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Certified financial planner Sophia Bera answers:
I am in my 20s and have started investing in a few stocks and some mutual funds.
I understand you can't tell me what stocks or mutual funds to invest in, but I was wondering what is the best advice you have in how to pick good stocks/mutual funds, or what business information you look at to decide if an investment is a good one.
My strategy is for the long run. I own two stocks and a single mutual fund, but would like to diversify my portfolio more.
The vast majority of millennials haven't started investing yet, so I'm glad to see you taking advantage of a long time horizon and beginning to build your portfolio. The best place to begin investing is within retirement accounts.
If the company you work for offers a match on an employer-sponsored retirement account like a 401(k), contribute at least enough to get the company match. The beauty of a 401(k) is that you contribute money pre-tax, so you'll save on taxes!
After that, if you qualify for a Roth IRA, aim to contribute the maximum each year. After that, if you're able to, put even more money into your 401(k). (If you want to learn more about smart (and easy!) retirement planning for millennials, I'm launching a course later this summer and you can get on the waitlist here).
Next, paying off any high interest rate debt should be your priority. If you have debt above a 5% interest rate of any kind, I would recommend that you pay that off as well, since you'd free up additional cash flow and earn a guaranteed rate of return.
You're right that diversification is important, and buying shares of funds is the quickest and easiest ways to attain instant diversification. I will caution you against investing in individual stocks because it's hard to own enough individual stocks to properly diversify your portfolio. It's also incredibly time-consuming to do the research needed. I do think Morningstar is a great place to find out more information on the investments you own or are thinking about purchasing.
You mention owning shares of a mutual fund. Something to look out for are fees, because mutual funds are actively managed by a fund manager, and that costs money. This is called the expense ratio and you can find that information for each specific fund on Morningstar.
Index funds and ETFs offer diversification, but at a significantly lower cost to you than many mutual funds. Some companies will waive trade fees on mutual funds if you set up an automatic contribution to the same fund every month. You'll often pay a trade fee when you buy or sell an ETF or mutual fund, so make sure to check those costs as well. TD Ameritrade, Schwab, and Fidelity all have a list of commission-free ETFs.
While you're young or a new investor, I think it's best to keep things simple. You'll make significant financial progress by getting out of debt, building up emergency savings, and saving for retirement. Once you're set on these things, I think that Betterment makes it really easy to start investing, set up ongoing contributions, and move on with your life. Investing should be boring. It's like watching grass grow.
My friend Bo Hanson, CFP®, from the Money-Guys Podcast, told me: "Asset accumulation is more important than asset allocation while you're young." Which basically means that getting in the habit of investing consistently over decades will help you more than choosing the best investments in your 20s or 30s. I wrote an article about that concept here.
You're already off to a great start, and I think you make a wonderful example to your fellow 20-somethings. Investing doesn't require a ton of money at once, nor does it require a finance degree. If you start slowly and build up your investment portfolio over time, you could build a nice nest egg for yourself over the next few decades.
This post is part of a continuing series that answers all of your questions related to personal finance. Have your own question? Email yourmoney[at]businessinsider[dot]com.
Sophia Bera, CFP® is the Founder of Gen Y Planning and has been quoted in The New York Times, Forbes, Business Insider, AOL, The Wall Street Journal, and Money Magazine. She tweets, travels, and loves helping millennials manage their money more effectively. Curious? Sign up for the free Gen Y Planning Newsletter.
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