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How many times have you had a conversation that involves some form of this question- “what should I invest in?”
Hopefully a lot! If you are on the receiving end of this question that you means you likely:
- Talk finances/investing/money with friends or family or co-workers regularly
- Work in finance or are known to be knowledgeable
- Are well respected and people want your opinion and guidance
- Are around the right people! Because this is what you should talk about, not the latest workplace gossip (been there too).
This is an excellent question that can lead us down so many paths.
- “Do you mean what specific investments?”
- “Do you mean what kinds of investment accounts or vehicles”
- “What do you invest in now?”
- “What are your goals with investing?”
- “What do you already know about investing?”
There are so many branches this conversation can take and that’s just beautiful. These are the best conversations you can have, if they are for the right reason and goal. I am sure we’ve all had at least one person ask us for a hot stock tip and just wanted to slap them because investing 101 isn’t about get rich quick.
We all probably have our own form of how we respond to this question. But, let’s walk through some simple answers you can give to the question- “What should I invest in?”
“The Specifics” Response
When asked about specific investments to make I never give people a “hot stock tip” and sometimes this is super disappointing. My friend, Matt, is much better at this. He plays around more with stock picking, and likes to dabble in cheap, riskier stocks for fun. His response would likely be more than sufficient for 50% of the people wanting “specific investments” in response to “what should I invest in?”
I always response with generalized advice focused on ETFs and Index funds.
The conversation usually goes like this:
“What should I invest in?”
“Like what specific investments?”
“Yeah, what’s the HOT stock I should pick up?”
*Sighs* “Well I’d recommend an ETF like VTI.”
“Tell me more! What’s happening with that? Is it surging? Massively underrated?”
“Definitely underrated for sure. It’s a well diversified investment that covers all the hot stocks in the S&P 500 in its allocation. It’s certain to always be at least as good as the overall market and will never leave you wishing you could at least match the S&P 500. It trades in an ETF form at a really low expense ratio of 0.03%, so you are keeping more of your money in your account. But, its really a buy and hold pick and you’ll watch it soar over the long term!”
“Hmm, I mean it sounds good…”
“It really is. You definitely want to check out similar ETFs and Index funds that track the market like VTI does. If you don’t like Vanguard’s platform and low expense rations, then try to find another like Fidelity to use. But this pick isn’t going to rapidly fluctuate with quarterly earnings reports from one company, it won’t crash if one industry sees a decline, and its fairly safe from speculation. I’d say just buy in and keep regularly buying more of it every two weeks or so, and watch your account grow. But temper your expectations, it’s not likely to grow 20% in value over night.”
“Thanks. I’ll keep looking.” or “Sounds like you know what you’re talking about, maybe I’m being too short-sighted looking for a hot stock pick. I just want to win big right away.”
My biggest goal, and yours should be too, is to explain to people that buy and hold investing over the long run, while minimizing expenses, and getting a broad diversification in the market is probably the SIMPLEST and EASIEST path to wealth. It will take time, but they won’t be worrying about a mass sell-off in one company. And maybe they’ll learn to eventually see declines as opportunity!
The “Accounts” Question
Probably the more challenging question to answer is the one about what kind of accounts to open.
Recently a co-worker and I were discussing our investment options at work. He had just got a notification regarding his IRA that he needs to take care of and was asking me what would be the best kind of account to focus on first.
This is where things get super tricky.
Do you suggest a Traditional IRA first (we have no 401(k)- so no match) where he will have more control over his investments but a lower maximum contribution? It’s pre-tax so that will help come tax time, but having a pension, he’s likely to pay just as much or more in taxes when he retires. Plus, he’s a financial independence guy and doesn’t see himself teaching for thirty years.
Do you suggest a ROTH IRA instead? The post-tax contributions will grow without fear of future tax rates. (I leaned here myself- but he countered with the tax benefits today of the Traditional).
Do you suggest a 457(b) plan (which we have as well as a 403(b))? The 457(b) plan has more flexibility in what to actually invest in than our 403(b) providers do. The expense rations are also much cheaper, meaning we will keep more of our hard earned cash. Plus the 457(b) has a sweet feature if you decide to leave your job or are fired- you can access the money penalty free.
Or being that he is interested in financial independence, does he just go for a taxable account that he can always access the funds in?
See? Really complicated.
My Story
When my co-worker asked “what should I invest in?” I didn’t quite clarify what he meant by this question, but mostly because I already knew some of his situation. So, I jumped in and gave some suggestions based on what I know and what I personally would do in his spot.
Basically, I suggested two things for accounts- the 457(b) for pre-tax contributions for retirement, and the ROTH IRA for post-tax contributions. My suggestion was to set up the automatic payroll deduction for the 457(b) and then to use the ROTH IRA as an investment vehicle for windfalls, coaching checks (soccer), and when he has spare money in his checking he doesn’t need.
For actual investments, I stuck with the VTI suggestion earlier (or any index fund ETF). Being that we both are younger and can take more exposure to the broad stock market, I didn’t suggest international funds or bonds at this point.
All of this was built off the understanding that I knew he already had paid off his high interest debt, that he had more than 20% equity in his house, and no other debts. He also has an emergency fund that is well funded and could weather a decent storm.
Do I think he will take my word as gospel? No. I hope not. Because investing is personal. Hence the name “personal finance.” No one can prescribe a perfect path with which investment accounts and what to invest in, in which quantities and how often and be 100% perfect to your situation.
But there are some basic rules of thumb to follow. The getting started part is the most important one. And even if my approach isn’t perfectly optimized, its simple, its easy to start and its fairly foolproof. It’s better than the alternative of not even getting started in the first place.
The “Simple” Answer
Anytime someone asks this question, particularly someone you haven’t spent a lot of time discussing finances and investing with before, go right to this response. It’s super simple and straight forward. Often times, you probably are speaking with someone who has yet to get started on their investing journey.
“I’d absolutely suggest opening an IRA with ____ provider and choosing a ROTH or Traditional, it isn’t as important as just getting started today. Then choose whatever S&P 500 Index Fund ETF you prefer and set up automatic contributions if possible every pay period. Just set it and forget it! Just remember you can’t exceed the contribution limit of $____ per year.”
That’s it. Just get them started. Don’t overload them. Getting started today with a decent provider and an index ETF is the easiest way to get them on the right path quickly!
Don’t overthink it. When they come back with more specific questions, then you can help them to optimize their investing.
What do you think? Is there a better one paragraph response to these kinds of questions? Share it with us in the comments below!
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Thanks for giving your ideas. Another thing is that individuals have a selection between federal student loan along with a private education loan where it’s easier to select student loan debt consolidation loan than over the federal student loan.
True, there are certain benefits to have private loans. However, the benefits that come with federal loans like choosing between repayment plans, deferment, and forebearance are huge. Federal loans were better to have in 2020 thanks to the pause on interest and repayment until 2021. It’s impact that people know what they are choosing when deciding between the two and weigh all the pros and cons.