"beginner's guide to investing"

Beginner’s guide to investing

Do you want to start an investment portfolio but aren’t sure where to start? We are here to help you! In this beginner’s guide to investing, you will learn what type of plan to use, what the best investments for beginners are, and how to how to actually invest the money. After all, what are Partners for?

Investment Plans/Accounts

The first thing you need to learn in the Beginner’s Guide to investing is what type of plan or account you should be investing in. The three best account types for beginners are employee sponsored plans, individual retirement accounts, and brokerage accounts.

Employee Sponsored Plan

If your employer offers any type of match, then the first thing you absolutely need to invest in is your employee sponsored plan. Many employers will offer matching contributions of up to 5%!  That’s like getting a 5% pay raise!  It’s basically free money, but you only get it if you contribute. So, if you work somewhere that offers the match, take it!  Start there!

Individual Retirement Accounts

Regardless of whether your employer offers a plan or not, you should be putting money away for retirement. Luckily, most investment firms offer Individual Retirement Accounts (IRAs) to let you do that! There are two types of IRA, the traditional one (usually just referred to as IRA) and the ROTH IRA.

There are two major differences between the IRAs, and whichever you chose will depend upon your individual situation. The traditional IRA is a tax deferred account. That means you can deduct all of the money you put into it from your taxes each year. It also means that you will be penalized for taking out any money before you hit 59 and a half years old. When you reach retirement age and start withdrawing, you will have to pay taxes on your withdrawals as if they are income. If you need the money before you reach the minimum age, you will have to pay the taxes and an early withdrawal penalty. You definitely want to avoid that!

The ROTH IRA is different in both of those regards. You cannot deduct your contributions from your taxes (because you are investing post tax dollars), but you aren’t penalized for taking any of your initial investment out (you are penalized for taking out any profits). You also won’t have to pay taxes on anything that you withdraw when you reach retirement age (as long as you’ve had the account for more than 5 years. There are lots of withdrawal rules for the ROTH IRA, and you can read about them all here

The main thing you should take into account when deciding upon which IRA type you want is your tax strategy. Do you want to pay the taxes now or do you want to pay them later?

IRA problems

The biggest issue with both types of IRA is the contribution limit. You can only put $5500 into any type of IRA account per year if you are under age 50, and only $6500 per year if you are 50 or over. If you want to save more than that (and you should!) you need a different type of account.

 

Non-retirement Brokerage accounts

The last main account type for investing is a brokerage account. These are great because not all of our investments are meant for retirement. You may be on a path to financial independence, so you may need to start withdrawing money from your investments before you get to the traditional retirement age. There are plenty of companies that offer non-retirement brokerage accounts. Some banks even offer them as well. Vanguard is my favorite, but there’s also Fidelity, Merril-Lynch, Edward Jones, and a whole lot of other investment management companies (you can also open IRAs with these companies, if you want all of your investments in one place). 

Types of Investments

Ok, so you’ve decided upon what type of account you need to open. The next step in our beginner’s guide to investing is to decide which type of investment is best! There are basically only three different types of investments that I would recommend to beginners. These are: index funds, target date funds, and mutual funds.

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Index funds

Index funds are my favorite type of investment. They are low cost funds that track certain market sectors. They usually aren’t actively managed, so whatever companies are tracked in the fund are the ones that you are invested in. One of the most well-known index funds is the S&P 500,  an index fund which tracks about 500 of the biggest companies in the US.

Related:  Which Vanguard total market fund should you pick?

My favorite types of index funds are full market index funds, because they basically track the entire stock market. I highly recommend Vanguard’s total market fund. It is well diversified and has a super low expense ratio. That means that it won’t tank if only a certain sector of the market tanks and it doesn’t cost a lot to maintain. Additionally, it is very very rare that a total market fund will completely go out of business. The markets may have a correction and go down, but as long as you stay invested you probably won’t lose money over time. Remember losses aren’t real until you cash out.

Target Date Funds

Target date funds are index funds that automatically adjust the amount of risk they are exposed to as the fund holders get closer to retirement. This means that they will slowly sell off equities and move into bonds as the target date gets closer.

 My work has 6 different options for target date funds: 2025, 2030, 2035, 2040, 2045, and 2050. Every five year a new fund gets created. I have some of my money invested in the 2040 fund, because that is when I’ll be close to retirement age. My older coworkers are invested in the 2030 or 2025 funds, because they are much closer to retirement.

The target funds are the absolute best for people who hate actively managing investments. If you want to be a “set it and forget it” investor, this is the best type of fund for you.

"Beginner's guide to investing"
 

Mutual Funds

Mutual funds are another good investment for beginners. Usually, a mutual fund will track a certain sector of the market. Some mutual funds are dedicated to certain sized companies while some invest in certain industries. Mutual funds are usually actively managed, which means that somebody is working every day buying and selling stocks to try to boost the fund’s performance. This also means that they have a higher expense ratio (cost more!). All of the people invested in the fund are paying the fund manager to make those trades. Sometimes this ends up being beneficial, and the fund outperforms the general market. Sometimes it doesn’t. Investing is inherently risky. If you do decide to invest in mutual funds, be sure to diversify and pick a few different ones. That way, you are protected if something happens to a certain sector.

