Here at The Motley Fool, we aim to help the world invest -- better. And that world includes busy and uninterested millennials who perhaps haven't contemplated investing or retirement...until now.
The Fool tends to point beginner investors to our 13 Steps to Investing Foolishly. It's quite a lot of words, though, so I wrote a six-step guide tailored for beginning investors who (possibly) aren't really that interested in investing. This is the third and final article in the series (click here to read Part 1 and here to read Part 2), and it's also the most exciting, because it covers steps 5 and 6:
- Pay off debt
- Save and invest with the right money
- Always be investing
- Open an account
- Finally buy something!
- Keep buying things
Let's dig in.
5. Finally buy something!
For your very first investing purchase, I'd suggest an exchange-traded fund. ETFs are a type of security that works like a mutual fund (i.e., it's a collection of many companies' stocks), but they trade like stocks, not mutual funds. Mutual funds only trade once a day, they tend to charge higher fees because they're actively managed by hot-shot stock-pickers, and they usually have minimum amounts you're required to invest and reinvest. ETFs are great because they give you instant diversity, meaning they spread your risk across many companies; if a single company's stock tanks, then your portfolio won't be dragged under with it.
For example, one of my favorite ETFs that I own is Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD). This ETF is a collection of companies that all pay dividends.
So, this ETF's top 10 holdings include Microsoft, Procter & Gamble, Johnson & Johnson, ExxonMobil, Coca-Cola, Verizon Communications, Pfizer, Chevron, and so on. Household names. Boring stuff. Huge moats. They're not high-growth companies, but they pay dividends, and dividends are great. Plus, if Coca-Cola somehow collapses tomorrow, I'm not completely exposed solely to that event -- there are 101 other companies in this ETF that'll keep it propped up. Instant diversification!
Don't forget expense ratios. That's how much the ETF is going to charge you for owning it. (They have to make money somehow from bundling the stocks together for you.) Schwab's ETFs have pretty low expense ratios, and they are commission-free, so I tend to favor them. However, Vanguard is a great option, too -- super-low expense ratios. No ETF should have an expense ratio greater than about 0.30%, because that is too much money to fork over for passive management. (I think all of my funds are under 0.20%.) Try to aim for that. Also, ETFs that hold international stocks typically charge more than domestic ones.
The Vanguard Dividend Appreciation ETF (NYSEMKT: VIG) is a nice low-expense Vanguard dividend ETF option. For a super-simple first purchase, check out Vanguard's S&P 500 ETF (NYSEMKT: VOO), which boasts a rock-bottom expense ratio of 0.05%.
Individual companies are typically grouped into ETFs based on certain qualities like their market value, growth profile, and geography. For example, here are a few I own in my regular brokerage, in addition to a handful of individual stocks:
I have an "aggressive" investing profile, which means my portfolio is roughly divided into 50% large-cap stocks, 20% international, and 20% small-cap stocks. The remaining 10% is split among a few companies like Apple and Markel, as well as a real-estate ETF.
When you get old, your investing profile will become increasingly conservative, and you'll start buying things like bonds. Your investing profile can be whatever you want it to be right now, but consider that you are pretty young, so you have lots of time. More time before retirement means you have more flexibility to take risk, because if the soup hits the fan, then you have the years to make up for it.
6. Keep buying things.
Just buy some shares every so often. Add to your holdings, or buy different ones. I like adding to what I already own because I already know how it's been doing, and I'm too lazy to research new things, but feel free to explore.
- When should I sell? Well, as Warren Buffett would say, "Our favorite holding period is forever." Just sit on your stock and let it grow.* Practically speaking, though, you'll probably want to lock in gains and use that money elsewhere at some point, whether it's a down payment on a house, a hoverboard, college tuition, or simply redeploying that capital into another stock (I sold Waste Management to buy a coat once, which actually wasn't super bright, le sigh). The only thing to really keep in mind here is that you want to hold an equity for at least one year. If you sell before holding a year, you get taxed at your regular income-tax level, which is probably 20% to 30% -- or even higher if you're self-employed -- yuck. If you hold for a year or more, you'll be taxed more like 15% (or less for certain people). Don't let taxes hose you.
*Not every stock or ETF is a winner, obviously (thanks, Whole Foods Market). You may want to sell your losers to redeploy what capital you have left elsewhere or to harvest some tax losses.
Get rich slowly
This article series was based on an email I sent to my 29-year-old brother. When I sent him a draft, he had some advice on the conclusion:
All of what he wrote is true: Investing is not intimidating. You don't need a finance degree. You should just go for it. And I don't have "a formal education in dollars." I have a BA in history. He has one in film.
Millennials don't have to be clueless with money. You don't have to spend the next 40 years wandering in the dark, blindly hoping this whole retirement thing will just work itself out. Be proactive. Start saving today, and invest when you can. And then keep investing.