No matter your age, the best time to start investing is now.
If you’re in your 30s and you haven’t started investing, don’t worry. Sure, it would have been great if you got started 10 years ago, but you’re not anywhere near over the hill.
12 Steps for How to Start Investing in Your 30s
The world of investing can be intimidating, so this guide to investing in your 30s breaks down the fundamentals into 12 easy steps.
Step 1: Learn the Basics
First, study the basics of investing. Learn how the markets work, understand the differences among securities — such as stocks and bonds — and learn about common investment products, such as mutual funds, exchange-traded funds (ETFs) and index funds.
You don’t have to go to business school, but it is up to you to do your homework and develop a basic understanding of the fundamentals of investing. The Securities and Exchange Commission (SEC), the federal agency that regulates financial markets, established Investor.gov, which is a good place to start gaining the competence required to be an effective investor.
Step 2: Evaluate Your Financial Situation
You need a clear picture of your monthly spending, your debt, your bills and your savings in relation to your income and assets. The federal government dedicated a section of USA.gov to personal finance, and that’s a good place to start.
Budgeting applications like Mint are simple and free. Enter some personal financial information and link your bank cards, and the software will give you a clear picture of your finances — including what you can afford to invest each month.
Step 3: Establish Clear Financial Goals
Are you trying to build a nest egg for when you retire in 35 years, or are you trying to save $10,000 for a down payment on a home three years from now? Your goals will determine everything from the type of account you open to the type of investments you make.
“Write down your financial goals,” said Gary M. Shor, vice president of financial and estate planning for AEPG Wealth Strategies in New Jersey. “This will help to keep you focused with all the noise around.”
You are more likely to achieve your financial goals if you set them based on emotional motivations. “Setting aside 10 percent of your monthly pay isn’t nearly as powerful a motivator as setting a goal to save $10,000 so that you can take your family on a vacation next December,” according to Forbes.
Step 4: Determine Your Tolerance for Risk
Now that you’ve taken the preparatory steps, it is time to start thinking about how and what you’ll invest. This will depend on your tolerance for risk.
Your risk-tolerance level is directly tied to your goals. According to T. Rowe Price, you can afford to take more risk for more distant goals, like saving for retirement, because you have enough time to absorb and recover some losses. Short-term goals, like saving for a wedding or education, require more conservative strategies because the primary goal is to preserve your original contribution, or principal.
Step 5: Allocate Your Assets
Asset allocation means spreading your money among different classes of investments. Your goals, your timeline and your risk tolerance will point you toward the right asset allocation strategy.
Conservative, short-term portfolios generally contain a heavier allocation of safer investments such as bonds. More aggressive portfolios may have a larger percentage of more volatile investments, such as stocks in emerging markets.
Asset allocation also means that you are avoiding the risk of having all you investment eggs in one basket.
Step 6: Control Investment Fees and Costs
You can not predict or control the markets, but you can predict and control costs and fees. Brokers take commissions; fund managers take fees; and the government taxes gains on securities and interest on some bonds.
“Fees matter,” said Stephanie Genkin, a fee-only financial planner and adjunct professor at New York University’s School of Professional Studies. “Before investing in a mutual fund, check the expense ratio. An additional 1 percent in fees could mean 20 percent less for you over decades.”
High costs can quickly negate gains made on otherwise “good” investments. Before you invest, examine the costs and fees in the investment prospectus, a document required to be filed with the SEC.
Step 7: Study Actively and Passively Managed Funds
Mutual funds can be actively or passively managed. Actively managed funds are controlled by a fund manager who decides the contents of the fund’s portfolio and modifies that portfolio throughout the fund’s life. That manager takes a fee no matter how the fund performs.
Passively managed funds, such as index funds, don’t require a manager because they mirror the imaginary portfolios contained within an index, like the Dow Jones industrial average or the Standard & Poor’s 500. Passively managed funds often have significantly lower fees.
Step 8: Determine the Right Kind of Investment Account
According to Vanguard, the type of account you open depends on your goals. If you’re saving for retirement, consider an IRA or a Roth IRA, which come with tax benefits — but also rules regarding withdrawals. If you are saving for something other than retirement, open an individual or joint investment account.
Step 9: Choose a Broker
According to the SEC, only a licensed stockbroker can buy and sell the securities (stocks, bonds, etc.) that will make up a significant part of your investment portfolio. According to TheStreet, this choice has a lot to do with how much money you have vs. the minimum investment requirements of a given brokerage firm.
For starters, full-service brokers often require higher minimum investments and charge higher fees, but they offer one-on-one help and guide investors with advice. Discount brokers, on the other hand, usually don’t provide any service other than executing trades, but they generally have much lower minimum investment requirements and charge much lower fees.
Step 10: Determine How Often You Will Contribute
Every time you contribute, the broker who executes the trade takes a commission, so you should avoid buying securities too frequently. But, on the other hand, the only way to grow your investment is to contribute regularly.
Dollar-cost averaging is a strategy in which investors contribute a certain amount of money on a consistent basis, say $50 a month, without regard to the price per share. The end result of this strategy is that you wind up buying more shares when the price is cheaper and less when it is more expensive.
Step 11: Rebalance Your Portfolio
Congratulations — you’re an investor! Even if you’re contributing a fixed amount on a regular basis, your portfolio still needs some TLC. Portfolio rebalancing — which means buying and selling small portions of your portfolio’s holdings annually — is like a tuneup for your car.
Each security in your portfolio gains or loses value at different rates throughout the year, which changes its weight in your portfolio. Rebalancing adjusts the weighting back to your original specifications.
Step 12: Never Stop Learning
You’ve learned a lot so far, but like martial artists, the best investors are perpetual students. Read up on trends, fall in love with new securities and develop new strategies. As your knowledge grows, your portfolio is likely to grow right along with it.
Learning is the first step — and the last step — to investing. You shouldn’t put off investing, but you should take it slowly, gather knowledge, search until you find a broker who’s right for you and run through your prospectuses with a fine-tooth comb until you understand the fees and costs associated with your investments.
Finally, don’t contribute and then walk away. Your portfolio needs your attention and care to grow to its potential. You’re still young — you and your portfolio have a lot of growing to do.