6 things you should know before opening an investment account

Advertisement
6 things you should know before opening an investment account

woman iPad checking

GaudiLab/Shutterstock

Advertisement
  • You're never too young to begin investing, and you don't have to be rich to open your first investment account.
  • Don't let your emotions rule your investment decisions. When the market turns down, smart investors wait it out.
  • Understand your investment goals. That will help you decide where to put your money.
  • Angela Moore, a certified financial planner (CFP), has some advice to get you started.

Angela Moore's first job after college was as a finance director for a car dealership. She spent all day looking at other people's credit and, she said, "I quickly realized that there was a huge financial literacy problem in the community."

Moore decided to go back to school so she could help people close this gap. She is now a CFP and a certified financial education instructor with her own firm.

Whether you have a little money saved up or you just got a windfall, Moore thinks "everybody should look at opening some type of investment account." She noted that most bank accounts pay interest rates that don't keep up with inflation, so your savings lose value over time.

Advertisement

Your investment account can be an IRA, 401k, or any brokerage account that hold funds made up of stocks, bonds, and other investments. Here are six things to think about before you open your first investment account.

{{}}

Create a rainy day fund first.

Create a rainy day fund first.

"You don't want to take all your cash and put it in investments and then not have any cash in case of an emergency," Moore said. That could force you to withdraw money from your investment account when the market is down.

Instead, set aside between three and 12 months of living expenses in an emergency fund, Moore suggested, noting that "the amount that you need depends on the stability of your income." Freelancers need a bigger cushion than someone with secure employment. Plan on having at least a couple months of emergency savings before you begin investing.

Understand the costs associated with investing.

Understand the costs associated with investing.

There are two primary types of costs associated with investment accounts, according to Moore: management fees, charged by your investment manager, and fees charged by the funds you invest in.

Total fees are usually in the range of 1% to 2%. If you start investing at a young age, Moore said, those fees will "add up over time."

Don't let this discourage you from investing – just understand the costs associated with your accounts and look for low-cost alternatives.

Advertisement

Get investment help from a robot.

Get investment help from a robot.

Moore has a suggestion that can save you some management fees: "There's a lot of robo-advisors where there's a very little fee or no fee at all." A robo-advisor is AI that asks you a set of questions about your goals and your tolerance for risk then uses an algorithm to recommend investments.

"For the average investor who's just getting started, a robo-advisor is great," Moore said. "I'm a financial advisor with a master's degree, and I use robo-advisors for myself."

She noted that accounts associated with robo-advisors often have lower minimums than accounts managed by humans. Some have no minimums, so you can start building your portfolio with a small monthly investment.

Nerdwallet has a list of the top robo-advisors for 2018.

Keep your focus on your investment goals.

Keep your focus on your investment goals.

"A lot of people make the mistake of choosing investments based on their performance," Moore said. While it's tempting to pick a hot stock, that stock could easily take a big tumble.

Instead, Moore suggests that you write down your investment goals, such as saving for a house, a wedding, or your retirement. Figure out how much you need and your time frame, then figure out what return on your investments will allow you to meet your goals.

Moore's suggestion: "Take the least amount of risk possible with the highest return to reach your goals."

Advertisement

Follow your head, not your heart.

Follow your head, not your heart.

"Behavioral finance is one of the most discussed topics in the financial planning world now," according to Moore. "Most investors operate based on fear or greed and often have overconfidence in the market or a false sense of fear."

Neither of those emotions are good investment advisors. Instead, Moore said, "Have a strategy based on your goals and practice prudence."

Don't put all your eggs in one basket.

Don't put all your eggs in one basket.

"You want to have different kinds of investments that do different things in different markets," Moore said. A portfolio with too much of one type of investment is susceptible to big losses when there's a downturn. A diversified portfolio protects you from the vagaries of the market. Moore noted that a robo-advisor can also help you balance your investments here.

At the end of the day, Moore said, "The important thing is that you get started and you don't allow fear of the unknown hold you back or make you procrastinate." The sooner you start investing, the sooner you start saving for your goals.

Advertisement
Next StoryRich retirees are paying over $1 million to move into luxury communities that operate like 'five-star resorts' with award-winning chefs, wine cellars, and VIP treatment