Here’s the thing. I don’t have a lot of money. I grew up with immigrant parents who were extremely frugal because they’d lived lives without a lot of money and remembered what that economic insecurity felt like. I remember talking to my dad about the best way to “invest” in high school, and his advice largely boiled down to “stay away from the stock market unless you’re really sure of what you’re doing.” He is one of the most economically-savvy people I know, and even he was burned hard by the market downturn in 2001.
Thanks to that scalding downturn, I grew up fairly wary of the stock market and had the idea that investing in the stock market is for rich people who’ve got money to lose. Or for really, really smart people who understand what things like butterfly spreads and derivatives are. I was neither of those things at 24, and I thought: I probably never will be.
Two things changed my mind: Helaine Olen and TFD. In Olen’s book The Index Card (which literally should be mandatory reading for everyone over 18), she makes the point that personal finance — even its higher-stake facets, like investing — doesn’t need to be scary and complicated. It’s just that there’s an entire financial service industry that profits from telling people they can’t handle the pressure of investing by themselves. Helaine also managed to lay out a basic investment strategy in easy-to-understand terms, which is when I started feeling like: “Wow, maybe I can do this too.”
On top of that, reading perspectives on TFD from people my age who still managed to invest without a ton of money or expertise made me a lot more confident in my ability to do the same. When I started out investing, I was making a grand total of $37k a year, so my ability to invest large sums upfront was decidedly limited. It took some time, but now — two years since taking that 37k job — I’ve been investing in the stock market in a decidedly careful way, and I’m far more savvy (and slightly wealthier) than I was a few years ago. Investing doesn’t need to be scary or complicated. Here are the seven steps I took to make it that way.
1. I opened a 401K.
In truth, I only did this because my company offered a 7% match if I invested 1%, and that seemed like a whole lot of free money to my penny-pinching self. I had literally zero idea what I’d just done, numbers-wise, but hey! I was an Official Investor now. Step One!
I kept my contributions at 1% for a full year, until it was time to do my taxes and I realized that if I had put away more, I would have qualified for a REALLY BIG TAX CREDIT. Since I made less than $18,250 in 2014 (by only working for part of the year), I qualified for the Savers’ Tax Credit, which provides a tax credit to low- and moderate-income taxpayers saving for retirement by basically giving you back a percentage of the first $2,000 you’ve contributed to a retirement account over the tax year — 50% of my total 401k contributions.
Since then, I’ve stepped up my contributions to 10% of my salary. As an automatic deduction, I felt the financial pinch of this decision for a month or two…but then I forgot about it. It became the new normal, I didn’t mind seeing 10% go to savings, and my savings ballooned. Sing it with me: Automatic transfers are your friend!
2. I tried out Acorns.
There are a number of apps that let you do this, but Acorns roughly matched the investing strategy I had in mind- namely, investing in a bunch of low-cost ETFs with tiny automatic transfers from the “spare change” (i.e. round-ups up to the dollar amount) on every purchase. Again, it was such a small amount I barely missed it, and it was an extremely easy way to get a sense of what “real” investing might actually look like. I did this for about six months until I felt comfortable doing it on my own which led—step three! —to my very own brokerage account.
3. I opened a brokerage account.
Brokerage accounts sound so fancy and adult-like that it took a while for me to realize I’d had one for several years without realizing. I opened up a Charles Schwab High-Yield Investor Checking Account several years ago because they don’t charge ATM fees — ever — but I didn’t touch the brokerage account that came with it until last year. I like Schwab a lot because it’s pretty low-maintenance — no minimum balance, excellent customer service, and no account management fees.
All trades are $8.50 per transaction, and they have a list of 100 ETFs that you can buy and sell for free, so it was perfect for my purposes. Vanguard is also great as a low-cost brokerage account: most trades are $7, and you can buy and sell Vanguard ETFs (some of the lowest-cost on the market) for free.
I funded my brokerage account with a tax refund to start. Since then, I’ve set up an auto-deduct of $50 from each paycheck. Every time I made some extra money in overtime or through freelancing, I’ve contributed that as well.
4. I invested mostly in a broad-based, diversified portfolio of low-cost exchange-traded funds (ETFs).
24-year-old Meghan is rolling her eyes at that sentence, but it’s pretty simple. There are broad-based ETFs that track entire markets or indexes like the S&P 500, as well as a diverse range of more specialized ETFs that focus on particular sectors, like healthcare or technology. By combining several ETFs, you can create a diversified portfolio in which a bad year or decade of eventual implosion of one or more sectors is likely to be at least partially offset by strength or stability in other sectors.
Mainly, ETFs are really, really cheap, both to trade and hold. In contrast to index or mutual funds, ETFs don’t require a minimum investment. And the ETFs I generally invest in (Vanguard) have very “low expense ratios” (the cost of running the fund annually). The average ETF carries an expense ratio of 0.44%, which means the fund will cost you $4.40 in annual fees for every $1,000 you invest. For instance, Morningstar found that the average mutual fund has an expense ratio of 1.25%. In comparison, the average ETF carries an expense ratio of 0.53%, and Vanguard’s own ETFs have an average expense ratio of 0.12% (waaaay lower — it costs just $1.20 cost to manage $1,000 of your own investment dollars)!
