How Much to Invest
Over the last few months I’ve had a question come up several times, namely “If I were going to invest with you, how much should I start with?” Besides the point that I have no minimums for investment accounts, this is an interesting question that I wanted to spend a bit of time unpacking. It’s no secret that I focus on younger people who are getting into the meat of their careers, so they may not have millions of dollars to throw around which leads to the above question. So in this blog I wanted to discuss not only how much you should start with but also some things to consider as you begin your investment experience.
How Much Should You Start With?
Because everyone is different and in a different place in their lives, there’s no uniform number that I can throw out that would make sense. Besides, the work we do together will be focused specifically on you as a person, so a standard number is irrelevant. Now that I’ve told you there’s no actual number to start with let’s look at what you should start with, and that’s what you can afford. Obviously this is easy to say, but let’s look at some of the factors around affordability. For some, you may not yet be in a place where you can invest as you simply aren’t well established enough in your careers to have money freed up yet, and that’s fine. While investing may provide returns over the long term, if you’re just scraping by and put your money in the market and it hits a downturn, you’ll be in trouble and much less likely to trust the markets in the future.
But let’s say that you’re doing ok, have a sense of your income and your expenses and you find yourself with a bit of money to utilize. In that case, starting as early as you can is a great way to have a successful investment experience, as you’re using both a long time horizon to smooth the bumps in the market and the time value of money to increase your returns. I’ve written a blog about the time value of money, so I won’t go into too much detail, but the basic concept is that it’s better to start early as the value will compound over time. You shouldn’t feel as though you need some arbitrary value to start investing, use the two most beneficial financial resources available: time horizon and the compounding of your money. My job in regards to investments is to work with you on your situation and put you on a better path or make your current path more efficient. Through that process we can determine what you have to work with while not impacting your day to day life. There are also a few things to keep in mind as you think about what you can invest, so let’s get into those.
Points to Remember
There are a few points to remember before you jump in to investing, and they are best addressed before you begin so as not to necessitate a change down the road. For this article I’ll be looking at:
Fees and the price you’ll pay to be invested
Strategy of the investments
Relationship to the advisor
I want to actually start with the last one, because that’s usually the first hurdle to clear. Please, do you due diligence on finding an advisor that works for you. Everyone has a different personality and some mesh well and others mesh less well so find someone you can trust and truly has your interests at heart, not their own. There are a lot of advisors who are looking to make as much money off of you as possible, and that’s especially true if you’re a medical professional so be aware and don’t be afraid to look at multiple options. It’s far better to take the time to find someone you trust and works in your best interest at the beginning than needing to switch a few years down the road. Switching can be a huge pain with a lot of paperwork that many people don’t want to deal with, so they simply stay with their advisor even if it’s working against them.
Now that you’ve found a great advisor, let’s look at the investment strategy they are proposing. If you don’t understand what they’re talking about and they’re using jargon to explain it, perhaps it’s best to go back to step one. In order to take full advantage of the investment strategy, you need to understand what’s happening and why. It could be the best strategy ever created but if you don’t know how it works or why it’s useful, you’re open to someone undermining your confidence in what you’re doing. The largest part of my job is education and teaching people who didn’t go into finance about why this strategy is better than that strategy and making sure that they understand what’s being implemented and why.
You’ve cleared the last two hurdles and are feeling great, congratulations! Now comes the nitty gritty part of looking at fees and making sure that the amount you’re able to invest isn’t being eaten away by high fees. You could have a great advisor, but if they work for a huge firm then they may be pressured to put you into accounts that don’t really benefit you in the long run. You have worked hard for your money and while a 1.25% or a 2% fee may not seem like a lot, it can erode the long term potential of your money to work for you so you need to be aware of what fees you’re paying.
The bottom line on all of this is that regardless of what amount you have to invest, the time to start is as soon as you’re able to take advantage of time and compounding. You should find someone that values your hard earned money and provides a great investment experience regardless of what amount you have. If you are able to assess what amount makes sense to invest, and clear those three hurdles, you have a great shot at having a successful investment experience. If you’re interested in learning more about my approach to investing, send me an email and I’d love to walk you through my process and discuss potential strategies.