Many would-be investors are frightened away from putting their money to work, but it isn’t as scary as it may look, said Rodney Lake, a finance teaching instructor at the GW School of Business. He is the director of the GW Investment Institute, which allows students to manage part of the George Washington University’s endowment capital. While making it clear that he’s not offering investment advice to GW Today readers, he drew on his expertise to offer the following guidance for educational purposes only.
Q: Is there a minimum amount of cash beginning investors should start with?
A: Different financial institutions have their own minimums to seed the account, but they’re generally under $20. For a beginning investor, the most important thing is to start. Part of that is also getting started with your retirement account, especially if you’re tied to a corporation or organization.
If you have an employer, use their plan first because you’ll likely get the best tax advantages. At GW, we have a 403(b). At a for-profit company, you have a 401(k). Those are the best places to start if you have a job. If you don’t, you can open an individual retirement account or a traditional brokerage account with providers such as Fidelity, Schwab, Robinhood, or E*TRADE—any of those will work. Some are mobile-friendly, so you can do it from your phone.
Q: If I have an account through my employer but I have some extra cash to invest, should I just add it to the existing account or start another?
A: Typically, the best thing to do is max out, if you can, your contributions to your employer plan. Sometimes people can do that starting out, and sometimes they can’t. But if you’re in a position to do that as an investor, that’s where you're likely going to get the biggest tax benefit for that year. Beyond that, if you have extra cash to deploy, you want to set up an account outside of that.
Q: Are there kinds of accounts that you would avoid?
A: If it’s a reputable, registered firm, you’re typically going to be just fine. Most established firms now offer online platforms that are fairly easy to use. Some are mobile-first, which might be a little bit easier. It depends on your comfort level. You just want to make sure that they’re reputable and they’re actually registered firms.
Q: Are there general rules of thumb for beginners?
A: Defining your goals is step one. If you’re right out of college and starting with an employer, you generally want to set up your account to compound for as long as possible. That’s very different from someone nearing retirement, who will have a different risk tolerance than someone just starting out.
If you’re just starting and want to compound this capital over the next 20 years, you’ll generally want to take on more equity risk. If you’re nearing retirement, your goal might be to start having some fixed income to pay the bills once you no longer have a job.
So defining your goal first is important. And coupled with that is your risk tolerance. That will drive the mix of investments. What time horizon are you investing for? It’s very different if you’re investing for the next five years and expecting to get money out of that account versus just starting out with 20 or 30 years to go.
Q: What’s a typical path for each of those situations?
A: Starting out, your asset allocation should generally be toward something that’s going to build over time, and historically that's been in the equity markets. What you want to do is get the lowest-cost exposure to that, depending on your plan. If you’re not interested in picking individual stocks, you can get an exchange-traded fund, or ETF.
Sometimes those are the best vehicles for individual investors. This is a fund that trades on an exchange, so it has daily liquidity, and you can buy and sell it. It also generally provides a better tax advantage versus a mutual fund. Broadly, you want low-cost market exposure and to compound over time. Using an index like the S&P 500 and the Nasdaq-100, or some combination, can be very useful.
On the other hand, let’s say you have a retirement account that has compounded. As you get closer to retirement, if you need to rely on that income in the short term, you have to get into more fixed-income instruments. So, you’re going to get bonds, or you’re going to be in the Treasury market. The purchasing power of the equity market will change over time—and you hope it grows over a long period. But that purchasing power needs to be more definitive when you’re looking to cash out.
Q: How do you choose a broker?
A: If your employer has vetted firms, I would highly recommend starting there. You can do some research online and use FINRA BrokerCheck, SEC IAPD, SIPC, and other websites to verify you’re looking at a legitimate provider. Shop around and compare their terms, fees, and structure. Generally, with the big names, you’re going to be OK.
Q: What’s the most important thing beginners can do?
A: Just getting started. A lot of people make the mistake of not getting started because they think it’s too hard—some of the terms are unfamiliar, or they just haven’t thought about it. It’s not actually as hard as it seems. Figure out a way to get started, and if you get discouraged, figure out a way to power through. Try not to get discouraged. That friction really gets in the way of what could be a significant amount of money for you and your family. The earlier that people understand that, the better off they are.
And if you’ve already gotten going, then it’s really about trying to get the best return over the longest period of time. Once you get started and build your capital base, that base can compound over time.
There are two great times to plant a tree: The best was 20 years ago, and the second best is today. Investing works the same way.
Disclaimer: This interview is for general educational purposes only and is not investment, financial, tax or legal advice. Investing involves risk. Consult a qualified professional before making any investment decisions.