5. I decided it was safer to invest my eggs in many baskets (instead of one blue-chip stock).
A “blue-chip stock” is a stock that’s considered — in the mind of the general population — as a reliably-profitable stock (because the stock is tied to a glamorous, “too big to fail” company, such as Apple). But the “blue-chip” category is just that: an idea. As my financial goddess Helaine says: “If there was a magic stock that your financial advisor could just buy and make a fortune off of, they’d be on a private island rather than managing your investments.” This has proved absolutely true.
When I started out investing, I chose three blue-chip stocks — Apple, Starbucks, and FitBit — on the assumption that they were all products I used regularly, saw a future for, and were doing well. BAD IDEA. Since I’ve bought them, Apple and Fitbit have tanked tremendously and Starbucks’ stock has been slipping — which I blame solely on their godawful revamped rewards program. I didn’t have enough available to invest in Chipotle when I first thought about it (thank GOD) because otherwise I’d probably have lost my entire nest egg at this point.
This isn’t to say that investing in blue-chip stocks is a bad idea, or definitively guaranteed to bring you losses. It just means you’re putting your nest eggs in fewer baskets, which is always a riskier (if they lose, you lose without a way to make up your losses with other well-distributed investments). The risk assessment of blue-chip stock options probably involves a lot more insider knowledge of a certain industry than I currently possess. And that means it’s probably not for me.
6. I got really lazy.
A study from Fidelity recently found that the investors with the best-performing portfolios…are dead. The second-best had forgotten about their Fidelity accounts.
This study alone shows that when you just leave your portfolio alone, it will generally make money (instead of losing money) over a long period of time. It’s an attitude that fits well with my overall laid-back attitude in life. My general approach is “set-it-and-forget-it,” meaning that once I’ve bought a stock, I write it off (meaning I say to that money: “Well, see you when I retire! I’m not planning to liquidate any of my investments for at least a decade or two”). I’ve made it a point to only invest what I can reasonably afford to write off — I always have a separate, easily-accessible emergency fund for short-term money needs.
When I started investing, I checked my brokerage account obsessively — as in, multiple times a day — and agonized over dips and celebrated gains on an (exhaustingly) hourly basis. A year out, I am way, way more relaxed about things. My “strategy” is as follows. I read the news every morning and on days when the media is shrieking about markets imploding, I pick up a few more ETFs, wait a bit, and profit.
For instance, on the day Brexit was announced, markets plunged worldwide. I bought shares of two ETFs I’d had my eye on; within days, the markets rebounded, and the $1K I’d invested was already showing a $100 profit. As Warren Buffet says: “Be fearful when others are greedy, and greedy when others are fearful.” My strategy has been to invest in the market overall rather than in a single “blue-chip” company’s future. I trust that with time, the dips will even out, which allows me to stop agonizing over little (inevitable) fluctuations and temporary declines in individual companies’ stocks.
7. I re-evaluate as I get smarter.
Remember my 401K? When I first signed up, my entire logic rested on focusing my entire investment portfolio on “growth” funds instead of “aggressive growth” funds because those seemed…uh…just too aggressive.
Looking back, I feel that was a mistake! After investing on my own and figuring out what an expense ratio meant, I looked at my 401K a year later and was horrified to see how high the fees were for the investments I’d foolishly selected — not to mention that choosing “growth” made for extremely conservative investments. I was actually losing, not making money (because the investment sizes were small, and the fees for making those investments here high). It took some rebalancing to get a portfolio I was happy with, but my 401K has actually posted gains ever since.
When I eventually left my job in May, between my 401K and brokerage account, I had a grand total of $15K in “investments.” An actual net worth! Granted, it’s the amount of money Warren Buffet probably made in the time it took me to type this sentence, but it was a Big Fucking Deal for me. Learning to invest in a way I was comfortable with — aka, not trying to “beat the market” or microtracking individual stocks — was a huge step forward for me.
The thing is, a lot of really rich people get wealthy by investing their money into something, not just letting it hang out under their mattress. And then they teach their kids to do it, so those kids then invest and build their wealth too. There’s a natural, profitable learning process for the already-well-off. Which makes it even more important for people like me (people without a lot of wealth and a genetic aversion to risk) to find ways to replicate that success in my own small way. I know how hard it feels as a non-rich person to let go of money that could be making your life easier today for uncertain, uneven, risky gains in the future. Yes, it is HARD to open myself up to the risk that the investments I made with bright-eyed, bushy-tailed optimism might fail.
But still. When it comes down to it, investing as a wee twenty-something — even in my small, careful way — means harnessing the magical powers of compound interest early in hopes of a more secure financial future. By teaching myself, I have given myself the ability to instruct my future kids and give them the financial opportunities my parents couldn’t give me. By taking a risk on my own judgements, I have a really strong shot at enjoying a kickass, financially-secure retirement traveling the world and eating cheese. Plus…I have the knowledge that I’ll always be able to stand on my own feet during any major financial decision in my life. I may not wind up a millionaire, but by investing the way that I have been and will continue to, I will almost certainly earn more money than the meager interest on a bank account. And that means everything to me.
Meghan is a national security researcher and occasional photographer in NYC. You can find her on Instagram.
Image via Pexels