Put down the Excedrin — it’s only investing.
By Sallie Krawcheck
For some of us, investing can feel like a migraine headache coming on.
“What type of product should I invest in? How do I choose my investment advisor? How do I fight my way through all of the jargon? How much should I invest?”
It can feel so complicated that one woman in Silicon Valley told me that she planned to take two weeks off in order to “figure out investing.” Ugh.
It doesn’t have to be as difficult as the industry makes it seem. Whether you invest with Ellevest or not, here are five fundamental concepts for investing:
- Your investment advisor should be a fiduciary. A fiduciary is required to put your interests before its own. Makes sense, right? Well, not all firms are fiduciaries; some are only required to sell you products that are “suitable” for you…which is a lower standard of care.
- Invest in a diversified investment portfolio. Diversification of investments has historically been demonstrated to reduce overall portfolio risk. In contrast, investing in a single stock or even a single mutual fund can mean too many eggs in one basket.
- Keep costs low. You can’t control market movements, but you can control costs. For us, this means investing in low-cost exchange traded funds (ETFs) to provide you with broad market exposure at a low cost. We also advise looking for an investment advisor whose own costs for advice are less than 1% and asking about any “hidden fees.” For traditional providers, these can take total costs to more than 2%.
- If you’re younger or have longer-term goals, consider investing in a more equity-heavy investment portfolio. If you’re “more mature” or have nearer-term goals, invest in less equity. That’s because equities have historically provided a higher return over time, but with greater risk. (These two things — risk and return — tend to go hand-in-hand.) So, if you have a longer-term time horizon, you may be able to take on more equities to potentially earn a higher return (noting that “past performance is no guarantee of future results” and all that). How much in equities? Well, an old rule of thumb was to subtract your age from 100 to get the percent of equities you should have in your investment portfolio. If you’re 35, that means 65% equities. (But this could also depend on the length of time you need to achieve a particular financial goal.)
- Make investing a habit. A bit out of every paycheck. Why? Because if you set it up that way, with direct deposits into an investment account, you won’t “forget” to invest and miss out on closing your personal gender investing gap. And because investing steadily has historically meant that sometimes you’ll be buying high (drat) and sometimes low (yay), but this may likely even out over time. It has also meant historically that you may be able to recover from market downturns more quickly — in some cases much more quickly — by continuing to invest.
How much to invest out of every paycheck? That’s where a financial plan comes in because it depends on what you want to accomplish. (And you know we provide these for you at Ellevest for free, right?) It can be a double-digit percent of each paycheck, but even 1% of your salary represents a step in the right direction.