Young Professionals have a lot on their plate, between working a full-time job, maintaining a social life, keeping up with bills, trying to save/invest for the future, and enjoying life. One consistent trend that I find in talking with young professionals is the hesitancy to invest. For whatever reason, we’re just nervous when it comes to investing. I think part of it is because we’re afraid of losing money and partially because we don’t understand how they work. With that in mind, I’d like to dive in with the goal of having you feel more comfortable with stocks, bonds and mutual funds! 

Why you should invest

As discussed in my post on why a savings account will make you poor, thanks to inflation, we’re essentially losing 2% of our money each year by just letting it sit there. Also, just putting money into a savings account won’t grow much at all. The real secret to growing our money is through investing. Although the market has its ups, and it’s downs (sometimes big swings), on average, from 1928 to 2016, the S&P 500 (a good measure of the market as a whole) has returned a 10% gain. 10%!!! Thanks to the power of compound investing, $100 will turn into $110, which will turn into $121 into $133, into $146…as you can see, it grows faster and faster assuming you keep your gains invested. That’s how you’ll be able to retire, and that’s how most of us will end up financially successful. There are few other options for you to easily invest your money than in the stock market. 

How you get setup to invest

Convinced? The nice thing about investing in the stock market is that you can do it with $100, or $10,000. Start small, but consider investing at a regular frequency. I personally try to put in about $250 into an index fund each month. I’ve already got an emergency fund of 6 months expenses set aside, and am contributing 15% to my retirement fund. After that, I’m good to invest in the stock market. 

To invest, you’ll do so through a brokerage account. E*Trade, Vanguard, TD Ameritradeare some of the bigger, reputable, and affordable brokerages out there. They’ll charge a few bucks to execute (i.e. buy or sell) a trade for you, but other than that, you shouldn’t be paying any other fees. It’s very easy and takes maybe 15 minutes. You’ll want to open an individual non-retirement/education account. You’ll put in your basic information and your social security number (so they can report gains/losses to the government for tax purposes). Once setup, you can either tie it to a bank account to easily move money in/out, or mail a check to fund your account. Within a few days you’ll have your account setup and ready to invest! Once open, you’ll have 3 options: stocks, mutual funds or bonds. Let’s break each one down: 

Stocks

Buying a stock represents buying a small ownership stake in a publically traded company. These companies can be big; like Coca-Cola ($KO), Apple ($AAPL) or Facebook ($FB), or smaller; like Tesla ($TSLA) or Remax ($RMAX). The letters after the dollar sign represent the ticker sign, or how you look the stock up. You buy stocks by the share, so if you had $1,000, you could buy about 10 shares of Google, or 100 shares of General Electric. 

Stocks make you money in one of two ways: either they increase in value, or they pay dividends. Stocks that are considered growth stocks typically don’t pay a dividend and instead use extra money to continue investing in growth. More established companies instead pay a dividend. Coca-Cola vs Google is a good example. Coca-Cola isn’t really growing as much anymore; they’re all over the world and basically available to anyone that wants it. So, we wouldn’t expect Coca-Cola to increase in price that much, but do expect dividends, and they pay $0.40 per share. Google on the other hand we expect to keep growing a lot and as such, they don’t pay dividends. 

So, when you’re buying stocks, you’ll either expect them to increase in value, i.e. their share price, or pay dividends. At a certain point, you could sell the stock at a higher price, and realize the money you’ve made. 

Yahoo Financeis a great resource as you’re starting to research stocks. Check out the quote of Ford Motor Company below. We see that it’s trading at $8.90, and is up $0.14, or 1.6% today. In the bottom right, we see that it does pay a dividend, at 6.85% of the price. 

Stocks are generally viewed as somewhat riskier compared to bonds and mutual funds. The reason is it’s hard to predict if the stock will go up or down. Stocks trade for a variety of reasons: good earnings (meaning they are doing well financially), future business trends (the industry it’s in expects growth) or even rumors. So, I (along with other real financial advisors) don’t really recommend putting a lot of money in individual stocks. If you want to play around a bit with a small portion (10-20%) of your investment portfolio, that’s fine, but much more is too risky for individual investors like ourselves. 

Bonds

Sometimes companies need to borrow money in order to grow or continue doing business. Instead of just going to their local bank and borrowing millions of dollars, they’ll turn to the stock market in the form of offering a bond. This bond is essentially a loan to the company, and multiple investors can loan them money. The entire bond (i.e. $100 million) is broken up into notes, often $1,000 increments. These notes pay a fixed percentage interest rate, like 5%. The notes are paid back in small increments, until the total amount + interest is paid back. 

For modern day individual investors, it’s not really possible to invest in individual bonds, aside from government bonds(‘T-notes’ or Treasury Notes). If you’d like to invest in corporate (i.e. big company) bonds, you’ll do so through an ETF, exchange traded fund. Check out some of Vanguard’s offeringto get a sense of what it would look like to invest. They’ve got some of the lowest fees out there, which I always like. 

For young professionals, I don’t particularly recommend investing in bonds. Bonds are considered the least risky of the 3, but also typically lower risk. As we’ve got a long time to have our money grow, we should take more risks. Now, if we were 50 and thinking more about retirement, it may be time to switch into bonds, but as we’ve got the time, we should take risk! Where should we take risk? Keep on reading. 

Mutual funds 

A mutual fund, or index fund, is a basket of stocks. Instead of putting your eggs in a few baskets like individual stocks, a mutual fund takes your money and invests it in several hundred stocks. Let’s say you and 100 of your friends got together and put in $100. You then would take the $10,000 and spread it out by buying lots of stocks. You then would own 1/100 of that basket. Some of the stocks will go up, and some will go down but on the whole, we expect more to go up than down. As such, mutual funds are a lot less ‘risky’, while still returning a healthy profit for you. 

Mutual funds come in all flavors. You can invest in a fund that puts your money in Emerging Markets(i.e. Asia, Africa, South America). Or maybe you think healthcare is really going to growin the coming years and want to put your money there. 

When researching a mutual fund, there are several important things to look at:

• Expenses: Every fund will charge a fee as there are people actually running the fund. The lower the better, as fees are just money that you’ll never see. Some mutual funds will charge as much as 2%, which is way too high. Look to invest in funds less than 1%, and remember, the lower the better! 
• Performance: Most mutual funds have been around for quite some time (i.e. years). You can review their YTD (year to date), 1 year, 5 year, 10 year or lifetime annual return. Obviously the higher the better, you want to put your money where it’ll grow!

Mutual funds are a great way to reduce risk vs. individual stocks but also expect more of a return vs. bonds. However, I’m actually a huge fan of index funds, which are a type of mutual funds. Index funds focus on having the lowest expenses possible, and invest broadly throughout the entire market. Although I’m not a certified financial advisor or anything, one of my personal favorites is $VTI (Vanguard total market index fund).

Hopefully this clears up some of the mystery around investing for you! Best of luck with your own investing! 

Looking for a more detailed guide to actually get started? Check out my YMF Guide on “Saving for Retirement” which offers step by step guidance on getting setup as well as the why behind what you’re actually doing.