Don’t worry…the answers aren’t from me!
(That would be like the blind leading the blind.)
Since I’m not well-versed in investing, I sent some questions to Eric and Wendy Nissan of DIY.FUND, and they were kind enough to answer them for me.
Kristen: Beginning investors often feel overwhelmed, and thus don’t ever get started with investing. What’s the simplest way for investing newbies to get started?
Eric and Wendy: Our recommendation for a newbie is to not focus on individual stocks. Start by following the overall market. SPY ETF, which tracks the overall S&P 500 is a good start
Next, you need to understand the mechanics of purchasing securities. Consult with resources such as Investopedia and introductory online courses to get familiar with the terms and jargon used in investing.
Your next step would be to open an online account with a broker. Nerd Wallet does a great job comparing the different platform an investor can used to purchase their securities.
Finally, when making your first transaction, start with buying a small amount of an ETF (exchange-traded fund), so you can get familiar with how to do it. When getting familiar with something new, it’s best to start with small, baby steps.
Kristen: Those of us who are risk-averse are scared of losing money in investments. Help us understand why an investment account is a smarter choice than a savings account, despite the potential for loss.
Eric and Wendy: The stock market has returned around 9.5% over the long term. It is one of the best opportunities for wealth creation out there. The key to investing in the stock market is having a long-term focus, patience, and doing your research. Of course, nobody should put all their eggs in one basket.
Regular savings account and investing in the stock market have two different financial objectives. The former is generally for shorter term objectives when the funds need to be more readily available. The latter is for longer-term objectives such as general future savings or retirement.
It is always wise to have a combination of both vehicles at all times.
Kristen: Most people look into investing in order to save for retirement. What do you think about investments for other shorter-term goals, such as a home purchase, a home remodel, or future college expenses?
Eric and Wendy: In the short term, it is much harder to predict where the market will be. The market fluctuates on a day-to-day basis and therefore it is much harder to know if the market will be up next year vs 20 years from now (which is much more reasonable to assume). Over the long term, we know that historically the market has performed well.
If you need the money in short term, you need to understand the increased risk with investing in the stock market.
While each individual investor’s risk tolerance is different, we generally don’t advise putting your money in the stock market if you need those funds within the next 3-4 years. If that is the case, you are better putting your money in treasury bills (T-Bills) or guaranteed investment certificates (GICs).
Kristen: Do you have to pay fees to invest? If so, what are some of the lowest-cost ways to invest?
Eric and Wendy: There are always fees, some hidden, some not. The cheapest way to invest is with a RobinHood account as they do not charge commissions. They make money on the interest in your accounts and other behind the scene ways.
The other online brokers have pretty good commission rates as well, so you might not want to base your choice of broker solely on commission costs. You should look to buy ETF’s instead of mutual funds as they have much lower fees associated with them as well.
Kristen: What’s the difference between ETFs and mutual funds?
Eric and Wendy: Great question! It is really important to understand the difference between the two. Both investment vehicles are similar in the sense that they bundle together securities to offer diversified portfolios.
Yet the two investment types are marked by key differences that have important implications for the investor.
Most ETFs track a particular overall index (such as the S&P 500 or a particular economy or industry) and therefore are passively managed, leading to lower operating expenses.
Mutual funds, on the other hand, are actively managed by portfolio managers trying to beat their benchmarks and they therefore have higher management fees.
ETFs offer an attractive investment opportunity for passive investors looking for a low-cost vehicles capable of matching the performance of the overall market.
(Note from Kristen: after reading Wendy and Eric’s advice, I was happy to realize that Ellevest accounts are ETFs, which is exactly what Wendy and Eric recommended. Yay!)
Readers, if you have thoughts on what Wendy and Eric had to say, I’d love to hear!
DIY.FUND’s mission is to enable individuals to invest with full transparency and control. Husband and wife founders Eric and Wendy Nissan were in the middle of successful career on Wall Street when they realize a huge gap existed between the tools afforded to institutional and individuals. The couple made the decision leave Wall Street behind and embark on the mission of empowering individual investors everywhere DIY.FUND was born, a FinTech company, allowing individuals, to simply manage and understand their investments using the same quality tools professionals use.