Tag Archives: stocks

Investing in Your 20s – It’s the Chance of Your Lifetime

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No matter how old you are, it is never too early to start investing. Whether you are in high school, college or just finished school, now is the time to start putting money toward securing your financial future. The good news is that it is easy to start investing no matter how much you have to invest, what your risk tolerance is or what your goals may be.

How Do You Start Investing?

The first step to becoming an investor is to find a broker to trade with. Most brokers allow you to make your own trades online in a matter of seconds. They will also have access to charts, analysis and news to help you make informed trading decisions.

Some brokers also offer training courses that help new investors learn the basics of investing as well as how to use the charts and tools that they offer. The broker that you choose depends partially on how much help that you want or need making investment decisions as well as how much that you have to invest at the moment.

How Much Do You Need to Start Investing?

Some brokers such as Charles Schwab will allow you to start investing with no minimum balance. Therefore, you can start contributing to an index fund with as little as $1 if that is all you had to invest or all that you wanted to put in for now.

Newer brokers such as Betterment or Motif require anywhere from $100 to $300 to get started whereas some mobile investing apps have no limits. If you invest with Fidelity, Vanguard or similar brokers, expect to need at least $1,000 to gain access to their stock or mutual fund offerings.

Why Should I Start Investing Today?

Compound interest is one of the most exciting concepts that you will ever learn. It is also the reason why you need to start putting money into the market today no matter how much or how little you have to get started with.

Let’s say that you bought stock worth $100 at age 30 and earned the historical average return of 11 percent per year. When you were 60, that $100 would be worth $2,289. However, if you put that $100 into the market when you were 20, you would have $6,500 by age 60 assuming an average 11 percent return.

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What Should I Know About Broker Fees and Capital Gains Taxes ?

It is important that you account for taxes and fees whenever you make an investment decision. When you first start investing, you will likely look to buy and hold a stock or index fund for many years. This is because most brokers charge a fee of $5 to $8 for each trade that you make. If you only have $100 in an account, that $8 may represent your return for an entire year.

When it comes to taxes, it is important to note that you only pay tax on the profit that is made on a given investment. Your profit is any gains above your cost basis, which is the price of the security plus any fees paid to buy or sell it. Therefore, if you bought a stock for $10 and paid $5 to buy it, your cost basis is $15. If you sold the stock for $20, you would pay capital gains taxes on $5.

If you are in the 10 percent tax bracket, you pay nothing in federal capital gains taxes. However, you may be required to pay state taxes on all capital gains. If the money is held in a traditional IRA, you don’t pay capital gains taxes while securities are in your account. Instead, you pay ordinary income taxes on any money that you withdraw when the withdrawal takes place.

Should I Open a Roth IRA or 401k Instead of a Traditional?

When you invest in a traditional IRA or 401k, you get a tax deduction in the year that the contribution is made. However, if you choose to open a Roth account, you use after-tax dollars to contribute to your account.

The benefit is that the money in your account grows free from capital gains taxes. Furthermore, it is not subject to income taxes when it is withdrawn because the money was already taxed.

Ideally, a person will invest in both a traditional and Roth IRA or 401k to reduce their tax burden both today and in the future. As a Roth IRA is subject to income limits, it may be best to contribute to a Roth 401k as there are no income limits and contribution limits are higher. A 401k is a retirement account provided by an employer, and those who are self-employed may open one on their own.

If you are serious about securing your financial future, you should start investing as soon as you have a few extra dollars to do so. Those who aren’t sure what their financial goals or timelines are may benefit from speaking with a financial adviser. This person may be able to help you create short and long-term goals as well as different investment strategies to make it easier to meet them.

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Please remember to check with a financial professional before you ever buy an investment and to read my Disclaimer Page.

