NerdWallet's Smart Money Podcast - I want to invest. How should I start?

Episode Date: August 2, 2017

We dive into the basics — getting financially ready, finding a good first investment, how to wade in safely and get over the fear of losing money.

Hello, and welcome to NerdWallet's Smart Money Podcast, where we answer your real-world money questions in 15 minutes or less. I'm your host, Sean Piles, and joining me is my co-host, Dayana Yochum. All right, today's question comes from Sean in San Francisco. He asks, I have $5,000 to invest, but I'm afraid of losing my money and don't even know where to begin. Help. Wait a minute. Sean from San Francisco. Yes, that's me. Okay. I admit it. This is my question, but I know that you're an investing maven and I figured I might as well use this wonderfully educational platform that we have created to educate myself and others like me who are maybe

inexperienced with the world of investing, but still want to have their money make them more money through investing, if that is how this works. It is. I'd be happy to help you. First off, Sean, don't get all Gordon Gekko or Wolf of Wall Street on me. Let's set this stage to make this a successful foray into investing. I'm going to start by asking you some very personal details about your finances. Okay? All right. If that's the price I have to pay to get this to work for me, let's do it. The big reveal. Well, we're going to start with some financial housekeeping. So these are the questions that everyone should ask themselves before they start investing their money. Number one, do you have an emergency fund?

I do. Yes, I do. I do. Excellent. I've written about debt for a little while now. I know how important that is, even if it's hard to make sometimes. Yep. All right.

Next question. Do you have any high-interest debt? And here we're talking about the dreaded double-digit credit card debt. No, just student loan debt. All right. At what interest rate? Just curious. Not double digits. I don't know. Okay. All right. Well, and the next question is, are you contributing to our company 401k? Yes, I am. And I'm doing well beyond the match. Perfect. You are like the poster child for getting ready to invest, Sean. Congratulations. Thank you. All right. Next, an important public service announcement. Listen here. Any money you need in the next five years or more, depending on your risk tolerance, should not be invested in the stock market.

Over the short term, the stock market goes up and down. And so you don't want to have to cash out at a bad time if you need the money. So as we go into this, you want to think about your timeframe and also your goals for your money. So got that? Okay. Yeah. I tend to be a somewhat impatient person, but I'll try to figure out that I even have this money and just let it sit there for a while. That's the perfect, I would say, you know, just go into a coma, but that's actually really dark. Yeah, and I want to enjoy life, so I think I'll avoid that coma. I can wait. I'm fine with that. Excellent. Excellent.

So I've passed these two questions. I'm getting ready to invest. I'm just sitting on a wad of cash rolling around. I'm in bed with it. I want to know where to put it. I know that there are various kinds of accounts. I know that there are a lot of things to do with retirement accounts, Roth IRA, but that's a whole nother episode. So how can I... Yeah. Or multiple episodes, really. Yeah. Today, we're going to just stick to the topic of investing that money. And if you want to keep it simple, one of the best investments, first investment, last one is an index mutual fund. Okay. This is where I get lost. I feel like we've just entered a forest of jargon and I

understand what an index and what the word mutual and what a fund could be, but together I am lost. All right. No need to be lost. So an index fund invests in all of the companies that are contained in a particular index or benchmark. So have you heard of, you know, the S&P 500, for instance, or when they come on the news and say the Dow is up 3%? Those are indexes. And when you invest in an index mutual fund, it owns portions of all of the companies that happen to sit in that index. And the returns of your portfolio will be roughly the

same as what the index does. So S&P is up. So it's like a school of fish swimming around our economy. And I'm going to have parts of all of them. That's right. A few scales here and there. That's a lot of sushi, but yeah. It is. Sounds good. Yeah. So, I mean, you've probably seen the index mutual funds are one of the investment choices in our 401k, right? Yeah. And I'm wondering what makes them such a good investment.

I just, I wonder why they are so appealing. Yeah. What makes it good for my situation? Well, the cool thing about it is Index Fund offers you instant diversification. You know, the whole don't put all your eggs in one basket thing. Well, owning a variety of assets or, you know, multiple stocks minimizes the chances of any one asset hurting your portfolio. And that's because some assets are going to perform well while others do poorly. But next year, their positions could be reversed with the former laggards. They become

new winners. Bigger fish. Yeah, bigger fish. So regardless, basically fish gaining and losing weight, right? Mm-hmm. But regardless of which ones are the winners and the losers, a well-diversified stock portfolio tends to earn the market's average long-term return. Another good thing about index funds is that management costs are low. That's because you're not paying some high-priced Wall Street suit living in the Hamptons to make investment decisions.

It's done automatically. Basically, a computer essentially shifts positions along with what's happening with the company in the index. So you're not paying salaries. A lot of index funds don't even market, so you're not paying marketing expenses. And you're keeping fees low. That's super important. That's also probably a great topic for another episode. Yeah, I totally agree. I mean, this is great for me because

as a total newbie here, I want things to be easy and relatively secure that I will make money with my money without having to hover over it all the time. Right. And we're talking about long-term returns here. Yeah, five years, five years. Well, at least, but you've got to be willing to let the money ride through the downs and also ride it through the highs because that's how investors make money over the long term. Okay. All right. So that makes sense to me. Now, how do I get started? I've seen various investing apps.

