By Natalie Hayes Schmook, MBA, CFP, CVA, Hayes Wealth Advisors
We’ve discussed how stocks are categorized and types of investment vehicles. This month let’s explore how to get started investing. Here are the considerations and how to get started:
Risk Tolerance. The first step to investing is to understand how you feel about putting your hard earned money to work with the prospect of upside return but also potential to lose money. Different portfolios tend to behave differently. For example, and all stock portfolio will generally be more volatile than an all bond portfolio, but historically has also grown more over time. You can learn more about your risk tolerance here.
Asset Allocation. Once you know your risk tolerance you have some information to pick the right asset allocation. Asset allocation is the mix between stock and bonds and what those stocks consistent of (US versus international, large, medium or small companies, value or growth and sector).
Implementation. In general, my preference is to dollar cost average in a broad base of passive, low-cost vehicles like ETFs and index funds. Fidelity, Charles Schwab and Vanguard all offer index and ETF asset allocation model portfolios and ETFs for investors that automatically rebalance on set intervals to respond to changes in market conditions. In plain English:
- Dollar cost averaging is putting money in at regular intervals regardless of what’s going on. This is a very different strategy than market timing, which is trying to strategically buy into and sell out of the market based on what’s going on, which is almost impossible to regularly get right, even for very smart professionals. Dollar cost averaging is also an easy way to rebalance (see below) an allocation based portfolio since you’ll be adding to lower performers (theoretically buying low).
- Rebalancing means if you want a 50% stock and 50% bond portfolio and the stock portion grows to 60%, an allocation model will rebalance back to 50/50, naturally selling high and buying low among asset classes.
In my opinion, this above strategy should constitute the bulk of an investor’s portfolio. However, I always encourage clients who are interested to have a “Vegas Fund”, or a for fun portfolio where they can buy whatever they think is cool (usually Apple, Tesla and crypto). This kind of investing makes the markets feel more real and can be a great education.
When your portfolio gets to a meaningful size it may be worth hiring a professional advisor (Fidelity, Charles Schwab and Vanguard offer this on their platform) that help with investments and financial planning. Practice owners—there are advisors (like Hayes Wealth Advisors) who specialize in planning and investment services just for your situation.
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