robo-advisor

The Top 4 Mistakes Beginning Investors Make and How to Avoid Them

 

The following is a guest post by Hank Coleman, who is the owner and publisher of Money Q&A, a popular personal finance blog dedicated to helping its readers invest and save more for retirement.

 

Your first venture into the world of investing may be overwhelming. Investment experts seem to hawk different stocks, investment advice from books and blogs may seem contradictory depending on what you read, and the amount of data and charts out there is often just too much for a beginning investor to manage alone.

 

It’s okay to feel overwhelmed by the investment choices. Everyone started from square one at some point. However, getting started in investing isn’t as hard as you might think.

robo-advisor

The Biggest Mistakes New Investors Can Make

 

To help you get the ball rolling, here are some novice mistakes to avoid while building your first investment portfolio:

Assuming You Need a Financial Adviser

 

All too often, people put off getting involved in investing beyond their employer-provided 401(k). They believe they need to have more money to afford a financial adviser to help them succeed in the stock market.

 

Maybe that was true a few decades ago. But, with the internet at your fingertips and the availability of robo advisors to help you invest your money, there’s no excuse for waiting to invest your money if it’s just sitting in a low-interest savings account.

 

Robo-advisors were designed to lower the barrier to getting involved in investing for everyday folks who want to see better returns on their money than what a traditional bank account can offer. With a robo-advisor, you don’t have to read a pile of investment guides before diving into the markets.

 

Investment companies build robo-advisors using extensive algorithms that determine the best possible allocations for customers’ money based on historical market trends and up-to-date market research. It also costs very little to use a robo-advising service compared to a traditional stockbroker. The fees usually range between 0.15-0.35% per month depending on your deposit amounts. And, some robo-advisors do not require a minimum balance to get started.



Getting Caught Up in the Hype

 

When you first start out as an investor, it’s all too easy to get caught up in the latest and greatest stocks that so-called investment experts proclaim are guaranteed good buys. Rather than funneling your money into the hottest tech stock or industry that people are raving about, stick to solid, time-tested strategies. Look for investments that diversify your portfolio and protect against large losses if something doesn’t live up to the hype.

 

Pulling Out of the Stock Market When It Goes South

 

There are many strategies for getting better returns on your investments. And, even if the market goes south for a bit, it’s important to remember that it will bounce back eventually.

 

Beginning investors are sometimes so risk-averse that they’d rather take the short-term losses by withdrawing from the market when it looks like things aren’t going well. They’d rather pull out their money than ride out the rocky waves and see their investments not only return to their original value but grow well beyond that amount.

 

If the Federal Reserve raises interest rates and the stock market dips or some global catastrophe strikes and the markets panic in the aftermath, don’t bail on your investments and squander your potential returns by fleeing to cash.

 

Look at your time horizon instead. When do you expect to need the money? Many will realize that they have decades before they need to use their investments. Staying in the stock market is usually the best strategy for investors. But, it takes a long-term mindset to see past the present panic.



Playing It Too Safe

 

If you’re relatively young (under 50 years old), then dumping all of your money into bonds may be overdoing it a bit. Bonds tend to be safer investment options than stocks and other volatile investment options, but they also offer significantly lower returns. Far too many young investors are risk adverse. They forget that they have decades to make up for any significant losses early in their careers.

 

Diversifying your portfolio is the most common and best advice for newer investors, and robo-advisors can help you decide the best allocation of your funds, based on your age and investment goals (i.e., retirement, saving for a down payment on a mortgage, your child’s college fund, etc.).

 

No Better Time to Get Started Than Today

 

Even if you have no background in investing or finance beyond creating a monthly budget, the plethora of valuable resources and no minimum, low-fee robo-advisors and index funds are making it easier than ever to invest like a pro.

 

It’s important to educate yourself and avoid novice pitfalls along the way as a beginner investor. You shouldn’t have to spend hours and hours reading investment advice and studying stock charts to be successful. You simply have to get started and stay in the market. Like the old saying…time in the market is more important than timing the market.

 

Did I miss any mistakes? What are some mistakes you’ve made as a young investor? I’d love to hear your thoughts in the comment section.

 

How the Millionaire Next Door pursues Income

How the Millionaire Next Door Pursues Income

Today’s guest post comes from Matt, who is a licensed CPA and founder of Distilled Dollar where he shares how he and his fiancée went from living paycheck-to-paycheck to building wealth. With his fiancée’s help, he’s distilling down $$$ topics in pursuit of financial independence by the age of 35.

Take it away Matt…

The Millionaire Next Door, by Thomas J. Stanley and William D. Danko, is a classic personal finance book that goes in depth on a few major topics.

The overall premise is many millionaires don’t act or even look like millionaires. The specific topic I’ll pull out of the book today is the importance of financial offense AND defense. In other words, how the millionaire next door pursues income.

When it comes to accumulating financial resources and building wealth, I prefer to learn from people who have, “been there, done that.” That’s why I picked up the book many years ago.

About 1 in 15 households in America are millionaires when you include household equity. Compare that statistic with less than half of Americans having just $100,000, again, including household equity.

Many people we presume to be millionaires are, in reality, worth less, much less. In fact, one in ten drivers of an imported luxury vehicle are actual millionaires. The most common cars driven by most millionaires today include Toyotas, Hondas & Fords.




Don’t confuse rich with wealthy.