They seem really easy but also maybe too good to be true. What do you think I should do? Actually, yeah, it is really easy to get started. And like you said, there are investment apps. One is called Acorns, which rounds up your purchases to the nearest dollar and invests the money into one of five portfolios. It depends on your age, your goals, your income, and time horizon, the whole longer than five years thing, much longer. And there are also apps, Stash is another one, that help you build a portfolio of ETFs,

which are like bite-sized mutual funds. So that whole basket thing I talked about, it's like the little parts. I'm trying to make this merge with your fish metaphor. I'm just not as creative as you are. But it's like bite-sized. It's like the fish took a bite of a mutual fund and they've got like tiny little bits of all of the other fish that the big fish ate.

And they're swimming around with them. Yeah, this whole thing, this is going off the rails. Like minnows? Yes. Let's just call it minnows. So there are investment apps. You can also do it on your own. You can buy an index fund by opening a brokerage account, which is essentially the same thing as opening a bank account. Very similar. You put in the paperwork. You give them all your personal information.

Puts you in control of what you put in the account. And plus, like the apps, one of the nice things that some brokers offer is you can automate deposits to go in once a month or however, however often you want. Okay. Again, keeping it easy, simple. I don't, I want, don't want to think about it, but I want to do this smartly. And that sounds like a nice middle ground. But even so, I still am concerned about losing all of my money. The stock market to me growing up has just been a way to lose your money, a big risk that wasn't worth it. And I never even touched it. So how do you get over that in your own life? And

how can I do the same? Stop being a baby, Sean. I can't. I'm just kidding. I'm just joking. That is a very, very legitimate concern. But a simple strategy to sort of ease into investing is something called dollar cost averaging. So instead of like cannonballing into the deep end, a better way is to add to your investment gradually. So let's say you set up an account and you want to invest in an index mutual fund. What you do is you add to that investment gradually. That way you're buying a bit over time at different price points, which evens out your costs, hence dollar cost averaging. And this is also a really good strategy for anyone who thinks that they can time the market. Like, oh, it's at an all-time low now, or I'm going to jump out now at the height. No, it's not really a successful proven strategy over the long term. And then

there's one other way you can dollar cost average, which is great if you know, okay, I've got $5,000 I want to invest to get completely invested. It's called buying in thirds. You decide up front, here's my total. You divide that amount by three and then schedule the investments to go ahead and deploy in your brokerage account. So that gets you in the door in a pretty low key way. And then you're going to promise me that you're not going to check your account every day, every hour, every minute. No, I get that. I think the easing into it seems like a good way to do it. If I am going to buy a bunch of fish in a big old school, I think I'd like to swim around with them first, get to know them, get to feel their vibe a little bit before I dive and

throw all my money at them. Yeah. And that's exactly what you're doing in the 401k. Your employer takes out, our employer, NerdWallet, takes money out of each of our paychecks every month so that it's dollar cost averaging us into the 401k. So you do that on your own too. I didn't even know. I'm already doing it. Look at me. Huh? Look at you. Look at you dollar cost averager. Okay. This is great. I feel a lot better about this. Um, is there anything else you think I should know? After, after I yelled at you for being a coward. It's good to be kind of good with it. I know I'm so proud of you for taking this money and actually putting it to work for yourself. Because a lot of people just let money like this language in a savings account earning nothing.

If you look at the stock market in over long periods of time, we're talking 10, 20, 50 years, 100 years, the average annual return is around 7% to 8%. So this is your best shot at making your money make money. Got it. Well, I'm excited. I guess I can be patient and we'll figure this out. But I think it's time for our takeaway tips, right? I think so. Well, the first one is, you know, is basically take care of the financial building blocks. Remember, every dollar you spend or save is an investment. So you are investing when you pay down a credit card with 14% interest.

Because you're saving that money. That's a guaranteed, exactly. Same with contributing to the 401k, especially if your employer matches any portion of your investment. That's free money, and that also is a guaranteed return. So take care of those things. Make sure you have your emergency fund at least started so that you won't have to dip into your investing dollars at a bad time. Yeah, I got that. So next one that I gathered from here,

don't get fancy. An index mutual fund is a totally okay way to start and maybe dabbling with some apps. Yeah. I mean, the app, you can buy the index fund through apps. Everybody thinks that they have to graduate into individual stock picking and stuff like that. Warren Buffett, perhaps you've heard of him. Don't try to imitate him. Just buy a broad stock market index fund, low cost, add to it over time and sit tight. Okay. All right. I think that's all the investing that my brain can take. So let's call it a day. I'm going to sit on it.

I'm going to think about these fish. I'm going to make a plan for my money. And that's it for today. You can get more on this at nerdwild.com slash podcast. Do you have a money question of your own? You can text us or call us at 901-730-6373. That's 901-730-NERD. Or you can email us at podcast at nerdwallet.com.

And finally, a brief disclaimer courtesy of the NerdWallet legal team. Your questions are answered by knowledgeable and talented finance writers, but we are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes. And with that said, keep it nerdy.