise and research," Duvall says. "Instead, use index funds, which are groups of stocks that follow a specific sector of the market. For example, a young person using a Roth IRA may want to look at a Small Cap Index Fund like Vanguards NAESX or the S&P 500 Index Fund like VFIAX that tracks the largest 500 companies in the U.S. Once these accounts are active, funding them on a monthly basis will be an extremely successful strategy over the long-term."
Step 8: Periodically Review Your Investments and Make Adjustments
Over time, your goals might change. As such, be prepared to make adjustments to your investment strategy. This might mean reallocating funds to alternative investments such as real estate, or putting more money into your stock portfolio to generate more income in the future.
Duvall recommends finding a way to put at least $100 per month away — no matter what — and then increasing from there.
"Don’t worry about the daily ups and downs, instead realize that over the long-term (30 years) the stock market has never produced annual negative returns," Duvall says. "On average, you're going to make money on your investments every year as long as you don’t buy and sell at the wrong time. Find a good stock mutual fund, setup an automatic withdrawal from your bank account and watch it grow over time. That’s a great way to get started in the stock market."
Step 9: Don't Be afraid to ask for help
The most important thing you have to remember is to not be so scared of all this new information that you keep your money under your mattress. You do not have to be a genius to do this. And you don't have to change your life and start religiously reading the Wall Street Journal and watch CNBC all day (though good for you if that's your jam).
There are tons of resources out there that break down all of this into simple steps. Don't feel shame in going to Investopedia and just looking up a bunch of terms. If you have an account at Fidelity or TD Ameritrade, they have people there who will talk you through it and be your own personal financial Yoda.