Investing for beginners

[MUSIC PLAYING] What's stopping you from investing? Simply insufficient knowledge. I don't know enough. I'm not sure how to go about it. Yeah, if I had confidence, but it's hard to get confidence. You know, I don't know that I have the wherewithal or the knowledge or the stomach for it. We get it, and we're here for you with Investing 101. [MUSIC PLAYING] Welcome to Money Unscripted, a podcast from Fidelity Investments. I'm Ally Donnelly. Whether it's stocks, options, asset allocation, diversification, today, we want to demystify investing. If you're thinking about making your money work harder, this is the episode for you. We're going to cover, how do when you're ready to invest? How much do you need to get started? How do you balance that question of paying off debt versus investing? And how to figure out what to invest in or if you want to have someone invest for you? So let me introduce Fidelity's Ryan Viktorin. She helps clients create financial plans for their unique and specific needs. And she's going to help us understand how to use investing as a tool to help us reach our goals. Ryan, thanks for being here. Thanks so much for having me. So, let me get right into it as we talk to people and ask them about investing, we kept hearing these kind of common themes of lack of understanding, thinking they didn't have enough money to invest, and then what to invest in. So first and foremost, answer this question, why do I want to invest? Well, the big why is because you want your money to work as hard as you do for your money. And I've actually changed that to say harder than you do for your money. It's what gives us agency to have freedom down the road, and it's so important to try to grow the assets over time as opposed to just save the money that you've got. Let's map that out a little bit. Saving versus investing. Well, I think it's important to acknowledge that it is actually a two-step process. So you obviously have to save your money, but I want to give you an example of the power of why we actually invest, like you said before, but with dollars associated with it. And I'm just going to use an example of what's called a conservative portfolio. So a little bit of risk and-- versus just leaving it in a bank account sitting, making almost no interest. Let's say we take $5,000. And after 10 years, we've just kept it in our bank account. And you might get $30 in interest over that decade. So after 10 years, you still have $5,000. OK, plus or minus a few dollars. Maybe a little bit of interest could have come along the way. Now let's say you took one step away from that and just put it in something conservative. After the end of 10 years, you might have over $8,000 at the end. And then now I'm using a $5,000 example. Add a zero to that, add a couple zeros to that, like you can see how it can really compound over time. And it's very powerful to actually invest after you save the money. I hear that. And of course, we all want to make our money work harder. But as I think of my finances overall, how do I consider when I should start investing or if I'm in good shape to be investing? And I want to hear from Jenny first, so let's have a listen. I'm a mother of a single-- a child with disabilities. So my focus has only and ultimately been my son. And honestly, the thought of investing anything wasn't there because my son's health was priority. But actually, I should have been thinking of it because he is my priority. So you hear that, and balancing priorities is really hard. Yeah, absolutely. And again, as moms, we tend to just give to others before we're giving to ourselves and not realizing that actually investing will give us freedom to give to others later on. I have to encourage you to actually look to do that so that you can have more choices down the road. And the way that we do that is to build that financial foundation. And where that starts is with your emergency savings. So the general guidelines here is about three to six months of your expenses. Now everybody has what I call a sleep-at-night number. The, like, Ryan, if I don't have X amount of dollars in the bank, I'm just-- I'm awake at night, I'm stressed, my blood pressure is like through the roof. So what's that number, but making sure that it works for you. At the same time, there is-- available to some people is something called a 401(k) contribution at work, and sometimes companies even have what's called a 401(k) match, which means whatever you put in, they put in to a certain percentage based on the company. So I want you to build both of those first, which is build an emergency savings, but also make sure that you're working towards getting that company match as well. And I say working towards because this isn't an overnight thing for a lot of people. Even-- I don't care if it's $30, $50 a week, or a month, work towards those two goals. Once you have that foundation put in place-- so emergency savings and you're actually saving enough to get that