In this episode, Sean gets very personal about his personal finances. He wants to dive into the world of investing, but doesn’t know where to start. Dayana gives advice on how to invest that money (get ready to learn about index mutual funds!) and get over the fear of investing.
Make sure your financial house is in order before you invest in the stock market. That means you have cash set aside to cover emergencies and no looming debt charging double-digit interest. And you’re saving 10 to 15% of your take-home pay in retirement accounts (if your workplace retirement plan offers an employer match, you should be contributing at least enough to receive the full matching amount).
Invest only money that you do not need soon (five years or less). Over short periods of time, stock market returns can take you on a roller coaster ride. But over longer periods of time, the returns you earn may handily beat what you’ll get in checking, savings and money market accounts, bonds and certificates of deposit.
Start with a simple, low-cost investment — an index mutual fund. A mutual fund pools money from multiple investors to invest in a variety of individual stocks, bonds or other securities. The benefits are:
- Instant diversification: Because each fund holds a diverse range of assets (so that you’re not overexposed to any one stock), they help minimize investment risk
- Broad market exposure: Index mutual funds, in particular, are made up entirely of the stocks comprising a particular index, such as the Standard & Poor’s 500 or the Nasdaq composite
- Low costs: Unlike actively managed mutual funds where a high-salaried fund manager picks and chooses what stocks to buy or sell, the investment mix in an index fund is automated to simply match what’s happening in the index. As a result, management costs (expenses charged to shareholders as a percentage of money invested) are much lower for index mutual funds than for actively managed mutual funds, which means more of your savings is padding your returns and not Wall Street’s.
Afraid to dive in? Take the emotion out of getting started. Strategies like dollar-cost averaging are a good way to wade in slowly. Like in a company retirement plan, money is added to the account at regular intervals, taking the emotion out of investing and helping avoid mistiming the market.
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