The Best Investing Advice We Would Tell Our Younger Selves:
Investing was a scary word to us before. This was before we educated ourselves and learned key investing advice that would help us to start investing! As we look back on our financial journey and our progress towards financial independence, these are 8 pieces of essential investing advice we wish we knew sooner and would love to share with you.
1. Build strong financial habits first
Having strong financial habits is crucial when beginning your investing journey. Habits will be the crutch you lean on during hard times, or your default mode if stress has you on autopilot. More specifically, financial habits are the foundation that you build your financial wellbeing. If you set up financial habits early, you will learn to trust your default behavior. Good financial habits can take many shapes:
Consistency is key here. We highly recommend reading James Clear’s book, Atomic Habits, for techniques in developing habits you want to keep (that goes beyond finances, too). Or, if you want more specific advice on mastering your saving habits (NYOP believes this is the most important financial habit for you to develop), then read our post on 7 Financial Habits to Save You More Money.
2. It doesn’t have to be complicated
Finances can be overwhelming, and this is probably the biggest reason for someone to avoid self reflection. Just because you can’t see your finances, doesn’t make them go away, though. Face your finances! Don’t let the talking heads feed your anxiety about investing or budgeting. Stop procrastinating, and keep it simple.
Money that’s left over after spending is your savings, and you can use it to financially free yourself. If you want to know where to tuck those extra dollars away in a step-by-step format, check out our helpful post about our own Order of Investing.
Another way to simplify your finances is by automating investments (remember tip #1 for designing good habits…). You can free up your mental calories every week knowing your investments are growing in the background. ‘Simple’ is not having to think about finances as frequently.
3. You don’t need a financial advisor to start investing
Financial advisors should not be gatekeepers to your retirement or financial success. If you can manage your own money, you will enforce better financial habits (see tip #1!), and cutting out the middleman makes your finances simpler (see tip #2!). Plus, investing has evolved a LOT in the past decades, and we personally think most advisors are obsolete. You can control all your investing virtually, invest in many stocks simultaneously through index investing (more on that in a second), and you don’t have to call up your finance guy just to make a trade anymore.
Don’t let financial advisors prevent you from becoming financially literate or taking that first step. The best time to invest was yesterday. The next best time is today. Waiting for the advice of a financial advisor is just delaying the days that your money should be growing. Financial advisor can’t be your scapegoat for procrastinating!
Now, you might be asking, “But NYOP, how will I know what to invest in? How will I maximize my return on investment?” The short answer is index investing. If you want the knitty-gritty details on index investing, find J. L. Collins’ book, The Simple Path To Wealth, or his website. You will find the same information from either source. He is our hands-down favorite source for any questions about stocks.
4. Understanding where to put your next dollar to maximize your returns
Chances are you’re not a world-class stock picker, which is akin to saying you aren’t a recent lottery winner. This means you shouldn’t expect to get +20% returns on your investments every year. Long-term investing is not sexy. It is not risqué (…or risky). Honestly, it should be pretty boring!
You’re not here to get rich quick. You’re not here to buy the next Google, Amazon, Tesla, or whatever the next up-and-coming individual stock is. You are here to get rich in a proven, predictable, and mostly passive way. The 3 best ways to do this are automate investing, minimizing taxes, and investing in low-cost, broad-based index funds.
Putting a portion of your paycheck towards a 401(k) is a great example of how to accomplish all 3 of these objectives. It is an automatic way to pay yourself first, you invest money in a tax advantaged way (i.e. invested pre-tax or growing tax free depending if it’s a Traditional or Roth account), and you can buy low-cost target date retirement funds. NYOP believes target date retirement funds are a great place for beginner investors to start, and they help keep your portfolio diversified.
If you want more tips on our favorite tax-advantage accounts or how you can optimize your next dollar, read our post on Order of Investing. Afterward, you’ll have no doubts where to save or invest your extra income. This is the type of essential investing advice we wish we knew sooner, as it would have helped us tremendously in kickstarting our financial journey.
5. How to understand stock selection
We hinted at this point quite a bit already. We do NOT think individual stock purchases will lead to predictable long-term financial success. Researching individual stocks is not worth your time, unless you happen to be some fancy hedge fund manager. You’ll be better served investing in the global market as a whole through index investing. This is essential investing advice we wish we knew sooner in our financial journey!