company match, then we can start to think about maybe investing. Sometimes it's not financial. Sometimes it's a mental barrier. So we hear that from the people we talked with, and I know you hear it all the time. So it's those, "I know I should be investing, but yet I'm not because." Let's take a listen. I'm scared of losing the money. I'm scared of putting money in and then it losing all its value and then now I'm out all the money I put in. So yeah, that's the biggest thing holding me back, is just the fear of not successfully investing. I feel like I don't have a ton of guidance with regards to how much is too much or how little is too little, especially when I have other competing costs like daily living and paying off my student loans. I'm, frankly, not sure whom to trust. So talk to me about the mental barriers to investing. Yes. Something I say all the time is we "should" all over ourselves. So first, remove the judgment from what you should or shouldn't do. Yes, I know. I'm saying there's power of investing, but don't put so much pressure on yourself is the first one. So we get in our own head saying, I know I should have done this, but I haven't started yet. And then we do nothing. Yeah. Or there's that embarrassment factor of, like, oh, shoot, everyone else is investing and I haven't, so I'm embarrassed, I don't want to say anything. Totally. Just move it aside is what I would say to people. But fear, fear is a huge component of-- mental barrier. And that fear can mean a lot of things. Fear could mean, oh my gosh, I'm worried about the ups and the downs of the markets. I'm worried that I don't know what I'm doing. I'm fearful to ask a question for that judgment that we were saying before. So we just have to push through it is what I'm saying to people out there. Another really important one is that this perception that investing is only reserved for the wealthy. And it's just absolutely not true. You told me that this is one of the biggest questions and most common questions you get. And when we went out and talked with people, we found that to be true as well. Let's have a listen. I guess depending on how much I make per month, what would the ideal amount be to start at? I mean, you think about it, how much do I need to really start investing to start investing? Yeah, so you need a dollar. I hear you say that. And I'm like, what is a dollar going to get me? OK, so a dollar-- just a dollar is not really going to move a lot of needles. But when I think about that from your 401(k) contribution, your emergency savings is built, where should your next dollar go? And then every savings after that. So, again, I say I bring it down to just $1, but my point is, I don't care if it's $30, $50-- maybe it's way more than that and that's awesome, but you don't have to have oodles of money to start investing. In fact, it's investing that starts to get you more money in the backend. OK. So if I have debt, how do I look at that? Should I put-- would I be better served to put that $30 or $50 to pay down my debt? Or just-- where does debt come into the debt versus investing conversation? Yeah, also a really common and very important question, and I would say it depends on the debt itself. And so I'll give you some examples. So credit card debt as an example is a really difficult one. It can have interest rates in the teens or the 20s. And that can get away from you quickly. So I'd want to balance paying off things like credit card debt before we start thinking about investing, or at least having a plan to do so. But then there's other types of debt like a mortgage that's designed to pay off over time. That tends to have much lower interest rates. And that's OK to pay off over time. So it depends on the debt, depends on the interest rate tied to it. So I've addressed my emergency savings. I feel like my debt is in a good place. I feel ready to invest. What comes next? OK, so next, you have to think about what type of investor are you? Or that you want to be. I'm going to break it down into three questions you want to ask yourself. Again, judgment-free zone. So first, do you have the knowledge to do this? Do you feel confident in your knowledge base for what to invest in? Second is, do you actually want to do this? Is this something that you have an interest in, that you want to take time-- you want to do it yourself? Totally. Yeah. And then third, do you have the time to do this? Or are you willing to spend the time on it? This one, this third one, tends to be the thing that gets in the way the most for people. And I use this as for my personal example all the time. I'm the mom of eight-year-old twin boys, which I call-- it's like living with two tornadoes. That doesn't even include my husband. And they're not even teenagers yet. No. They're only eight. They're already eating me out of house and home already. But I'm busy. I'm a working mom. My husband works as well. So as a mom, I have to decide what are the things that I'm going to outsource and get