With graduation season upon us, we put together a short list of investing tips we wish someone had told us as we entered the workforce. Once we did, we stepped back and realized that all the same guidance can apply to seasoned investors. So whether you’re new or an old pro, here’s some food for thought.
1. Beware the lure of cash. According to BlackRock’s Investor Pulse survey1, many investors across all ages hold a lot of cash. But the trend is most pronounced among younger investors. Why? For some, there’s a pressing reason to have liquid assets on hand — such as saving for a wedding or their first home. Others might want to invest, but have no idea where to start. Yet others hang on to cash as a result of coming of age during the Great Recession: they’re leery of the markets.
While cash may look like the best way to not lose money, it isn’t necessarily as safe as it seems. In a low interest rate environment, cash loses value every year due to inflation — not to mention the opportunity cost of not participating in potential market appreciation. Yes, the markets suffer periodic set-backs — but the younger you are, the more time you have to recover from potential losses and seek to realize gains over the long term.
2. Make compounding your friend. For a new grad in their first job, just making the paycheck last to the end of the month feels like accomplishment enough — and retirement may seem hard to budget for and very distant. However, even putting aside a small amount each month — especially if the employer offers a 401k, with tax benefits and potentially matching contributions — can make a huge difference down the line. For example: saving just $100 a month from age 25 can grow to over $154,000 by the time you’re 65, assuming an average return of 5%. Starting at 45, an investor would end up with just over $41,500 — nearly four times less! (Check out the SEC’s calculator to create your own scenario). Time is clearly on the side of younger investors — but starting early is key.
3. Watch out for costs. The flipside of this concept is that investing expenses compound over time, too. Whether you’re a new investor or an experienced one, it’s worthwhile to check in periodically and make sure you understand what you’re paying for. Outside of any fees charged by your financial advisor, there are costs associated with buying and holding funds. While we’re used to associating quality with price, that may not be the case when it comes to investing. For example, index instruments can outperform their actively managed mutual fund peers, largely due to their lower costs. Just like returns compound, these costs can add up over time. For example, keeping $250,000 invested in ten years in the average active mutual fund (with an average expense ratio of 1.03%) at an 8% annual return can yield over $437,000 — not bad! However, using an average iShares ETF (expense ratio: 0.38%) with the same 8% rate of return can result in more than $493,000 — meaning the investor can keep an additional $56,000, just from choosing a lower-cost investment vehicle.
Chart reflects the hypothetical growth of a fictional investment of $250,000 with an 8% return and assumes the reinvestment of dividends and captal gains. Fund expenses, including management fees and other expenses, have been deducted. The graph is for illustrative purposes only and is not indicative of the performance of any actual fund or investment portfolio.
4. Check your emotions at the door. For better or worse, account balances aren’t just numbers. The digits after the dollar sign can often feel like proxy metrics for self-worth, achievement, legacy. Therefore, it’s not surprising that emotions often play a role in the investing process.
This isn’t necessarily a bad thing. In a recent survey, younger investors (ages 21–40) were 38% more likely than older investors to say that they “felt a rush” when making investment decisions. It’s possible that this excitement is part of what drew them into investing in the first place, and continues to keep them engaged.
But emotions can also lead to panic in times of high market volatility, which can be damaging to returns in the long run. When investors sell as the markets turn south, and then wait to buy back in until late into the recovery, they may pass up much of the upswing. As the chart below shows, missing even just the best ten days in the markets can turn a highly positive return into a flat line.
Bloomberg, as of 12/31/16. Dalty data from 1/2/2007 to 12/31/2016 for the S&P500. Index returns are for illustrative purposes only. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.
The good news is that investing does not have to be complicated. The most important investing considerations are the most basic.
- Don’t sit in cash for your long term investing goals
- Start investing as early as you possibly can (and take advantage of any tax-deferred options your employer may offer)
- Keep your costs low to help keep more of what you earn
- Don’t let short-term market turbulence dissuade you from your long-term goals
This article was originally posted on iShares.com
- The BlackRock Global Investor Pulse Survey consisted of interviews with 4,000 Americans between the ages of 25 and 74 who were either sole or dual financial decision makers for their households and were interviewed using an online survey methodology. Included in the study was a group of 600 affluent Americans (those with investable assets of $250,000 or more). The research was carried out by Cicero Group, an independent research company, in January and February 2017.
RO Code: 182215