Starting to invest might feel intimidating if you feel like you have to figure everything out on your own—but, fortunately, there are plenty of good examples to follow. Successful investors tend to share similar ideas about when and how to invest. Here's a look at seven ideas to get you going.
Idea 1: Earlier is easier
The earlier you start investing, the less you may need to save to reach your goal, thanks to the potential for long-term compound growth. Consider two investors who each wanted to save $1 million by age 65:
- Rosa started investing at age 25, so she needed to save just $5,720 a year to achieve her goal.
- Jin, on the other hand, didn’t start investing until he was 35, so he needed to save $11,125 a year to achieve the same goal.
"At age 35, Jin still has three decades to invest to meet his goal. Nevertheless, he has to save nearly 50% more than Rosa to achieve the same goal," says Mark Riepe, head of the Schwab Center for Financial Research. "Not everyone will be able to do that, which is why it’s so important to invest as much as you can as early as you can."
Source: Schwab Center for Financial Research.
Calculations assume a lump-sum investment on January 1 of each year and a 6% average annual return and do not reflect the effects of investment fees or taxes. The example is hypothetical and provided for illustrative purposes only. It is not intended to represent a specific investment product.
Idea 2: Diversify, diversify, diversify
You can help protect your portfolio against large drops in the market and also potentially boost your portfolio's value through diversification.
For example, if you had an all-stock portfolio, you could own stock in large companies (large-cap), small companies (small-cap), and international companies. Then, you could diversify your large-cap stocks by investing in different sectors, such as technology and health care. Finally, within the technology sector, you could buy stock in hardware, software, semiconductors, and networking. For new investors, exchange-traded funds and mutual funds are an easy way to diversify without doing a lot of research on individual investments.
Alternatively, if you're interested in particular companies, purchasing fractional shares can be a sensible way to diversify your large-cap stocks in the S&P 500®. Because you're not purchasing a whole share, fractional shares are more affordable. Also, they can allow you to practice your trading skills while potentially risking less money.
Depending on market conditions and other economic factors, an all-stock portfolio may be more profitable than one that includes other asset classes. Just remember that stock prices can fall as quickly as they rise. Are you willing—and able—to take that risk?
If not, a blended portfolio containing stocks, bonds, and other asset classes could mitigate your risk over the long haul. For instance, at the start of the COVID-19 pandemic in 2020, a diversified portfolio of stocks and bonds was less volatile—and had an ending value nearly 9% greater—than an all-stock portfolio.
"A diversified portfolio won't always outperform an all-stock portfolio, but it will generally lose less of its value during a downturn," Mark says. "And when your portfolio is less volatile, you're less likely to make rash decisions that could undercut your savings."
Source: Schwab Center for Financial Research with data provided by Morningstar, Inc.
Data from 12/1999 through 06/2021. Portfolio performance during market crashes is based on monthly data, not peak-to-trough declines. The blended portfolio is composed of 60% stocks and 40% bonds. Stocks are represented by total annual returns of the S&P 500® Index, and bonds are represented by total annual returns of the Bloomberg U.S. Aggregate Index. The portfolio is rebalanced annually. Returns include reinvestment of dividends, interest, and capital gains. The example is hypothetical and provided for illustrative purposes only. Past performance is no guarantee of future results.
Idea 3: Small fees can make a big dent over time
Management fees—from expense ratios charged by mutual and exchange-traded funds to the annual fees charged by an advisor—are often a necessary part of investing. That said, even seemingly small differences can erode your returns over time.
"Make sure you're getting what you pay for—whether that’s strong returns, exceptional service, emotional support that keeps you on track, or practical, trustworthy advice," Mark says. "In any case, it's wise to scrutinize your investment expenses regularly—perhaps as part of your annual portfolio review."
Source: Schwab Center for Financial Research.
Ending portfolio balances assume a starting balance of $1,000 at age 25, a 6% average annual return, and no additional contributions or withdrawals and do not reflect the effects of taxes. The example is hypothetical and provided for illustrative purposes only.
Idea 4: Sometimes, the best thing to do is nothing
Source: Schwab Center for Financial Research and Morningstar.
