Question of the Week
How can I make my money work for me?
Hey all! Happy Five-Minute Friday. I hope you’ve had a good week!
I’ve gotten a few questions this week from clients really wanting to make sure their money is working for them, rather than them just working for their money. They are thinking about investing in the stock market. That’s certainly not the only way to make your money work harder. You can also invest in real estate, start a business or invest in yourself (skills, education, etc.). Still it’s a good one, and this week, we’ll talk about the fundamentals of investing in the stock market.
It’s actually much simpler than you think. Here are the three things you can focus on to make sure you make the most from your investments
Keep costs low
When building your portfolio make sure you understand what fees you are paying—whether to your adviser, an investment platform (like Schwab or Ameritrade) or for your investment itself (including expenses, administrative fees and transaction costs). The lower your costs, the more of your returns you get to keep.
You should consider the total cost when making your decision. For instance, many Vanguard Index funds have expense ratios of .05% to 2.0%. You can purchase those directly through Vanguard or use a management platform like Betterment or Ellevest for a fee of .25% – .50%. (This a fee to purchase shares in the fund. It’s separate from fund expense ratios, which pay for the day-to-day costs of managing a fund).
Active strategies—those that try to beat the market—usually carry higher fees than passive ones (those that try to perform in line with the market). Active managers will often tell you that the extra cost is worth it because they’ll outperform the market. Unfortunately, most of them don’t. The SPIVA finds that active managers under-perform their benchmark nearly 80% of the time. Also don’t assume that all “Index Funds” are low cost. Some aren’t. Check the prospectus to be sure.
Stay diversified
Staying diversified (many investments across many sectors) helps reduce market or systemic risk (that is, the losses you incur with the whole market goes down). The good news is you don’t need 20 different funds or 25 individual stocks to do that. You can diversify across the entire market with total market funds. For example, Vanguard uses the following in most of its Target Date Funds: Total Market Index fund (for domestic stocks), Total International Fund (for international stocks), Total Bond Market Fund (for domestic bonds) and a Total International Bond Market Fund (for international bonds).
Invest for the long haul
Where you invest depends on how soon you’ll need your money. Are you saving for an expense within the next five years? Keep that money safe in a money market. Do you have a long-term goal like retirement or college education that’s 20 to 30 years in the future? That’s where you’re better off in the stock market. If you have a long time to invest, you don’t need to worry about what the market does from year-to-year or try to anticipate crashes and bear markets. Market averages will go up and down, as they have for decades. But overall, the trend is up. You want to be IN the market, so you can benefit from the highs as far as returns and the lows when you can buy investments on sale.
That’s my quick primer on investing in the market. You should also be cognizant of your appetite for risk and your ability to take on risk. But heading these principles will get you off to an awfully good start.
Quote of the Week
“’Investing is not nearly as difficult as it looks. Successful investing involves doing a few things right and avoiding serious mistakes.” – John Bogle, founder of Vanguard
Task of the week
Do you know what you’re invested in? This week take a look at your latest investment statement, whether it’s a 401k, IRA or taxable brokerage account. Can you determine how much you are paying in fees? What is the percentage of riskier investments (stocks) to less risky investments (bonds)? And is this money invested for the appropriate goal? Take a little bit of time this weekend to make sure you’re making the most of your investments.