some help with of all the things in my life? And what are the things that I want to take ownership to? Investing is just another one of those things. So you have to decide, where are you with the time to dedicate to that? Let's simplify the investing process. Walk me through-- I know broad strokes, but step by step, and then let's dig in. One, you have to actually open the account that you're going to invest in. Two, you have to put money into the account. That's the savings piece we were talking about before. Three, and this is where the willing, the interest, the time starts to come in, you actually have to choose the investment. So do the research and figure out what you want to actually invest in. Four, you actually have to go buy it. You have to place the trade. That's saving and investing. Like I said, two-step process. And then you have to maintain that portfolio. And I use the word "maintain" very purposefully because we don't just check in on an annual basis and see if everything is OK. You have to maintain to make sure it's always working towards the goals that you have down the road. Let's jump to number three because if you're already feeling a little nervous or overwhelmed or you're getting agita about the investment process overall, then you think about, oh, boy, now I have to choose my investment. So we get a lot of questions on this. Here's a few. I don't even know all the different ways to invest. So maybe knowing which ways I could do it, and then which would be the best option for me in terms of where I am in my life right now. What would be a good investment? How will I know when I have enough? Yeah. I mean, I want to be able to retire at a reasonable age. And I don't want to work too long and not be able to enjoy what should be my golden years. So I need to know when I have enough. I have one kid going to college right now. And so-- and I've got two more to go. Neither my husband or I have the time to do the research. In the meantime, the money is sitting in the checking account. Yeah. So I think it really actually starts with what your goals are. I actually frame it in the following way. The who, the what, and when. Who are the important people we're planning for? What are the things you're hoping to accomplish? And when are they happening? So let me give you some examples. Let's say you're saving for college and you want to invest for the future. Do you have a 15-year-old and it's in a few years? Do you have a two-year-old and it's a long time away? Or let's say retirement. It's a huge goal for most people. Is it 30 years away? Is it three years away and you're starting to invest for that? So the longer the time horizon, the time until your goal, the farther away from it is, the more risk you can take because it's longer you can tolerate the ups and downs in the market. But if the goal is really close, we want to just be a little bit more careful with the way that we do that. So time is really important, but what are the actual goals you have as well? That's where to start with the framework that you can comprise for yourself. So in addition to that, you also want to think about something that is called your risk tolerance. Again, more jargon that we're trying to demystify here. We hear that a lot. Yeah. And to me, the most important word in that is "tolerance." What types of ups and downs can you tolerate and stay invested. So what are you comfortable with over time? OK. So as we're thinking about comfort levels-- and knowledge is definitely going to be one of those. So let's define some of our investment choices. Yes. Want to start with stocks and bonds? Yeah, let's start there because that's really the big what we call asset classes. Stock, bonds. So let me explain what each one of those are. A stock is you purchase one slice-- or commonly known as a share-- of a company. And your performance, how that does, is tied to whatever that company does. Now it tends to be riskier on the scale because it's however that company does. Right. Versus bonds, which is actually a loan. So if I'm buying a bond, I'm loaning money to a company. It could be a government, it could be an agency. And at the end of a certain period of time, which you set up at the start, you would generally expect to get that money back. Doesn't always happen. We can't say guaranteed, but at the same time, it tends to be a bit more stable than the stocks that tend to go up and down, and you get interest along the way. So that's the difference between those two things. One's a little bit riskier, one's a little bit more stable, generally speaking. How about mutual funds and ETFs? Yes. So this is a big category that we're going to break down. Mutual funds, generally speaking, are for people who say, yeah, I don't know what stock or bond to buy-- like, not for me, and I need help, generally speaking. So let me give you an example. Let's say you and I say, uh, no thanks, not for me. I don't want to choose these investments. We want to pool our money together