Getting Started: A Foundation For New Investors, Part 2

Last month, we began our series for new investors who are anxious to get started. Investing can be daunting for beginners, but we aim to alleviate some of the most common fears. Let’s look at these common concerns, and how best to address them:

“I don’t know anything about the stock market.”

This is easily the most common concern for new investors, and it’s understandable. While the global securities market isn’t the easiest thing to understand, it also isn’t the most complicated thing, either. Movies and television make the stock market look like quantum physics. Spoiler alert: it’s not.

Also, there are ways to invest without having to fully comprehend every nuance of the global securities markets. Hire a financial advisor, invest in low-cost index mutual funds and ETFs, or use target date funds in your retirement plan. Utilizing these tools often simplify investing for the average person, and calms those initial fears they might have.

“I don’t even have enough money to invest.”

Even if you understand financial topics like a seasoned professional, if you don’t have enough money to invest, then investing is not feasible. This is obviously true. And, unfortunately, many people legitimately do not have excess funds to invest after monthly household bills are paid. However, many people do have extra money to invest, but it might be such a small amount—say, $50-$100/month—that they believe investing the extra $50 won’t make much of a difference. Wrong. It will make a huge difference. Over a long time, yes, maybe 10 or 20 years, but it will make a huge difference. This is why starting to invest early, even in small amounts, into a 401(k), 403(b), or IRA is so crucial. Let the magic of compound returns work in your favor.

“I get worried about losing it all if the market collapses.”

Markets sometimes go down. Sometimes they go down significantly. But they always go back up, which means market downturns are temporary. “Losing it all” is a very real fear for new investors. They’ve worked hard for their savings. But proper portfolio diversification significantly reduces risk to your investments. Yes, investing in a single highly volatile, speculative stock might risk “losing it all”. Sinking your life savings into your college buddy’s new restaurant might risk “losing it all” too. But smart investors don’t make such errors, and such errors are easier than ever to avoid.

“I do want to invest, but I don’t know where to start.”

So, you have money to invest, you feel you’re knowledgeable on the topic, and you’ve accepted the inherent risks of investing. Where should the money go? How much should you invest each month? What funds should you buy? In other words, where should you start?

First, determine how much money your monthly budget would allow for investing. Emergency savings and monthly bills should not be sacrificed in order to invest.

Second, the easiest and most tax-efficient way to begin investing is to set up a deferral of a portion of your wages into your employer’s retirement plan, usually a 401(k) or 403(b). Opening an IRA is the best option if your employer does not offer any such plan. Each pay period, defer a comfortable amount of your wages into your retirement account.

Third, you will need to actually invest the money you put into your account. Most plans offer target-date funds as options. If your plan does offer these, invest your deferral amount into the target-date fund that corresponds to your approximate retirement year. Keep it simple. IRAs also allow you to invest in target-date funds. If your plan doesn’t offer target-date funds, low-cost stock and bond index funds are a good alternative.

Those three steps, truthfully, would take about an hour of your time, require only a basic understanding of finance, and will help you begin a lifetime of smart investing.

“I don’t want any additional tax hassles.”

Investing does raise the possibility of increasing your annual tax liability. However, it could also reduce your annual tax liability. Deferring and investing into a qualified retirement account—401(k), 403(b), IRA—with pre-tax dollars actually reduces your taxable income for the year in which you made the deferrals. For example, if you saved $10,000 in 2022 into your 401(k), your taxable wages for 2022 are reduced by $10,000, even if that $10,000 investment grew over the course of the year. You will owe income taxes on 401(k) distributions once you’re retired, but there are tax advantages in the near term.

Investing outside of a qualified plan might trigger additional taxes. Dividends are taxed like normal income. Selling an asset at a gain will likely result in taxes being owed, but only when they are sold.

Investing does have some tax implications, for sure. So does getting a massive salary increase, yet nobody is likely to refuse an extra salary because of tax concerns.

Bottom line: investing is smarter and easier than ever before. Get started early. Get started with the basics. Learn as you go and hone your investment knowledge. We’re here to help, as always.

Next month, in the final part of this series, we’ll address some of the more complex questions new investors often have that go beyond the “getting started” phase.

Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice.

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