As you read this, give yourself two big pats on the back: One for putting in the work to earn your college degree and one for finding this article.
The fact that you’re here shows you’ve already taken the most important step toward financial freedom by starting your investment education.
Often, the biggest hurdle to investing is simply a lack of knowledge. The prospect of learning how to invest can feel so overwhelming that many put off starting altogether.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more – straight to your e-mail.
Profit and prosper with the best of expert advice – straight to your e-mail.
But the good news is that investing doesn’t need to be complicated, nor do you need to study for it as if there will be a final test. All you need to do to start investing is to start investing.
That said, just diving in with no preparation can lead to some potentially costly blunders.
And while you likely have enough time on your side to recover from any near-term mishaps, a bit of advice beforehand can pay off in the long run. So here is the best investing advice for college grads, according to financial experts.
1. Build an emergency fund first.
You wouldn’t build a house without ensuring the foundation is solid first. The same holds true with investing. Before you get serious about investing, make sure your financial foundation is sturdy with an emergency fund.
“One of the shortest paths to derailing a financial plan is when unexpected expenses snowball into a debt cycle,” says Ashley Weeks, a wealth strategist at TD Wealth.
He recommends having at least four months of living expenses in cash put aside. This will help prevent unexpected events from forcing you to sell your investments to make ends meet.
One of the biggest mistakes young investors make is putting off saving until some vague point in the future when they expect their finances will be more in order.
“My experience has been that employees who don’t enroll in their company’s retirement plan early often wait years before enrolling,” says Andrew Crowell, financial adviser and vice chairman of Wealth Management at D.A. Davidson & Co.
You can’t get back the years you skip contributing. And it’s the earliest years that have the biggest long-term impact on your savings.
As an added bonus, your pre-tax contributions are generally not taxable, so the more you put in, the lower your taxable income, says Beth Stenz, a financial adviser at Edward Jones. “Plus, your earnings can grow on a tax-deferred basis.”
Make sure you contribute at least enough to get your full employer match in your workplace plan, if your company offers one. That’s free money.
3. Make investing automatic.
The best way to simplify investing is to automate it. Most workplace retirement plans, like a 401(k), will automatically funnel a portion of each paycheck into your retirement account.
But you can also set up automatic investments to many external brokerage accounts. Simply search for “automatic investment” on your broker’s website to see if this feature is available.
“The benefit of automatic investing is that it takes no ongoing effort to remain on track with a savings plan, and contributions are made before the money can be spent,” Weeks says. “It also preempts the temptation to try and time the market, which almost always results in underperformance. “
4. Begin paying down debts.
Alongside an emergency fund, minimizing debt helps make your financial foundation sturdier.
If you’re like many new graduates and have debt, such as student loans, staying on top of your payments should be a priority, according to Stenz.
Falling behind on payments can lead to late fees and other problems. The good news is that this is another opportunity for automation.
“Consider enrolling in autopay, which will help you stay current on your loan and possibly earn a rate reduction,” Stenz says.
Equally important is to avoid taking on more debt. “Interest can really add up over time and eat away at other financial goals,” Crowell says.
If you have debt from multiple sources, focus on paying off the highest interest-rate debt first. This will save you the most over the long term.
Lower-rate debt can be paid off more slowly, and alongside your retirement savings.
5. Don’t be afraid of risk.
Young investors have one major asset when investing: time. You likely have decades to invest and ride out any market volatility if you’re saving for long-term goals.
This means you can afford to take a bit more risk in your portfolio by investing primarily in stocks rather than bonds.
Just remember to keep that long-term perspective when the markets get shaky. This will help you look past short-term fluctuations, avoid the temptation to time the market and increase the likelihood of long-term success, says Nick Liolis, chief investment officer at Guardian.
That said, if you find yourself wanting to sell your investments at every bump in the market, you may need to reduce the risk level in your portfolio. You should aim to invest with as much risk as both you and your finances can tolerate.
Short-term goals and sensitive stomachs require a more conservative approach.
6. Diversify, diversify, diversify.
You may have heard realtors say it’s all about “location, location, location.” Well, the same is true in investing. Only here, you want to use as many “locations” as possible through diversification.
This entails spreading your dollars across different asset classes and investment types.
“Diversification protects against both known and unknown market risks,” Liolis says. If you own only Stock A and Company A goes out of business, you’ve lost everything. But if you have a little bit of 26 different stocks, losing some money on Stock A won’t derail your entire portfolio.
Diversification isn’t just a numbers game where more is always better. It’s a location game. Holding 26 stocks in the same “location” won’t do much good. Instead, you want each of your investments to be unlike the rest.
“Aim to diversify across as many factors as possible for optimal protection,” Liolis says. For example, you should invest across different market sectors, geographic regions and company sizes.
7. Don’t get excited.
Your college years may have been full of excitement, but this is the last thing you want in your investments. Investing shouldn’t make your heart race, and any guidance that does spike your pulse is likely bad advice.
“Investing should be like watching paint dry, not betting on a horse race,” says Wes Crill, senior client solutions director and VP at Dimensional Fund Advisors.
Think slow and steady, rather than adrenaline junky. It can help to focus on the elements you can control – keep costs low, diversify and invest early and often – rather than chasing the ones you can’t, like investment returns.
“At the end of the day, there’s no magic blueprint for accumulating wealth any more than there is with dieting or exercise,” Crill says. “Instant gratification schemes advertised on social media are no match for consistency and discipline.”
