Investing in Your 20s and 30s (Part 3)

Last month I shared with you an article about how you can invest your money, and the feature before that I explained why investing is so important. Today, as promised, I will walk you through exactly how to choose the right investments for you and how to open an investment account.

One of the most frequently asked questions I get about investing is, “How do I actually select the right investments for me?” With all the options available these days, I completely understand how overwhelming it can be. The answer will come down to your personal risk appetite, the purpose of the money, your age, and the time frame of the goal.

If you are investing for a long-term goal such as retirement, investing in a mutual fund would be a good place to start. By choosing to invest your money this way, you will already be getting exposure to lots of individual stocks or bonds (depending on the type of mutual fund). Since most mutual funds have a team of managers, aka fund managers, that do the actual research and selecting of individual stocks or bonds that make up their mutual fund portfolio, some of the hard work will already be done for you. Think of it like a shortcut to diversifying your money across many types of stocks or bonds.

Now, what mutual fund or funds should you invest in? How do you pick from the thousands of mutual funds available to you? Well, the good news is, thanks to technology, there is another shortcut to choosing the right mutual fund for your money. Lifecycle mutual funds, also known as “age-based” or “target date” funds, are types of mutual funds that actually diversify your money across other various mutual funds depending on your risk tolerance, age, time frame of the goal, etc. So think of it as a “fund of funds.” These can be great for first-time investors since within just one mutual fund, you will have broad diversification between various mutual funds: large cap mutual funds, small cap mutual funds, international mutual funds, etc. And within each one of those mutual funds, you will own lots of individual stocks or bonds depending on the type of mutual fund. Wow — talk about diversification.

Lifecycle or target date mutual funds offer a great way to gain exposure to many investment types and make your life simpler by doing most of the work for you. All you have to do is select the appropriate lifecycle or target date mutual fund. From there, the mutual fund will automatically adjust its allocation mix from more aggressive in the beginning to more conservative as you get closer to the target date. For example, if you select “XYZ target date 2045” fund, your mutual fund allocation will start out more heavily weighted toward aggressive types of mutual funds, and then scale to more conservative types of mutual funds as you get closer to 2045. I know it may sound really complicated but just think of it this way: The target date mutual fund you own does all the work for you by diversifying your money and adjusting it for you as needed. It’s very convenient! Now, keep in mind that this is definitely a more automated approach to investing and of course there are fees involved, but it can be a great way to start investing and make sure you are diversified right from the beginning.

There are many mutual fund companies that offer lifecycle or target date mutual funds; Vanguard, Fidelity, and T. Rowe Price are just a few. You can log on to their websites and use their friendly search engines to find the right fund for you based on your criteria: age, risk, and time frame of goal. If you have trouble finding the right one, you can call their sales department and talk to a representative who should be able to help you out further.

Now that you know what mutual fund to actually invest in, it’s time to open an investment account. Again, you can use online financial institutions like ING Sharebuilder, E*TRADE, TD Ameritrade, Fidelity, Vanguard, etc. to open up an investment account (account types include a brokerage account, Traditional IRA, Roth IRA, or other type of retirement account). I suggest you do some research to find the most convenient, user-friendly platform, and then open your account with that institution. Here are the six easy steps for how to open up an investment account:

  1. Decide on the type of account to open, and then fill out the online application.
  2. Decide on how you will fund your account — one-time transfer, monthly contribution, etc. I suggest you transfer the amount needed to make an initial purchase into the mutual fund you want, since most have minimums.
  3. Select the lifecycle or target date mutual fund you want to purchase and go through the steps to buy the mutual fund.
  4. Next, set up an automatic monthly transfer into the account to ensure you are investing regularly. For example, you might choose to transfer $50 every month.
  5. After that, set up an automatic purchase into the mutual fund so that every time you add new money into your account, it will get invested into the mutual fund. Otherwise, your money will sit in cash.
  6. Every year, review your account and make sure you are constantly adding more money into the account and ultimately investing for your future.

By now, you should understand the why, what, and how of investing. Again, I understand how overwhelming and complex investing can seem, but with a little education and research, you can start feeling more confident and begin investing for your future.

Brittney Castro is a member of the DailyWorth Connect program. Read more about the program here.