Market returns are represented by the S&P 500® Total Return Index, using data from January 1970 to March 2021. Cash returns are represented by the total returns of the Ibbotson U.S. 30-day Treasury Bill Index. Since 1970, there have been a total of six periods where the market dropped by 20% or more, also known as a bear market. The cumulative return for each period and scenario is calculated as the simple average of the cumulative returns from each period and scenario. Indexes are unmanaged, do not incur fees or expenses, and cannot be invested in directly. Examples assume investors who switched to cash investments did so in the month that the market reached its lowest point and remained in cash for either one, three, or six months. Past performance is no guarantee of future results.
"The problem with selling during a market drop is that by the time you act, the worst may already be behind you," Mark says. "Thus, not only are you locking in your losses, but you're likely to miss some of the best days of the recovery, which often happen within the first few months."
Idea 5: You may have more control over your tax bill than you think
Taxes may be a certainty, but there's still plenty you can do to try to minimize them. For example, how you sell appreciated investments can have a big impact on how much of your gains you get to keep.
"You never want to think about taxes after the fact because, by then, it’s too late," Mark says. "Instead, taxes should be an integral part of your investment choices—because seemingly small decisions can have big implications on your tax bill."
Let's say you're looking to realize a $5,000 gain on an investment you've held for 11 months. Because you've held the investment less than a year, your gains will be taxed at your marginal federal tax rate—24% for a 25-year-old single filer making $76,000—resulting in a $1,200 tax bill ($5,000 0.24).1
To reduce your tax bill, you could take one of three common approaches:
- Approach 1: Hang on to the investment for at least a year and a day, at which point any gains would be taxed at your long-term capital gains rate of 15%, resulting in a $750 tax bill ($5,000 0.15).2
- Approach 2: Sell another investment at a loss to offset some or all of your short-term $5,000 gain. For example, if you realize $3,500 in losses, your gains would be reduced to just $1,500, resulting in a $360 tax bill ($1,500 0.24).
- Approach 3: Combine approaches 1 and 2—holding on to your investment for at least another month and a day and realizing $3,500 in losses to offset your $5,000 gain, resulting in a $225 tax bill ($1,500 0.15).
The example is hypothetical and provided for illustrative purposes only.
Idea 6: Saving more doesn’t have to hurt
Instead of saving a flat dollar amount each year (see "Scenario 1" below), consider contributing a percentage of your income so your contributions increase anytime your income does (see "Scenario 2").
"Of all the ways to save more, this approach is pretty painless," Mark says. "It doesn't eat into your take-home pay because it's being skimmed off your raise. It's harder to miss what you never had to begin with."
Better yet, increase that percentage by at least a point anytime you get a raise, which can have an even greater impact on your portfolio value (see "Scenario 3").
Source: Schwab Center for Financial Research.
In Scenario 1, the investor contributes 5% of her pretax income in the first year and then contributes that same dollar figure in subsequent years. In Scenario 2, the investor contributes 5% annually at the start of every year from age 25 through age 65. In Scenario 3, the investor contributes 5% annually at the start of every year beginning at 25 and then increases her contribution rate by 1 percentage point with each raise. Scenarios assume a starting salary of $76,000, annual cost-of-living increases of 2%, and a 5% raise every five years. Ending portfolio balances assume a 6% average annual return and do not reflect the effects of investment fees or taxes. The example is hypothetical and provided for illustrative purposes only. It is not intended to represent a specific investment product.
Idea 7: Putting your financial goals in writing makes them tangible
Seeing your goals on paper makes it easier to envision your financial future, which can motivate and guide you along the way. Schwab's 2021 Modern Wealth Survey found that individuals who have a written financial plan are more likely to exhibit healthier money habits as well. "It's not surprising that people who put in the effort to plan for the future are more likely to take the steps necessary to make that vision a reality," Mark says.
Source: Schwab Modern Wealth Survey.
The online survey was conducted from 02/01/2021 through 02/16/2021 in partnership with Logica Research among a national sample of Americans ages 21 to 75. Quotas were set so that the sample is as demographically representative as possible.
Your investment strategy should begin with a well-thought-out plan—then try implementing just a couple of these ideas and see how your financial journey progresses. You can always make adjustments along the way. Here's to your future!
1 According to a survey conducted by Charles Schwab in April 2021, the median annual income of Generation Investor—investors who first began investing in 2020—was $76,000. For more information, please see aboutschwab.com/generation-investor-study-2021.
2 Long-term capital gains rates are 0%, 15%, or 20%, depending on income, plus a 3.8% surtax for certain high-income earners. If you decide to hold on to the investment for at least a year and a day, be aware that your investment could decrease in value during that time.