to create a mutual fund-- "mutual" "fund." That's where that comes from. Look at you! All these years I didn't know, I didn't get that. Yeah. So what that means is we're saying we don't know what we want to do. We want to pool our assets together, and we've got to pay somebody to do this for us. And it could be a person. It could be a team who's trying to actually grow the money and try to outperform if we were trying to do it ourselves. That's a mutual fund, and that's what's called actively managed. OK. Because somebody else is doing it. Somebody else is doing it. Got it. And they're actively trying to make decisions to try to do well over time. So different companies could slide in and out? Different companies. It could be stocks, it could be bonds. There's all sorts of mutual funds. OK. There's also a type of mutual fund called an index fund, which is similar, but there's no person trying to beat anything. Or it's still trying to grow, it's just trying to participate in whatever the investment. So if it's a stock index fund, that could be tied to, let's say, the stock market. It's going to do whatever the market does as opposed to paying a team a little bit more to try to beat the market as an example. Same thing with bonds, generally speaking. A mutual fund feels more active. Yes. And an index fund feels more passive. Yes. That's what's called passively managed, that's exactly right. Then the next part of this, you exchange what's called an ETF, an Exchange-Traded Fund. OK. You can have it be actively managed or passively managed, but one of the major differences between mutual funds and index funds versus ETFs is when they trade throughout the day. So mutual funds and index funds trade at the end of the day, ETFs trade throughout the day. Why does that matter? It matters because let's say you want to sell something, you see a price that you like or you want to buy something at 10:30 in the morning and you want that price, that's what an ETF does. OK. Similar to-- that's what a stock does at the price-- a price that you see it at the time. Yeah. But if you don't-- maybe you see a price on a mutual fund and you trade it at 10:30 in the morning, it's still not going to trade to the end of the day. Not better or worse, just different. OK, I got you, I got you. So you just walked through those investment choices, but then, again, as I'm looking at them, how do I choose? How do I make that decision? Mm-hmm. I think going back to those questions I asked before, do I want to do this? Do I have time to do this? They have the knowledge to do this? If you need some help, then there are really two paths you want to go to. One is either a fund that is diversified all by itself. There's commonly called target date funds. We see them a lot in 401(k)s. Lots of people are already invested in that kind of way. So it's a mix of stocks, bonds, and cash, and then over time, it'll be tied to a date and get safer, let's say, towards retirement. It'll get safer as you approach that goal. That's one version of help where you say, all I have to do is pick that fund and then put money into it. And automate it is what I'd want to see. And then, of course, there's full-fledged professional management that people can explore, but that's a whole other podcast to talk about that. But if this is not for me, I can talk to somebody else. Absolutely. That's right. Yeah, so leaning into that I'm going to do it myself, I feel like now I'm ready to make a trade. Yeah. Where do I start? What do I do there? So that's going to all be based on where you trade. So the main thing to think about when you're actually going to place the trade is, what are the costs affiliated with that? That's actually part of the research for the investment itself. OK. Now at Fidelity, it's commission-free to trade stocks most of the time. But you want to look into that when you actually go to do it to physically go and buy. You can call your institution and ask how to do it, and you can do a lot of it online, but you want to know the cost affiliated with it, too. Why does it cost matter so much? We want to make sure our costs as low as humanly possible. And it's the cost of whatever the actual trade is itself. Free is always better, in my opinion, obviously. But at the same time, it's cost could be if you do need it managed, how much would that cost? And what's the difference between you trying to tackle it yourself versus a cost invested in-- what's the cost of not doing it? If you don't take action because you don't feel comfortable, and it might cost a little bit more to have somebody do it for you, but they are actually taking action, that might be worth the cost. So it's all in the evaluation. Yeah, yeah. So I feel comfortable. Mm-hmm. I have a portfolio. I'm ready to make trades. I'm doing it. How do I manage my account, so to speak? How do I maintain it, as you say? Yes. I use the word "maintain" really purposefully because sometimes what I hear from clients is, I look at my statement or I