Many people feel that starting to invest is something that is confusing, stressful and intimidating, especially women. I know because I was part of this group that thought it would be interesting to invest in the stock market, but just didn’t know where to start. I am here to share that it is really not as complicated as we make it out to be.
There is a known investment gap between men and women. In 2019 Financial Advisor Magazine published an article stating that although 41 percent said it was an optimal time to invest only 26 percent of American women invest in the stock market. Because fewer women participate in the financial market their total wealth over time is lower than it could be. We already know that with all else equal there is a pay gap between men and women. When we then layer on the fact that women aren’t investing those lower earnings, the gender wealth gap continues to increase.
I am not a certified financial advisor or financial planner, but I am going to share what has worked for me. This does not mean you will see the same results or that this is the best fit for you. Although I graduated with my MBA in May of 2017, I didn’t start my first brokerage investment account (outside of my 401k + HSA) until September 2018. I remember I was sitting on the shuttle bus from the rental car drop off to the terminal at LAX and decided what the heck let’s do this. I downloaded Robinhood (will discuss platform choice later) and deposited my first $250 to start with. A week later I added an additional $450. Over time I continued to add money and when I look at my all time returns within Robinhood today I am up over 100%. Again, this is not average returns that you can expect. The average stock market return for 10 years is 9.2%, according to Goldman Sachs data for the past 140 years. The S&P 500 has done slightly better than that, with an average annual return of 13.6%.
THE BASICS: FINANCIAL ASSESSMENT
Let’s start with the basics. First you need to assess your financial situation and see if it is a good time for you to even start investing.
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Do you have high interest debt? The most common example of this is credit card debt. If you are paying the minimum balance you owe on your card or are just paying the interest and not making a dent in the principal, you need to address this first. Once credit card debt starts to stack up it can be hard to get out from underneath it. Pay off your high interest debt first before considering investing.
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Do you have an emergency fund? Having a liquid emergency fund is key and I think many people have learned this over the past year with unforeseen furloughs and firings due to COVID. You should have enough to cover 3-6 months of expenses if you had to. Ideally this is cash sitting in a high yield savings account.
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Keep in mind that not all debt is bad. We are often taught that debt is bad and we should pay it off as soon as possible. This goes back to #1…if it is high interest then yes pay it off. There are other types of debt that aren’t really better to pay off immediately. Personally I still owe a small amount on my car and student loans. I choose to make higher payments toward the accounts with higher interest but luckily many are at a 3-4% rate which is low. I know that by investing I can have a higher return than that amount so investing makes more sense. Another thing to note is that if your income is lower than a certain threshold (currently it is phased out for income between $70k-$85k filing as a single individual) you can deduct up to $2,500 in interest paid each year on federal and private student loans.
THE RULES
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The stock market is volatile. I like to treat my handpicked brokerage account like Monopoly money. Does that mean I don’t take it seriously? No. It means that the stock market is volatile and has ups/downs. Although over time the market trends up you don’t want to have to rely on that money in a downturn. For example in March 2020 when the markets tanked it would be a huge loss to have to sell at the point instead of being able to hold until the prices went back. History repeats itself…here is an article showing the biggest stock market crashes in history for more context.
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Risk is inherent. Consumer behavior is not always rational. Things can change from one day to the next. There are ways to combat the risk but remember that it is always there.
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Take advantage of what you have available to you. This is the most important rule. If your company matches contributions to your 401k or HSA then you should be contributing enough to get that full match. If you aren’t then you are leaving free money on the table.
THE APPROACH
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The most important driver for investment earnings is TIME. The earlier you start investing, the better of you will be. Compound interest is your best friend in long run. Even if you can only start with a small amount it will add up in the long run. Don’t sit on this!
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Do your due diligence. Do some research and educate yourself about companies/industries that you are interested in or even those that you know nothing about. Also, if you know something well lean on those strengths. For example, I know the retail industry very well because of my job. I read about the sector and know what companies that are considered best in class are doing. I also know myself as a consumer and look at companies that I can stand behind the product/growth strategy.
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Think in the long term. The best known proponent of this buy and hold strategy is Warren Buffet. Also called passive investing, you essentially buy a solid collection of long-term holdings, balanced across multiple industries, sectors, etc. with the intention of not selling. You regularly buy more and reinvest your dividends. Warren Buffett made a $1 million wager in 2007 that passive investing would outperform hedge funds over a 10 year period and he was right.
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Diversification is key. This helps to mitigate risk. Your investments should span companies and sectors. Instead of putting all of your eggs in one baskets, you are spreading them out so that market events don’t impact all stocks in the same way. A great way to diversify is to purchase mutual funds or ETFs To understand more about mutual funds and ETFs, check out this article on Investopedia.
WHERE TO INVEST
There are many options for brokerage accounts so I suggest doing your research. I first chose Robinhood based on the ease of use and quick set up. Robinhood has received some negative press recently but I have always found it easy to use. Join with my link and we will both receive free stock. I do also have a Charles Schwab brokerage account out of convenience because I have an IRA with them as well. To create a Schwab account click here.
TAKEAWAY
So what is the takeaway? If you are in the position to invest based on your financial assessment….DO IT! You can start small and build up as you gain more confidence, but again remember that time is something your should use to your advantage by starting sooner rather than later.