How to invest

The last main step in our beginner’s guide to investing is how to invest. There’s really only one option that I like, and that’s dollar cost averaging. With this method, you take a regular amount each paycheck/month/week and invest it. I have $100 per paycheck automatically going straight to Vanguard, regardless of what the market is doing. Sometimes you are buying when the market is up, and sometimes you are buying when the market is down. It averages out over time.

Its also super easy to do. You just have to set up an automatic withdrawal from your checking account or bank account. Most investment firms have an online step-by-step, so it’s super easy to set up. 

The other methods are lump sum purchases and investing when you have the money. Investing at some point is better than not investing at all, but if you make it a regular thing it’s easy to stick to. Also, with dollar coast averaging, you don’t even think about timing the market, so it’s great psychologically too.

Beginner’s Guide to Investing

So there you have, a quick and hopefully easy beginner’s guide to investing. I hope this helps you start your own journey to financial independence. In the next few weeks, we are going to talk about some of the bad investments for beginners, so stay posted and subscribe if you don’t want to miss it!

If you have any additional investment ideas or tips that would help beginners out, please feel free to share them in the comments!

 

*Links with this next to it are affiliate links. That means I’ll receive a small commission if you decide to click on it and buy something. Don’t worry, it doesn’t cost you anything extra! Also, I am not in anyway affiliated with any of the investment firms that I mentioned (outside of having accounts with some of them). I recommend Vanguard because I use them and I like them, not because they pay me to!

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I finally bought my Vanguard Total Market fund!  I’ve heard amazing things from tons of people about this fund (the biggest perk being the instant diversification), so after a lot of my own research, I decided to buy in. If you are serious about your quest for financial freedom, you should definitely look into investing in a total market fund. As you could probably tell, I prefer Vanguard.

Which one though?

Apparently, there are three different funds that you can buy which are technically “Vanguard Total Market” funds. I had no idea! I knew I wanted the total market fund, but I had no idea what the difference was between these three. Time for more research!  But luckily for you, I did the research so you don’t have to!

Vanguard Total Stock Market Index Fund Investor Shares (VTSMX)

Vanguards Investor Shares fund is a mutual fund with holdings in the full range of the equity market. This fund invests in small cap, mid cap, and large cap stocks in addition to growth and value stocks.  The minimum buy-in amount for this fund is three thousand dollars, and the minimum additional investments are only one dollar. This is a great fund for someone who wants to track the whole market and also wants to use dollar cost averaging to add to their investment. The expense ratio for this fund is .15%, which is well below average.

Vanguard Total Stock Marked Index Fund Admiral Shares (VTSAX)

The admiral shares index fund is pretty much exactly the same as the investor fund. The only differences are higher buy-ins and lower expense ratios. If you have ten thousand dollars to invest and want to keep adding to your investment, the admiral shares are definitely the way to go (this is what I bought!). If you can only scrape together three grand but want the same re-investment privileges, you should go with the investor shares. Just be sure to switch it over to Admiral shares once you reach the 10K mark!  There is no reason to pay more in expense ratio fees than absolutely necessary. The expense ratio for the admiral shares is only .04%! It’s a total steal!

Vanguard Total Market Fund ETF (VTI)

If you are not interested in adding more money to the fund (outside dividend re-investments) then getting the ETF may be a better option for you. The expense ratio is the same as with the Admiral Shares (.04%!) and there is no minimum buy in amount!  The problem with this fund is that you can’t add to it automatically from your paycheck like you can with the other two. This ETF works more like an individual stock, where you have to go in and do the whole “ask” price thing. You have to buy full amounts at the market price when you place an order, and you will probably have to pay a brokerage fee each time (which varies depending on which platform you use for trading). You can buy more of this ETF whenever you want, but its not as easy to set up automatic investing.

Related: Use credit card rewards to score big!

So…

Vanguard total market fund

which one should I chose?

Like I said before, I chose the admiral shares because I had 10 thousand dollars to invest and I wanted to automatically invest more every paycheck. If you have 10 thousand dollars or more, this is the absolutely the best option, because it has the same expense ratio as the ETF, and gives you the option to add the automatic investing (and even if you don’t want that now, you never know, you may in the future).

But not everyone has 10K to dump into a fund, and if you don’t the fund you should chose depends on what your goals are. If you have less than 3K to invest the ETF is probably best for you (unless you want to save up 3K before investing, always an option!). However,  If you have between 3K and 10K but don’t have any desire to set up automatic investing, the lower expense ratio of the ETF makes it a better option. But if you have between 3k and 10K and plan to set up automatic investing, the investors share fund is probably going to work best for you.

Related: Hopefully our Vanguard Fund Will help us achieve our 2018 Goals!

Clear as Mud?

I know investing can be confusing. I love that Vanguard makes investing in the stock market super easy, especially for the lay person. And hopefully, this short post can hep you decide which Vanguard Total Market Fund will best meet your needs.

 

Final Word

For the sake of a full disclosure, you should know that I have absolutely no affiliation with Vanguard other than having my own account. I will not make any money if you click one of the links, open a Vanguard account, or buy into one of the three accounts I wrote about. I’ve written this post because I have an account with Vanguard, I believe in their product, and I was confused when trying to figure out which fund to purchase. I’m not gonna lie though, if Vanguard had an affiliate program I’d sign up in a heartbeat, because I truly believe in their product (and I’m only going to add affiliate links for products that I believe will add value to your life).

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