What should I invest in?

More than any other topic, people seem to be totally befuddled by investing – especially people who’ve never tried it! Investing is actually far easier than most in the financial industry want people to believe. Everything I’m about to suggest can be done alone and without the help of a paid financial advisor!

When it comes to investing, there are really two questions: First, where to invest and, second, in what? I already took a stab at the “where to invest” question here. Keep reading this post for more info on “in what” to invest.

If you think you’ve got a handle on where to invest, the question of “in what” to invest is easier still. For a first time investor, the choice I believe should be between one of two options. First, if you just want to “set it and forget it”, invest everything in a Target Date Retirement Fund. These “funds of funds” include ETFs or mutual funds that, in turn, hold thousands of stocks and bonds from all over the world.

They are special for two reasons. First, they automatically rebalance every year to maintain a certain asset allocation (i.e., your proportion of stocks to bonds or domestic to international assets). Second, they gradually become more conservative over time (i.e., invest more heavily in bonds) to automatically try to protect your savings. Contributing exclusively to these funds means never having to really think about investing, at least, not any more than you think about your savings account – like I said, investing is easy! The “catch” is that you pay a little more in fees than if you managed this yourself.

And what if you want to manage your own portfolio more? First, check out the same Target Date Retirement Funds and see what they’re invested in. Or, check out some “robo advisors” like Betterment or Wealthfront – you’ll find all of these choices are invested in basically the same core groups of investments. Start off by mimicking one of these “funds of funds”. Then, gradually and carefully, adjust your allocation as you see fit.

Or, want to keep things even more simple? For most young people, here is an easy choice: just load everything into “total stock market” ETFs. These ETFs cover the world market and generally have very low fees. You won’t max out return or beat the market, but that’s not the point for first time investors. As your personal knowledge and investment safety net grow, you can try investing in other funds.

Thinking you want to be a little more creative? Well, in my opinion, first time investors should not try to get too creative! But, after setting up a good foundation, there are plenty of alternative investments to consider, such as peer-to-peer lending, REITs, investing in a small business, and so on. Dip your toes in as you learn about these options.

If you’re worried about making a bad investment, consider what the biggest pitfall is – by far: simply not investing. Many young people are struggling with other financial obligations like paying off student loans or meeting rent every month. And when these people do have some savings, they are less likely to invest than older generations.

I have a friend who managed to save up $50,000 in his first three years working in tech (it helps to live with your parents). But he didn’t invest a penny, back when the market was going up 25%+ years in a row. Being so risk averse cost him tens of thousands of dollars in missed returns. While it worked out for him in the end, a lifetime of leaving money in savings could leave millions of dollars on the table.

We advisors often focus on investment returns, but this is really the wrong idea for people who are just getting started with investing. For at least the first decade, the vast majority of a person’s investment portfolio is going to come from their own contributions – and not their investments returns. Said another way, if the goal is to increase the size of your investment portfolio, the biggest issues are how to increase income, decrease expenses, and save more every year. The investing itself is actually pretty straightforward – the real trick is how to save up to purchase those investments in the first place!