How to Invest Money When You Don't Have Any
J Thoendell stashed this in Personal Finance
In the old days, diving headfirst into stock trading usually meant finding a financial adviser. Market novices still need some guidance, but that doesn't mean you have to rely on a human—nowadays "robo-advisors" are a cheaper alternative to meat-brained money managers.
Michael Batnick, the director of research at Ritholtz Wealth Management, a financial planning company that also happens to offer a robo-advisory service called Liftoff, told me that they're a great way for young people to get returns on investments and get a feel for how the markets work.
"This software is a perfectly viable replacement for humans with two caveats," he explained. "You must be able to emotionally handle wild market swings without someone talking you off the ledge, and you have no financial planning needs. As most people earn more money and have a family, their needs become more complicated and advice from a human starts becoming very necessary."
Basically no one should invest in stocks until they are far enough along in life that they can afford to do so. But anyone can learn about stocks and investing in advance of using real money.
The problem for Millennials is it's hard to think long term.
"Picking stocks is really difficult, you're not just fighting your own psychology, but you're also fighting the fact that the majority of stocks just stink," Batnick told me.
It's true—most stocks are terrible investments. As Batnick put it, "Since 1980, roughly 40 percent of all stocks have suffered a permanent 70-percent decline from their peak value. Also, two out of every three stocks underperform the index."
Using the Robinhood app, I purchased two shares of Calloway Golf, which was picked basically at random, although I guess I thought hitching my wagon to a golf company would be a good entryway to the world of wealth. Also, it was like $10 a share and I was only willing to put like, $25 into this experiment.
After two days, I was down 2.77 percent. This did not seem like a path to riches, or even a PS4. Investing in your financial future is, day-to-day, about as exciting as transcribing other peoples' meetings—it's a slow process by which a tiny nest egg grows by fractions of percentage points until you're ready to retire, at which point you'll be able to buy whatever video game system you like, and can you even imagine how intense Halo 65 will be?
The trick, Michael Batnick advised me, was just to reinvest my dividends every year, and to remember that you have many years ahead to learn more and to grow your accounts.
"The problem for millennials is it's hard to think long-term," he told me. "The unfortunate reality is that time and compound interest are an investor's greatest asset, yet so few are able to leverage it."
I like this passage:
The first question I decided to ask was, I thought, a pretty simple one: What's the best way to invest $1,000? The answer, boringly, is "it depends," so I'm going to break it down by how much risk you want to take on.
If you Google "Charles Schwab Roth IRA," you will get this form, which takes 15 minutes to fill out. You have no excuse.
First, I called up Ben Carlson, a chartered financial analyst (CFA) and finance bloggerand asked him what I should be doing with my extra cash besides buying booze and sneakers. He told me what I didn't want to hear—that I should be taking a portion of what little money I have and putting it away where I can't touch it for a long-ass time.
Carlson said the safest bet was to set up a Roth IRA, something I could do in 15 minutes by walking into a Charles Schwab and filling out a form, or by just going on the financial services company's website. "IRA" stands for "individual retirement accounts"—the idea is that you automatically send before-tax money every week, month, or quarter into one. You can then pick a target date when you'd like to retire, and it will choose investments for you.
While that all sounded great—necessary, even—a Roth IRA is technically not an investment but rather a place to hold investments. Perhaps more importantly, retirement is a loooooonnng way away for me—what if the sea rises, or I die from an overdose of processed cheese before then? I asked Carlson, and he asked me to consider my "time horizon."
"I want to be able to buy a PS4 before the sun explodes," I said.
"I think something like an online savings account where you can earn a little bit more money would work," he offered. "At a savings account at a bank, you might earn 0.1 percent, whereas with an online savings account you might earn closer to 0.5 or 1 percent back on your money. The reason these places are able to provide higher interest rates is because they don't have a brick and mortar bank, so they are just online, and don't have any overhead costs."
We also talked about CDs, or certificates of deposit, which you can also get through a bank. If you put your money in them, they accrue more interest than a savings account, but you can't cash them in for three, five, or ten years, depending on the CD.
Even these seemingly safe investments aren't guaranteed, however—if inflation is higher than the interest you're earning from a savings account or CDs, you'll have more money but it'll be worth less than the pile you originally invested.
What about playing the stock market? That was the type of investment I was familiar with from the internet and movies about men with suspenders and slicked-back hair. Could I be like those guys?
"I think for that kind of shorter- or intermediate-term goal, you don't wanna mess around with the financial markets, because they're just too unpredictable in the short term," Carlson told me.