I’m one of those people who tend to over-complicate things.
I’m always trying to take things to the next level of detail. Or think of a different approach to something.
Sometimes this is helpful, such as in my day job in corporate finance where I’m looking at how different variables may impact a forecasting model.
But in other situations it can be damaging. Investing is one of those situations. I damn-near beg people to PLEASE keep it simple when they are investing, especially when they are in their 20s or 30s (and honestly 40s and beyond as well).
Why? Because I think for the average person there is little, if any, upside in trying to pick and choose individual companies. At worst it can mean big losses, but in most cases it will be a lot of wasted time with little to show.
But how do you keep it simple? What does that actually mean?
It starts with index funds and Exchange Traded Funds (ETFs) and a focus on low fees.
Index Funds and Low Fees
I should preface all of this with the fact that I am not a financial adviser and even if I was I could not give individual investing advice without knowing your specific financial situation. With that being said, the general guidelines on how to keep investing simple are leveraging index funds and keeping fees low.
Index funds (or ETFs) attempt to mimic large benchmarks like the S&P 500, or even the “total stock market.” Said differently, they move up or down in price based on a larger basket of stocks. What that means is your investment is exposed to the larger market, not to an individual company or even a handful of companies. While all investments come with risk, investing in the larger market takes away the risk of any one stock dropping significantly (or ceasing to exist altogether).
The reason why this is preferable is simple: it’s unlikely that someone will beat the returns of an index by picking and choosing individual stocks. Many actively managed funds struggle to beat an index, and the employees working on that fund literally spend all day every day researching companies in an attempt to find winners. If they can’t beat an index fund, why would it be worth the time and energy for an average investor to try to research companies and beat the market?
If you truly want to keep it simple, invest in tax-advantaged accounts like a 401(k), 403(b), IRA, or HSA. Look for index funds, which typically will be the funds with the lowest fees. Invest in these and avoid the funds with high fees.
The reason index funds come with low fees is because it requires less effort from management. In fact, if you are investing funds outside of these tax-advantaged accounts, I recommend looking into a few index funds that have low fees:
- FZROX – Fidelity ZERO Total Market Index Fund
Objective (from the Fidelity website): The fund seeks to provide investment results that correspond to the total return of a broad range of U.S. stocks.Expense Ratio (Fees): 0.00%
Minimum Investment: $0
- VTSAX – Vanguard Total Stock Market Index Fund Admiral Shares
Objective (from the Vanguard website): Designed to provide investors with exposure to the entire U.S. equity market, including small-, mid-, and large-cap growth and value stocks..Expense Ratio (Fees): 0.04%
Minimum Investment: $3,000
These funds may not be an option in your retirement account, but I recommend looking at what funds within your account have low expense ratios and seriously considering those over the funds with high fees. Of course, do your research and due diligence, but it’s tough to pay a 1%, 2%, or even higher fee when it’s well known that actively managed funds struggle to beat the market.
Avoid Individual Stocks
We’ve already hit on this, but I want to re-iterate the benefits of avoiding individual stocks, especially for investors who are just starting out. I’ve overheard many coworkers in their 20s and 30s talking about individual stocks to invest in, and investing strategies. While I think it’s valuable to have a pulse on the economy, including understanding the strengths and weaknesses of individual businesses, spending time trying to pick and choose stocks that could beat the overall market index likely isn’t worth the time and energy.
Instead of picking individuals stocks, focus consistently contributing to your retirement accounts and exposing your money to low-fee index funds. If you want to get creative down the road when you have a larger portfolio you certainly can consider it, but in your 20s and 30s it makes more sense to focus your time and effort on paying down debt, consistently investing in a retirement account, increasing income, and building an emergency fund.
The first step is getting started. If you aren’t consistently contributing to a retirement account, it’s time to get started. The next step is to find index funds with low fees. Keep it simple!
Take Advantage of Easy Wins
I keep mention retirement accounts because they can offer some easy wins. Not only do they have tax advantages, but there’s a chance your employer matches your contributions up to a certain amount (i.e. 3%, 6%, etc.). Fully taking advantage of that employer match should be an immediate priority for you because it’s “free” money that your employer is offering as part of your benefits.
Besides an employer match to a 401(k) or 403(b), an employer may also match contributions to a Health Savings Accounts, or HSA. I am a huge fan of HSAs and I think more people should contribute. Not only does it build a medical emergency fund, it’s also an IRA on steroids. It’s worth mentioning the fund options are better in my HSA than in my 401(k). I’m not sure if others are seeing the same thing, but it’s worth comparing.
Finally I have to call out Employee Stock Purchase Programs, or ESPPs. You may be thinking “wait didn’t you say to avoid individual stocks?” ESPPs are the exception.
At my employer we can set aside up to 10% of our income for the ESPP. Every six months the lesser of the starting and ending stock price is used as a purchase price. Meaning, if the stock went from $25 to $50 over the course of six months, I’m given an opportunity to buy the stock at $25 (even though I can sell immediately for $50!). But that’s not it – some ESPP plans take the lesser of the two prices PLUS a discount. At my employer that discount is 15%. So $25 at a 15% discount is $21.25, which I can then immediately sell for $50. Employees not taking advantage of this are really missing out on some easy investing wins.
To summarize, PLEASE keep investing simple by doing the following:
- Use index funds and index ETFs to get exposure to the larger market (and to pay lower fees)
- Within your 401(k), 403(b), or other retirement accounts, look for funds with low fees. Actively managed funds tend to under-perform the market and can charge high fees
- Take advantage of an employer match to your 401(k), 403(b), and/or HSA
- If an Employee Stock Purchase Program (ESPP) is offered, learn the details and consider taking advantage of it if it has perks like purchasing stock at a discount
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