100 Percent Invested in Stocks

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Purity You Can Taste

Do you think you have the risk tolerance to invest 100% of your portfolio in equities?  I had an asset allocation of 100% invested in equities for over 10 years.  At this stage in my life, However, I no longer have the need or desire to have that asset allocation.  That was how my portfolio was invested when I reached my first milestone of Saving $100,000 by age 30.

This is the first of a 4-post series about my asset allocation.  This series on asset allocation is about my asset allocation at different points in my investing career.  The series is based on where I started, what happened, where I am at now, and were I will be heading based on age and risk tolerance.

My investing career began in 1997.  This was a time Alan Greenspan referred to as a period of irrational exuberance.  The stock market was soaring.  The S&P 500 had an average return of over 15% per year from 1989 to 1999.  If a person invested $100 in the Vanguard 500 Index Fund (VFINX) in 1989, it would have grown to $692 by 1999.

In 1997, I purchased my first mutual fund.  My first fund was the Vanguard 500 index fund (VFINX).  This was the only investment that I owned from 1997 until 2000.  I would purchase at least $500 worth of this funds shares per month.  Over that 3-year period, the Vanguard 500 averaged a return of nearly 20% per year.

In 2000, as the result of my savings and market returns, my portfolio was large enough to add more funds.  To improve my diversification, I wanted to add small caps and international stocks to my asset allocation.  I added the Vanguard Extended Market Index Fund (VEXMX).  By adding the Vanguard Extended Market Index fund to my portfolio, I could replicate the total stock market because I already owned the Vanguard 500 Index Fund.  The third fund that was added was the Vanguard Total International Stock Market Index Fund (VGTSX) for international exposure.

My asset allocation was:

Vanguard 500 Index Fund – 60%

Vanguard Extended Market Index Fund – 15%

Vanguard Total International Index Fund – 25%


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As far as equities are concerned, my new portfolio was diversified.  It contained every major publicly traded U.S. and international stock.  In my mind, I was ready for the new century and another decade of 20% annual returns.

It did not take long for things to change for the worse.  In March of 2000, the dot.com bubble burst.  On September 11, 2001, New York City and Washington D.C. were attacked by terrorists.  By 2003, the U.S. was fighting two wars in Afghanistan and Iraq.  Those unfortunate events drove the U.S. economy into an extended recession.

As the result of those events, the stock market posted losses for three consecutive years.  The average annual  return on my portfolio was a loss of -16%.  In other words, if I invested $100 in January or 2000, it was worth $61 by January of 2003.

How did I handle the prolonged recession and market contraction of the early 2000s?  Honestly, I stayed the course.  I dollar cost averaged the same amount of money into my investments every month.  My goal was to reach financial independence, so I rode out those volatile markets and took advantage of buying equities at a reduced price.  I would, however, feel unnerved when I paid attention to the media.  Fortunately, I was too busy working and going to college to become obsessed with the media.  I honestly do not remember ever feeling overly panicked during this period.

My patience did ultimately pay off.  By sticking with my allocation, I was rewarded handsomely between 2003 and 2007.  Over the course of those next five years, my portfolio had an average return of more than 16% per year.

During my first 10 years as an investor, my portfolio returned slightly more than 8.5% per year.  This asset allocation, however, was extremely volatile.  The best year returned 34% and the worst year had a loss of -20%.

An asset allocation of 100% invested in stocks is not suited for every investor.  It worked for me because I was young and able to dollar cost average when the market was both up and down.  This type of volatility does cause many investors to sell low and buy high.  That is a losing game if you want to reach financial independence.  If you cannot honestly handle a -40% drop in the value your portfolio, then a portfolio made up of 100% stocks might be too aggressive for you.

There is a simple solution if the volatility of a portfolio invested in 100% stocks causes you to feel insecure.  Add a percentage of bonds to your portfolio that matches your risk tolerance.  In my next post, I will write about how adding bonds to my asset allocation reduced the market volatility of the next decade.

Please remember to check with a financial professional before you ever buy an investment and to read my Disclaimer page.

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