Whether you’re brand-new to investing or more experienced, it’s likely you have questions about how to invest money wisely. You’re not alone: I spoke to numerous financial experts to learn the investing questions that they get asked over and over again, and then found the answers to these common questions. With topics ranging from how to invest with little money to how to adjust your strategy as you age, here’s what the experts had to say.
1. If I Only Have a Small Amount of Money To Invest, Is It Even Worth It?
“Of course it is,” said Pauline Paquin, founder of Reach Financial Independence. “Small amounts add up and snowball over long periods of time. Don’t take my word for it — use a compound interest calculator, and see how much your nest egg can grow. Twenty dollars a week can turn into over $130,000 after 30 years at an 8% [return] (the average rate the S&P 500 has returned over the past 30 years). Many robo-advisors have no minimum to start investing.”
2. Where Should I Invest If I’m Brand-New to Investing?
“There are two excellent ways to begin investing,” said Barbara A. Friedberg, CEO of Robo-Advisor Pros. “The first is to invest in your workplace 401(k) account. Choose a target date fund, and you’ll be on the right path. Or open a Roth IRA at a robo-advisor like M1 Finance or Betterment, and transfer $500 into that account every month. That will ensure that you’ve invested the $6,000 allowed by law for 2019 and 2020.”
If you want to invest directly in the market, entrepreneur and financial writer Eric Rosenberg recommends starting with low-cost index funds.
“These give you access to dozens or hundreds of stocks in one purchase, which gives you instant diversity and helps keep risk lower than when buying single stocks,” he said. “While it isn’t as exciting as trying to pick a hot stock, it is a great long-term strategy and better for most investors.”
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3. Everyone Says I Should Invest In Stocks, but I’m Nervous About the Markets. Should I Be?
“You’re right that there are no guarantees in the stock market, and your investment could go down. But remember that stocks have historically had a very high success rate over long-time horizons,” said Roger Young, a senior financial planner at T. Rowe Price. “If you’re saving for the distant future, like the later years of retirement, you want some investments with growth potential. And a diversified portfolio can help you manage the risks.”
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4. If I Want To Invest In a ‘Hot’ Stock, How Should I Pick One?
“Picking specific investments and timing the market is ultimately a losing game,” said Nora Dunn, a certified financial planner and founder of The Professional Hobo blog. “Studies show that your returns are largely predicated on creating an asset allocation plan and sticking to it. And your asset allocation plan starts with what you want to do with your life and how you are going to engineer your finances to get you there. I’m invested in the stock market, but I don’t presume to have the expertise to know which stocks are ‘hot’ right now. That is a full-time job unto itself. So I outsource that to mutual fund managers. They are paid according to how well their funds perform — so they not only have the knowledge but also a vested interest in investing better than I can. The funds I pick are specific to my own customized asset allocation plan. How do you create an asset allocation plan? Sit down with a financial planner who can act as your ‘financial quarterback’ and bring all the pieces of your income, assets, liabilities, taxes, portfolio, goals and dreams together into a cohesive — and adjustable — plan.”
If you want to make selections on your own, be sure to do your research, said Ben Watson, an education coach at TD Ameritrade.
“What is ‘best’ may vary widely from investor to investor,” he said. “That’s why markets move — because of differing opinions of what and when to buy and sell. Some investors use research and analysis of a company’s fundamental business aspects, such as profit margin, revenue and debt ratios. Other investors may use technical and statistical analysis of stock price movement to determine what and when to trade. Many investors use a combination of these and other strategies to inform stock selection, but a first step in answering the question may be determining what role a particular stock may play in an investor’s portfolio. Price appreciation, dividend generation and asset allocation/exposure are just a few of the reasons why an investor may choose a specific stock. Ultimately, it’s better to do some research and searching rather than trading on a blind recommendation.”
5. Are Alternative Investments, Like Angel Investing or Cryptocurrencies, a Good Idea?
“Generally, they aren’t,” said Jim Wang, founder of Wallet Hacks. “Most investors need to put their savings into a couple of low-cost mutual funds and then focus on increasing those investment contributions through making more or saving more of what they make. Too many people fall into the trap of seeing what’s ‘hot’ and wanting to get a piece of the action. The reality is that so many trends are nearing their end when regular people hear about them, and trying to catch the trend is a mistake. It also teaches you the wrong principles — that the path to wealth is trying to find the next lottery ticket when the real path is saving, investing and waiting patiently.”
6. Should I Tweak My Investment Strategy as I Age?
“Making sure your portfolio is balanced is only one part of keeping your financial plan on target. You also need to make sure your overall strategy is tracking with your age, your income and when you retire,” said Chris Hogan, a financial expert and the No. 1 national best-selling author of “Everyday Millionaires.” “When you’re young, you have more time to invest. With a longer time horizon, you could probably afford to invest in funds that carry a little more risk. But when you’re closer to retirement, you want your money to be in less volatile funds. This helps to protect the wealth you’ve grown over time.”
