You’ve just landed a new job — perhaps it’s your first job — and for the first time in your life, you’ll have enough money to create an investment portfolio. Woo-hoo!
But investing for beginners can be tricky.
Questions to ask yourself: How should you deal with investing your money? Should you go the do-it-yourself route? Should you hire a financial adviser? Or should you use a robo-adviser? All 3 options have pros and cons.
Which investing route is right for you?
- You are self-sufficient.
- No advisory fees.
Get a financial adviser
- You want the gold standard of setting a financial plan.
- Advisory fees plus fund expenses.
- You prefer technology over sitting with someone in an office.
- Lower fees.
As for doing it alone, “the big benefit is cost savings,” says Christine Benz, director of personal finance for research firm Morningstar. “You won’t have to pay an extra layer of advisory fees.” Advisers typically charge an annual fee of 0.75% to 1% of your assets, she says, on top of fund fees.
In the current market environment, with stock and bond prices at very lofty levels, “the raw materials for great market returns aren’t there,” Benz says. “So do you really want to turn over a large chunk of your money to an adviser?”
On the other hand, self-sufficiency isn’t for everyone. “If you don’t know what you’re doing, you may cost yourself more than if you just went with an adviser,” Benz says.
In the beginning, throwing money in a low-cost index fund can be a good place to start until you get up to speed with investing. But fear or greed can wreak havoc on your portfolio. “You don’t have a sounding board, a check on your emotions. That’s where advisers can offer a lot of value — protecting investors from their own worst instincts,” Benz says.
Another benefit of financial advisers
“They are the gold standard if you need someone to provide a financial plan,” she says, including help with insurance and tax planning, for example. “You can get a holistic view.” As for the fees, “a good adviser can earn that fee back many times over.”
And you don’t have to pay an annual fee. “There are planners who charge by the hour, such as many in the Garrett Planning Network and the National Association of Personal Financial Advisors,” says New York City-based financial adviser Tom Fredrickson, who’s a member of both groups.
Robo-advisers for those with a technology bent
The fees for robo-advisers, an automated investing service, are much lower than those charged by financial advisers because you aren’t paying for human contact. And robo-advisers generally put your money in exchange-traded funds, which have low costs.
For example, Wealthfront charges no fee for the first $10,000 of your assets and a 0.25% annual fee on amounts above that. (This doesn’t include your ETF fees.)
Robo-advisers may be particularly appealing to younger investors. “They might be more comfortable with technology than sitting with someone in an office talking about a financial plan,” Benz says. “The problem is they can never be completely holistic.”
Again, investing for beginners can be tricky. So which route is right for you? It’s really a matter of personal preference.
Whichever way you choose to go, Fredrickson says, “the most important thing is a commitment to save a regular amount — perhaps 10% to 20% of one’s income.”
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