Tag Archives: investing

The Best Investments for People in Their 20s

As a young professional, I talk to friends a lot about our different investment options, not only for retirement, but for short-term and long-term savings, too.

Many people think that they should invest a brokerage account if they want to invest, but for most people, there are better options and a very clear hierarchy that should be followed to be sure you’re taking advantage of all the perks our many investment vehicles offer.

Everyone has a different mix of investment options, but it’s very easy to follow. If you don’t have a type of account mentioned, that’s OK. Just move on to the next option.

Investment Vehicles

Most of have the opportunities to invest through 401(k)s and IRAs as well as non-tax-advantage accounts, but not everyone knows which ones are best for different situations.

The most common situation for young people is the choice of 401(k), IRA (Roth and Traditional), or a regular brokerage account.

If you need a refresher course, check out the explanation of each of the types of retirement accounts. The only account we’ll discuss that’s not included in that article is the standard brokerage account. This is the type of investing account that is promoted most, so think E*TRADE.

As opposed to all the other investing accounts, which are retirement accounts, a standard brokerage account is not targeted toward people looking to invest for retirement (but you can still invest in one with an eye toward retirement). There are no tax advantages to this account, but for those who want to save for other goals, this could be the right place to do it. All earnings are taxed, but you can always withdraw both contributions and earnings with no penalties.

Where Should 20 Somethings Be Putting Their Investments?

So how should young people invest?

First, start with any 401(k) contributions that would earn a match through your employer. This is just free money, so if you get a match on up to 5% of your salary, contribute 5% of your salary. They’ll match with 5%, so you’re essentially getting a 5% for free! This is definitely your first step.

Next, invest in your Roth IRA. This account has far more flexibility than a 401(k), and your contributions (but not your earnings) can be withdrawn at any time with no penalty. Contribute up to the maximum, which is $5,500 in 2015 as long as you’re under the income limit of $121,000 as an individual or $181,000 as a married couple (and you will be if you’re just starting out).

Once your Roth IRA is fully funded, keep funding the 401(k) through your employer if you are eligible, up to the maximum $18,000 for 2015. You might as well take advantage of any tax deferred savings incentives while you can!

Finally, you have my permission to invest in a regular brokerage account. This should be the last option because there are no tax advantages of this type of account.

If you’ve got enough to invest that you make it to the brokerage account, you’re doing a great job. But can you beat my savings goal?

What Happened To Groupon While Everyone Was Watching Facebook?

It was the stock market story of the summer: how would Facebook’s initial public offering fair?

Everybody was watching Zuckerberg and his social media powerhouse to see what would happen. When Facebook announced that IPO would be $38 a share, everybody – from personal finance bloggers to traders to Facebook members – chuckled… and held their collective breath. Was the eight-year-old company really ready for such a massive leap into the stock market? Did it have what it took to be a successful publicly-traded company?

It didn’t take us long to learn the answer – a resounding “No.”

But while everyone was watching Facebook, another web-based business that had also broken new ground – basically defining its industry – had also started to tank.

So why didn’t anybody notice Groupon was floundering until now?

A Tale of Two Stocks

Facebook made its IPO on May 18, 2012. By the end of the day, the stock was already trading below the $38 mark; it has yet to top that amount in any trading day since.

Only six and a half months earlier, Groupon made its IPO. At the time, the $700 million valuation – 35 million shares at $20 each – was the biggest IPO for a web-based business since Google’s $1.7 billion IPO in 2004. By the time Facebook entered the market in mid-May, Groupon’s stock was already trading well below its IPO mark; on May 18th, Groupon (GRPN) closed at 11.58 – a scant 58% of its debut price.

Since then, both stocks have shared a similar trajectory. By Labor Day, Facebook (FB) was trading below $18 a share; Groupon was flirting with the $4 mark. Yet, as everyone from Mark Cuban to Forbes Magazine has blasted Mark Zuckerberg for the Facebook debacle, leading many to speculate over how long the Harvard dropout can maintain his place as Facebook CEO, by comparison there have been few news reports of investors calling for Groupon CEO Andrew Mason’s head on a proverbial golden platter.

So What Happened?

Here we have two tech stocks, both offering their IPOs on NASDAQ within just over six months of one another. Both have tanked to just a fraction of that initial value – so what’s going on? What happened?

The folks at Facebook claim it was simply an overvaluation; they also blame the site’s inability to grasp the mobile market when it comes to advertisers. Groupon says it didn’t expand aggressively enough internationally, and – quote – “stupid risks.”

Is there a larger lesson to be learned here, though? About businesses going public too early, or about determining a company’s worth based on intangibles? How can you value a company when it doesn’t really sell a product, or only works as a middle man between providers and consumers?

Readers, what do you make of these stock quotes and their downward trajectories? Are they two of a kind – or two completely different situations?

How Often Should You Check Your Investment Accounts?

When I started investing regularly when I got my first job out of college at age 21, I was checking the progress of my investment accounts at least 3-4 times a week. I wasn’t going to do anything drastic based on what I saw, especially not at a time when I was only investing two or three hundred dollars a month.

Eventually I started looking less and less, but I also started to read more about the markets and keep up with the economic news.

There’s something very addicting about investing. Maybe it’s because investing sometimes feels like gambling and it can be very stressful. The markets are at times unpredictable, and it’s almost impossible to know when to sell and when to buy. Just like we like to be in control of our daily finances and our monthly budget, we want to keep tabs on our investments. But is checking constantly healthy?

There is no one-size fits all solution, but there are certain rules we can follow that will help us learn what works best for us as individuals. Some people can handle large swings in their balances on a weekly basis, while others can’t think about losing 10% of their account balances without crying a little bit.

Retirement investment accounts are typically long-term investments. Looking at the balances and performance each day is definitely overkill, as it often leads to stress and worry. We tend to look at the ups as normal and the downs as unexpected, so when the market is not doing well, it makes us cringe and think of ways to change things. We get emotional, and this often leads to making misguided investments.

The most important thing to do is to create a plan in advance. It doesn’t have to be a super rigid plan because things change, but having something written that documents what we are trying to achieve with an account can help us stay on track when our investments stray the 10% per year gains that we hope for.

My recommendation is to look at index funds once or twice a month, especially if there are no plans to make any changes. It’s always good to keep up-to-date on the world and investing news, but looking at your individual balances too often could lead to snap judgments and knee-jerk reactions.

For investing that is medium-term (a horizon of less than 5 years), since we’re going to be using that money sooner, checking on it more often may not be a bad idea. Keeping tabs on money that’s important to us is helpful because it can help limit losses to what we can afford. I check my Lending Club account every so often to check on the performance, but also because I have funds to reinvest from when loans are paid back.

For example, if we’re saving for a house in 5 years, investing in the stock market could be a good idea if we were to get average returns. But losing a lot of money would be bad, so checking every week or two might be smart to make sure the balance is at a comfortable level for you.

With fun money (anything that is not designated for a specific goal and you can afford to lose in a worst-case scenario), there really are no rules. While it may not be good for your mental health to check on your accounts each day, go ahead and check as much as your heart can handle.

I think the most important thing to keep in mind is that whatever timeline you choose, make it one that fits into your schedule but one that won’t tempt you to make changes based on the balance and one that won’t stress you out. Going into investments, we know the best and worst-case scenarios. By creating a plan beforehand, there will be an exit strategy in place whether it means selling when we’re up 30% or cutting our losses when we’re down 20%.

Readers, how often do you check your investments? How did you settle on the time between checking?