Essentially, your strategy needs to evolve when your life changes. “Based on your goals and your current financial status, you may need to save more,” he said. “Or maybe you need to save outside your work retirement plan. Or you might discover that you’ve reached a milestone sooner than you thought, and you need to adjust your strategy to protect your wealth. That’s why you need to ask this question on an ongoing basis.”
7. Should I Invest a Cash Windfall or Use the Extra Money To Pay Down Debt?
“After investing the minimum required for the match in a company-sponsored 401(k), deploy your cash where you will earn the highest return,” said Paul Vachon, founder of The Frugal Toad. “For example, paying down a mortgage with a 4% interest rate instead of investing in an index mutual fund such as the S&P 500 index would have cost you a 14% return on your money this year.”
8. What Kind of Returns Should I Expect?
“Investment returns are determined by a variety of factors, beginning with investment objectives, time horizons and risk tolerances,” Watson said. “Additionally, since no one can predict market movement with absolute accuracy, and projection of expected return for any investment is simply an assessment of known factors and risks, then whenever new information comes into the market, that assessment changes. Investors can evaluate past performance of a stock or other financial instrument, or a portfolio, or a specific strategy, for a look at what has happened, but similar returns in the future are never guaranteed. Rather, an investor may look at potential returns vs. risk and decide what is appropriate for their level of risk tolerance. Once that’s determined, managing risk becomes the primary task. Remember, markets — even highly liquid and electronically traded ones — are reflections of human emotions of fear and greed. For example, the average percentage return for the S&P 500 over the last 20 years has been around 5% to 6% per year. Some years have been much higher, and some much lower. That number may inform investor expectations as long as it’s understood that future performance is never guaranteed.”
9. How Can I Get the Best Returns With the Least Amount of Risk?
“I try to change the frame of reference from market returns in a vacuum to planning for goals,” said Justin Pritchard, founder of Approach Financial Inc. and a certified financial planner in Montrose, Colorado. “If you need your money in the near future, then the risk is problematic, and you need to ask yourself if the potential short-term gain is worth the potential loss you’re facing. But if we’re talking about specific long-term goals, as opposed to your account balance on paper, clients seem more willing to take on an appropriate level of risk that can help them reach those goals and hopefully outpace inflation. In some cases, it doesn’t make sense to take many risks, and that’s fine. The other answer is that diversification can potentially help you reduce your risk without sacrificing returns, but it doesn’t eliminate risk.”
10. How Do I Know How Much Risk I Can Tolerate?
“You should dip your toe into the stock market with a small amount of money to feel out your reaction on the day-to-day movements in stock prices,” said Kyle Kroeger, founder of Millionaire Mob. “From there, research the different investment options from a capital stack perspective. You can be a lender or invest in real estate. If you are not comfortable with the stock market, there are plenty of alternatives that can accomplish similar results. The best way to determine your appetite is to just get started.”
11. How Can I Invest More Tax-Efficiently?
“There are three ways to invest in a more tax-efficient manner,” said Amanda Salyer, a financial consultant with Fidelity Investments. “One, defer taxes — consider saving the maximum annual contribution limit to employer-sponsored accounts such as 401(k) and 403(b) accounts, and/or save the maximum to IRA accounts if eligible. If more savings are possible after maxing out 401(k)/IRAs, then consider a low-cost tax-deferred annuity. Two, manage taxes — in your taxable accounts such as joint or individual brokerage accounts, consider tax-efficient strategies, such as favoring long-term capital gains versus short-term capital gains when considering selling investments or using municipal bonds for bond exposure. Three, reduce — consider ways to ‘reduce’ your tax burden, such as gifting appreciated securities to charities or considering Roth conversions as a way to manage taxes from a long-term planning perspective.”
12. Should I Invest More When the Market Is at a High?
“It’s important to distinguish between ‘timing the market’ — which research shows does not work as clients tend to invest emotionally — and dollar-cost averaging,” said Denise Davis, vice president and wealth planner with Fidelity Investments. “Dollar-cost averaging allows us to put money to work in a measured and rational manner regardless of the market cycle to ensure that we meet our client’s goals and objectives.”
Joe Vietri, branch network leader at Charles Schwab, said that investments should be seen as a long-term strategy.
“In a perfect world, every investor could ‘buy low and sell high,’ but the realities of the market often prove more complex,” he said. “Emotions often steer investors in the wrong direction. When the market is moving up, investors don’t want to be left out of the party so they tend to buy when prices are high. On the flip side, when the market experiences some volatility and declines, investors get scared and end up selling. Building wealth is a long-term endeavor, and time in the market is more important than timing the market.”
13. What Is the Ex-Dividend Date for a Stock, Mutual Fund or ETF?
“Many folks often believe it is important to buy before the ex-dividend date in order to receive the dividend,” said Cogdell Bradshaw, vice president and financial consultant with Fidelity Investments. “However, once the security gets to the ex-dividend date, the price is adjusted downward by that amount, so buying the dividend before will likely add to your tax bill, while buying after the dividend allows you to buy more shares at the adjusted price.”
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Gabrielle Olya contributed to the reporting for this article.