Here at The Motley Fool, we aim to help the world invest -- better. And that world includes busy and uninterested millennials who perhaps haven't contemplated investing or retirement...until now.
Continue Reading Below
The Fool tends to point beginner investors to our13 Steps to Investing Foolishly. It's quite a lot of words, though, so I wrote a six-step guide tailored for beginning investors who (possibly) aren't reallythatinterested in investing. This is the third and final article in the series (Click here to read Part 1 and here to read Part 2), and it's also the most exciting, because it covers steps 5 and 6:
- Pay off debt
- Save and invest with the right money
- Always be investing
- Open an account
- Finally buy something!
- Keep buying things
Let's dig in.
5. Finally buy something!
For your very first investing purchase, I'd suggest an exchange-traded fund. ETFs are a type of security that works like a mutual fund (i.e., it's a collection of many companies' stocks), but they trade like stocks, not mutual funds. Mutual funds only trade once a day, they tend to charge higher fees because they're actively managed by hot-shot stock-pickers, and they usually have minimum amounts you're required to invest and reinvest. ETFs are great because they give you instant diversity, meaning they spread your risk across many companies; if a single company's stock tanks, then your portfolio won't be dragged under with it.
For example, one of my favorite ETFs that I own is Schwab U.S. Dividend Equity ETF .This ETF is a collection of companies that all pay dividends.
Continue Reading Below
What is a dividend?
Sometimes companies produce tons of cash, more than they can do anything with -- basically, so much cash they can't actually use it to reinvest in the company, acquire other companies, etc. Typically, they will do one of two things when they have too much cash: Buy back stock (reducing the share count, and therefore "increasing" the value of the remaining shares), or pay their investors a dividend. So, every quarter, Apple pays me about a 2% dividend. Note: The dividend yield is the cash Apple gives me divided by the current share price.
It's cash money, son.You are getting paid to own that company's stock.What can you do with it? Buy yourself a sandwich,or reinvest those dividends.Reinvesting those dividends means buying more stock with money the company gave you.Note: You can set any given holding that pays dividends to automatically reinvest -- most brokerages will do it for you, and you are not charged commissions on those subsequent stock purchases.
So, this ETF's top 10 holdings include Microsoft, Procter & Gamble, Johnson & Johnson, ExxonMobil,Coca-Cola,Verizon Communications, Pfizer, Chevron, and so on. Household names. Boring stuff. Huge moats. They're not high-growth companies, but they pay dividends, and dividends are great. Plus, if Coca-Cola somehow collapses tomorrow, I'm not completely exposed solely to that event -- there are 101 other companies in this ETF that'll keep it propped up. Instant diversification!
When people get old, they will oftennotreinvest those dividends and actually live off of them as an income stream. Pretty great, right?
Don't forget expense ratios.That's how much the ETF is going to charge you for owning it. (They have to make money somehow from bundling the stocks together for you.) Schwab's ETFs have pretty low expense ratios, and they are commission-free, so I tend to favor them. However, Vanguard is a great option, too -- super-low expense ratios. No ETF should have an expense ratio greater than about 0.30%, because that is too much money to fork over for passive management. (I think all of my funds are under 0.20%.) Try to aim for that. Also, ETFs that hold international stocks typically charge more than domestic ones.
The Vanguard Dividend Appreciation ETF is a nice low-expense Vanguard dividend ETF option. For a super-simple first purchase, check out Vanguard's S&P 500 ETF , which boasts a rock-bottom expense ratio of 0.05%.
Other ETF options
There are also commodity-specific ETFs, like ones for gold or silver, and sector-specific ETFs, like for tech companies. By virtue of focusing on a single commodity or sector, they tend to concentrate risk, so I avoid them. Plus, commodities are not always rational (see: gold).
Individual companies are typically grouped into ETFs based on certain qualities like their market value, growth profile, and geography. For example, here are a few I own in my regular brokerage, in addition to a handful of individual stocks:
Image source: Author.
I have an "aggressive" investing profile, which means my portfolio is roughly divided into 50% large-cap stocks, 20% international, and 20% small-cap stocks. The remaining 10% is split among a few companies likeAppleandMarkel, as well as a real-estate ETF.
What about individual stocks?
Well, I own a handful. They've done OK. But I contract for a company that tells meexactlywhat to buy, when to buy it, and why to buy it. You probably don't. So, you'd have to put in the research and stay on top of your companies' news. If there's a coffee-bean shortage, Starbucks' stock may take a beating. Should you panic and sell (no, don't do that), or is it potentially an opportunity to buy shares at an undervalued price (sometimes, it is)? Honestly, it's unlikely I will ever bother buying an individual stock again. You have to own many for diversification purposes, and you have to pay at least a little attention to what's happening with that company, with its industry, with the economy, blah blah blah. I don't care. If you're reading this article, you probably don't, either.
When you get old, your investing profile will become increasingly conservative, and you'll start buying things like bonds. Your investing profile can be whatever you want it to be right now, but consider that you are pretty young, so you have lots of time. More time before retirement means you have more flexibility to take risk, because if the soup hits the fan, then you have the years to make up for it.
6. Keep buying things.
Just buy some shares every so often. Add to your holdings, or buy different ones. I like adding to what I already own because I already know how it's been doing, and I'm too lazy to research new things, but feel free to explore.
When should I sell?
Well, as Warren Buffett would say, "Our favorite holding period is forever." Just sit on your stock and let it grow.* Practically speaking, though, you'll probably want to lock in gains and use that money elsewhere at some point, whether it's a down payment on a house, a hoverboard, college tuition, or simply redeploying that capital into another stock (I sold Waste Management to buy a coat once, which actually wasn't super bright, le sigh). The only thing to really keep in mind here is thatyou want to hold an equity for at least one year. If you sell before holding a year, you get taxed at your regular income-tax level, which is probably 20% to 30% -- or even higher if you're self-employed -- yuck. If you hold for a year or more, you'll be taxed more like 15% (or less for certain people). Don't let taxes hose you.
*Not every stock or ETF is a winner, obviously (thanks, Whole Foods Market). You may want to sell your losers to redeploy what capital you have left elsewhere or to harvest some tax losses.
Get rich slowly
This article series was based on an email I sent to my 29-year-old brother. When I sent him a draft, he had some advice on the conclusion:
Source: Author's iPhone.
All of what he wrote is true: Investing is not intimidating. You don't need a finance degree. You should just go for it. And I don't have "a formal education in dollars." I have a BA in history. He has one in film.
Millennials don't have to be clueless with money. You don't have to spend the next 40 years wandering in the dark, blindly hoping this whole retirement thing will just work itself out. Be proactive. Start saving today, and invest when you can. And then keep investing.
The article From 1 Millennial to Another: Honest Advice on How to Get Rich, Pt. 3 originally appeared on Fool.com.
John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Erin Kennedy owns shares of Apple, Coca-Cola, Markel, Starbucks, Schwab U.S. Dividend Equity ETF, and Whole Foods Market. The Motley Fool owns shares of and recommends Apple, Markel, Starbucks, and Whole Foods Market. The Motley Fool owns shares of ExxonMobil and Waste Management. The Motley Fool recommends Chevron, Johnson & Johnson, Procter & Gamble, and Verizon Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright 1995 - 2016 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.