monitor, but I think of monitoring is just checking in as opposed to maintaining is always making sure it's working for that framework we talked about-- remember, the who, the what, and the when. Is it still serving those goals? And I think of maintaining like you would maintain your yard or your garden or a plant that you might have depending. You don't just monitor your yard, or else, oh boy, it's going to be grass higher than you. So you have to maintain it over time. Do you want to do it yourself? Do you want to hire somebody to do it? It's the same type of thing. It's just investing is another one of those categories. OK.. So, you've given me the confidence. I want to get started. Let's remind people of the top steps. Yeah. So first, remember, remove the fear. That's where to start. So remove the judgment, judgment-free zone. That's what we're doing here for investing. Second is you want to make sure you open the account, you put money into the account. But what I would say is the foundation of all of this is make a plan for this. These are not things that are in a silo by themselves. Think about that framework that you really want to focus on for the who, the what, and the when, and then make those decisions within a framework. Don't be afraid and you can totally do this. Don't be afraid to ask for help, just get started. Ryan, this has been such a good conversation. Thank you. You're so welcome. It's been a blast. Awesome. If you want to learn more or you're ready to start investing, check out our website. It's Fidelity.com/MoneyUnscripted. You can also head to our show notes, and on both, there are links to articles and toolkits on the investing basics, a deeper dive into types of accounts, and resources and tips for new investors. Be sure to like, follow, subscribe to the podcast, and we'll see you next time on Money Unscripted. It's your life. Get your money's worth. [MUSIC PLAYING] Footnotes + Disclosures: Methodology for investing returns example: Estimates derived using Fidelity Goal Booster. Estimates are based on past performance. Past performance does not predict future results. The timing of deposits and when you are looking to use the money can impact potential return as well as which savings or investment options may be right for you. Hypothetical models include the following assumptions:   The average market return corresponds to the 50th percentile of the returns. Conservative Investing mix is based on 20% stocks, 50% bonds, 30% short term investments. Estimated/Average return rates stay constant over the course of the goal timeframe   You won’t make any withdrawals from the account during the goal timeframe No fees or taxes will be applied   Your starting amount and monthly contributions are invested in the model allocation in the stated time period  Investments in “traditional savings” and “locked savings” assumes only FDIC insured accounts or certificates of deposits are used.  For investing returns, calculations are made by computing the 1, 2, 3, 4, 5, 6, 7, 8, 9, and 10-year average annual returns based on monthly historical performance of stocks, bonds, and short-term instruments from 1926–2022, obtained from Ibbotson Associates. These are hypothetical and therefore past performance is no guarantee of future results. Returns include the reinvestment of dividends and other earnings. The assets are rebalanced monthly to the stated asset mix. Any chart is for illustrative purposes only and does not represent actual or implied performance of any investment option.  Stocks are represented by the Dow Jones Total Market Index from March 1987 to latest calendar year. From 1926 to February 1987, stocks are represented by the Standard & Poor’s 500® Index (S&P 500® Index). The S&P 500® Index is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance. Bonds are represented by the Barclays U.S. Aggregate Bond Index from January 1976 to the latest calendar year. The Barclays U.S. Aggregate Bond Index is a market value-weighted index of investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities, with maturities of one year or more. From 1926 to December 1975, bonds are represented by the U.S. Intermediate Government Bond Index, which is an unmanaged index that includes the reinvestment of interest income. Short-term instruments are represented by U.S. Treasury bills, which are backed by the full faith and credit of the U.S. government. The average market return corresponds to the 50th percentile of the returns, the below average market return corresponds to the 25th percentile of the returns, and the significantly below average market return corresponds to the 10th percentile of the returns. Savings returns are calculated using a national average savings account rate from FDIC. Locked rate savings returns are calculated using national average CD rates for 1-, 2- and 5-year CDs from BankRate. CDs are assumed to be purchased once and are not being rolled over upon maturity. 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