As college graduates fully enter adulthood and begin their search for jobs and fulfilling careers, there’s another task that they should get started on: saving for retirement.
Responsibilities will begin to pile up and it could be easy to push aside investing, especially living on a tight budget. But getting to work on securing long-term financial stability now will pay off over time, as the magic of compound interest and the benefits of being in the market over the long term add up.
“When you’re exiting school, it is the absolute best time to set yourself up to be a multi-millionaire effortlessly,” said Brad Klontz, a financial psychologist and author.
You don’t need to have a brilliant investment idea or do hours and hours of stock market research to get ahead. Setting-it-and-forgetting-it, as the investing mantra dictates, is the only piece of intelligence that you need to get started.
Right now, it might seem like an iffy time to get started if you’ve seen the recent headlines about volatility in the market. But ignore the noise. The U.S. stock market plunged in April, but it’s already recovered all of those losses. And the point is, the more time you have to invest, the less the short-term noise matters.
“I recognize that it might be very difficult to stay invested right now, to start investing right now … there’s no way to tell exactly when it’s a good time to invest,” said Lan Anh Tran, a manager research analyst for Morningstar Research Services. But she added a point that is more important, and core to success as an investor: “Time in the market beats timing the market.”
Klontz says getting started, getting into the routine of investing at a young age, is key. “It’s sort of just recognizing that anyone can do it. You know, it’s actually pretty easy. Rich people aren’t at their computers trading all day,” he said.
‘Go-to building blocks of portfolios’
“Invest as much as possible,” said Todd Sohn, senior ETF & technical strategist at Strategas Securities.
That may seem to be a high hurdle for a just-graduated college student in search of their first job, but it doesn’t take much, especially if students, who may be back living at home and free of rent obligations, are able to put some portion of any new income into investing. “If you could do it monthly, do it monthly. You know, if you could put away $100 every month, do that because in the long run you’ll be rewarded,” said Sohn.
Index funds, including exchange-traded funds, that invest in a broad market index of stocks, such as the U.S. stock market and international stock markets encompassing several key global regions, can help new college grads get started on a diversified long-term plan. Investors should be more heavily tilted to stocks, also called equities, when they are younger as long as the goal is long-term investing returns — saving up to buy a house within five to ten years, or for a wedding, could create entirely different investing time horizons.
A smaller percentage of investing dollars can be invested in bond funds for diversification across both the stock and fixed-income market. Warren Buffett, the most famous investor of the 20th century, has said in the past that a reasonable plan is to place 90% of investment dollars in stocks and 10% in bonds to “smooth out” returns over time. That’s because the value of bonds typically rises during periods of time when stocks are going down as investors seek safety as opposed to the higher risks associated with stocks.
That mix of stocks and bonds should change over time, and the older you get, the more that may be allocated to bonds. Though current investing wisdom is that even investors nearing retirement, or in retirement, should maintain significant exposure to stocks. In any event, for the recent college grad, that’s a decision for another day.
For now, “I would start with anything that is low cost,” said Sohn. “And low cost is going to be from companies like iShares or from Vanguard or from State Street. Those are going to be your go-to building blocks of portfolios.”
Consider the largest stock and bond index ETFs of all — or in other words, where the most investor money already is allocated across core domestic, international and bond funds — which also tend to have relatively low fees. Remember, even if you can buy a fund without paying a brokerage commission (and you should be able to do that), each fund has a management fee charged annually to its investors, expressed as a percentage of assets under management, or in what are called basis points. As an example, the Vanguard S&P 500 ETF has an expense ratio of 0.03%, or three basis points. That means for an investor with a hypothetical $10,000 in the fund, the annual fee would be $3.
Largest ETFs for stock and bond market exposure
Vanguard S&P 500 (VOO)
SPDR S&P 500 (SPY)
iShares Core S&P 500 (IVV)
Vanguard Total Stock Market (VTI)
Invesco QQQ (QQQ)
Vanguard Growth (VUG)
Vanguard FTSE Developed Markets (VEA)
iShares Core MSCI EAFE (IEFA)
Vanguard Value (VTV)
Vanguard Total Bond Market (BND)
iShares Core U.S. Aggregate Bond (AGG)
Source: ETFAction.com
Constructing a portfolio around core, diversified funds doesn’t mean you can’t take some big swings, so to speak, in the market. In fact, as long as a core, diversified investment plan is in place, taking risk on the edges of the portfolio can add considerable value over time.
Sohn said new investors can start researching themes that they are passionate about, whether that be AI or natural resources or cryptocurrency, and consider more targeted investments that could produce outsize returns. There’s more risk than investing in a diversified fund, but if limited to a smaller percentage of overall investment dollars, say 5% to 10% at most, the approach can pay off — but it does require more research than investing in a few core stock funds.
Whatever an investor chooses to put their money into should be informed by what is referred to as risk tolerance.
Over the long term, investors should not be concerned about any short-term dip in the market, but each investor does need to learn what they are comfortable with, so they don’t make emotional reactions to market swings. The worst thing you can do is make investing decisions in a panic informed more by your anxiety than actual market information. There are ways to calculate risk tolerance, but the main question to ask yourself is, “Will market volatility affect my comfort? And if so, how much?”
While risk may seem like a scary word, or even one that has a negative connotation, risk is exactly what a young investor wants to be taking in the market so they can generate solid returns over a long-term time horizon. That circles back to the set-it-and-forget-it mindset, and the “time in the market” mantra.
Small steps on the road to becoming a market multi-millionaire
Klontz says that there are small steps these investors can take every day to start earning their financial freedom, and a good moment for that first step could be with graduation gift money or when you get your first full-time job paycheck. Whether or not that check makes you feel rich, it’s a pivotal moment in an investor’s life.
“It’s really at that moment in time that you can set yourself up to retire early, a multi-millionaire, or sort of sentence yourself to a lifetime of being the average American, struggling,” he said. There may be thinking about how much to spend on an apartment, a wardrobe, a car, but how much to allocate to the markets has to be part of the debate as college grads begin on the long journey of managing their income for short-term necessities, long-term security, and everything in between. “It’s the mindset that X percent of every dollar I get is going to be invested for my financial freedom.” Klontz said.
Although retirement may seem far away, everyone needs to think of it as being a real part of their lives.
“It’s so easy to say ‘I’ll worry about that later.’ I think it’s sort of human nature to do that in general, especially when it comes to abstract things.” Klontz said. “And the problem is that it’s really, really abstract, this abstract notion of retirement.”
And that highlights what may be the most important advice of all when it comes to getting started. Taking action is imperative in investing, Klontz said.