If we want to become financially wealthy then we should model the wealthy, not the rich. That’s why the book described financial defense as being critical. If we overspend our income, we will never become millionaires.


“A fat kitchen makes a lean will,” as Ben Franklin phrased it.

How Millionaires Pursue Income

 

Stanley and Danko interviewed thousands of millionaires. My main takeaway was that millionaires are willing to work harder because they understand their financial defense is in place.

Meaning, they know for every dollar they earn, they will be placing a large amount of that dollar into their investments and into their businesses.

Many affluent people know they need a strong positive cash flow going directly back into their assets as opposed to paying off liabilities.


If our income is earmarked for future purchases, then is it really our income to begin with?

Financial offense becomes more meaningful when we have a strong defense.

There are enough obstacles as it is when it comes to making additional income. The one barrier I, myself, have removed is having a lifestyle where the money’s gone before I realize it was there.

I’m always working on plugging holes in my budget to optimize my lifestyle.

Since I am young, at the age of 27, I know I’ll have plenty of time for luxury down the road. Right now, I’m focused on enjoying a lifestyle I can afford while simultaneously building wealth and resources for the next chapter of my life.

Is your financial defense supporting your financial offense? What helps you in having a winning combination?

-Matt
Distilled Dollar


To read more articles from Matt, check out Distilled Dollar.




pay off student loan debt

Student Loan Debt

Unless you come from a rich family, student loan debt is all too familiar to those with those looking to further their education. Todays guest post comes from Michael L. owner of the person finance blog, Super Millenial. If this article helps you, or you want to hear more from Michael, take a moment to visit his website. Without further ado….take it away Michael…

Student loan debt is a necessary evil and a reality many young people will face to continue their education. According to the Wall St. Journal “ About 7 in 10 seniors set to graduate this spring borrowed for their educations. Along with their diplomas, they’ll carry an average $37,172 of student debt as they enter the workforce.” Before we go into let’s take a look at three easy ways to approaching paying down student debt:

  1. Live Like A Student: You’ve been doing it for past 4-5 years, keep doing it as a way to keep costs down to pay more towards your student loans

  2. Set Up A Plan: Know how much you can afford, when your expected pay off date is and how you can pay it off sooner. As you reach certain dates and reach goals make sure to celebrate to stay motivated!

  3. Refinance: If you’re committed to paying down student loans early look at ways to consolidate your loans to the lowest payment possible. This will ensure you’re paying more towards the loan and less wasted on interest.

So should you pay off student loans or look to start investing in your retirement funds? A good place to start is the Federal Student Aid by comparing your student loan interest rate vs. your expected portfolio returns. Student loan debt has ranged from 3.86% (direct, subsidized loans) to 6.41% (Direct Plus loans). Historically the stock market has been ~8% but there will be bad times in the economy, drops in the stock market, and potentially another bubble or recession.


Student Loan Debt Interest >=< Expected Investment Return?

In the end it is a very personal decision as some may not be able to sleep at night knowing they have a debt looming over them. Here are the benefits of both investing by building assets & paying off student debts:

Investing (Building Assets)

Emergency Fund: Do you have enough money in savings to pay for basic expenses for three to six months? If not then start saving & automating 1o% of each paycheck towards your emergency fund until you reach your goal.

401K: Are you currently contributing to your employer’s 401K? If they match a percentage or amount, invest at least up to that amount to take advantage of free money from your employer. If you invest $3,000 and they match, you just doubled your investment instantly. This habit will ensure you automatically pay yourself first and contribute towards your future.

Pay Down Credit Card Debt: With high interest rates these will do more damage to your credit and your potential for lending than student loan debts.

Roth IRA: By opening a Roth you can increase your savings and also still have liquidity if needed as there is withdrawal flexibility if you need to use those savings in the future (unlike a 401K). Generally, early withdrawals from an IRA prior to age 59½ are subject to income taxes, plus you’ll pay a 10% tax penalty. However, you may be able to withdraw your contributions (before any earnings) tax-free and without penalty.

Taxes: Depending on your income you may be able to deduct up to $2,500 of your student loan interest costs. If you pay your loan off early you may reduce your tax savings.

Paying Down Debt

Now that we’ve covered the benefits of building assets it’s important to also evaluate the benefits of paying off student loans:

Predictability: While the market has historically been 8% returns the future may yield different results. Your student loan payment is fixed for the life of the loan and will give you consistency in your budget planning.

Credit: Paying down your loan make a big impact on your credit score as you are lowering your overall debt which can increase your credit score. The higher your credit score the more likely you’ll be able to get a lower rate on buying a car or house

Stress: Debt is a burden to many, some people can’t barely sleep at night knowing they owe money. Once your lower your debt or completely eliminate it you’ll be able to enjoy peace of mind and really begin to start increasing your net worth.

Dealing with debt is like meal prepping for a full week; it’s necessary but not always the most fun (until you see the results). I’ve mentioned before it’s important to find a balance in your life and finances, same goes for investing and paying down debts. Start by eliminating credit card debt then accelerate your student loan debt while investing in your emergency fund, 401K, and Roth IRA. The most important part is identifying your debts and setting up a game plan for each paycheck.

Have you had success paying down either type of debt & investing at the same time? What strategy worked best for you?

Michael L. is the creator of Super Millennial. He teaches people how to evaluate their financial situation, simplify money management & learn how to automate your investments to reach their financial goals. Subscribe for his personal finance “Keys To Success” PDF and blog updates HERE.