Index investing works because it sets you up for diversification, they have very low fees (usually!), the research on stocks within the fund has already been done for you, and they are super convenient to buy. Let’s inspect each of these 4 points:
- First, diversification happens passively because funds are made of many companies. A popular index like the S&P 500 tracks the top 500 U.S. companies’ stock performance. If you buy a share of this fund, you are buying a tiny piece of every company on the list.
- Second, fees are low! You can expect common index funds to have expense ratios close to 0.05%. For those who don’t know, an expense ratio covers the operation cost of owning an index fund. It is the percent based fee paid to the company you invest through, like Vanguard or Fidelity, but more on that later. Compare this 0.05% expense ratio to the 1-2% fees that most finance gurus charge for ‘assets under management.’ Bleh – it leaves a bad taste in my mouth.
- Third, the research has been done. And it was done by people a lot smarter than us. Index funds are a curated list of companies worth investing in – that simple.
- Fourth and final, index funds are convenient to buy. Instead of buying hundreds of individual company stocks, you can buy a share of an index fund. There are dozens of institutions that offer easy access to mutual funds and ETFs. Best of all, everything is virtual now.
6. Please invest your HSA
Let’s get one thing straight – health savings accounts (HSAs) are NOT like flexible spending accounts (FSAs). If you have a high-deductible health plan through your employer, you are probably eligible for an HSA, and we want you to take full advantage of it.
To clarify, HSAs are different from FSAs in one major aspect. Money in an FSA will disappear at the end of a year if it’s not spent, but HSAs will roll over and can also be invested! Because of this, HSAs should be considered a tax-advantaged investment vehicle similar to IRA or 401(k) accounts.
HSAs have many tax advantages. The first benefit is that all contributions are tax deductible. That’s right – contributions do not count as income, so you can get this benefit even if you choose not to invest your HSA contributions. But interest you earn is also tax-deferred, so growth on your invested HSA assets will happen tax free! Do – not – skip the investing part.
According to Denivir’s 2022 HSA research report, only 7.2% of all HSAs had some money in investments. That means 92.8% of HSA owners are NOT getting the benefit of tax-free growth. Don’t be the majority of Americans, please invest your HSA contributions.
7. Understand expense ratios and fees
We briefly mentioned expense ratios when we compared them to fees of financial advisors. It’s definitely a financial topic we wish we understood sooner. Taxes, fees, and expense ratios are the fastest road to decreasing your return on investment because they are all guaranteed losses.
We believe a good index fund should have an expense ratio less than 0.1%. Fidelity even offers a few no fee indexes like the FZROX total market index fund. Most indexes are easy to manage, so it makes sense that their fees are also low.
Contrast this with heavily managed funds that buy and sell shares frequently, promising returns that ‘outperform the market’. Visual Capitalist presented data showing that 95% of actively managed large cap funds have underperformed their benchmark index over the last 20 years. We have yet to find a financial institution with a magic crystal ball, but that won’t stop them from charging you a whopping 1.5% assets under management fee.
8. Emotional investing is risky investing
We have all heard this bit of investment advice before – buy low, sell high. Seems simple, right? Most investors get it wrong when it comes to real life. People panic when they see their net worth drop 20% over a week span, and end up selling at a big loss because they think it’s better than selling at zero. I can promise, short of armageddon, the market will bounce back eventually.
The best way to combat the emotional component of investing is to be consistent. Always be buying. Markets are up? Buy. Markets are down? Buy. Markets are stagnant?…. Buy! Ignore all the media predictions and sensational news – who really cares what stocks Jennifer Lopez just bought?
If you consider yourself a strong, emotionally resilient investor already, then you can take this advice to the next level and flip the script. Did the market just take a big dive? Double down on your investing, and take advantage of ‘on sale’ stocks! Just like the famous investor Warren Buffet said, “Be greedy when others are fearful, and fearful when others are greedy.”
Conclusion
We hope that we provided some actionable tips, and that you can learn from the essential investing advice we wish we knew sooner. If we inspired you, please read more of our finance and travel posts. Remember to stay consistent, and keep your finances simple!
Check out our other posts!
- Barista FIRE: How to Semi-Retire Early and Enjoy Life
- Coast FI in our 20s: The Best Type of Financial Independence
- How To Invest Your First $1000 (So You Can Retire Early)
- Simple Investing Tips For Beginners
Like this post? Share it!
