It’s Financial Wellness Month, and if your new year’s resolution was to get your personal finances in order, we’re here to help. In this series, we’re tackling the most common topics our Certified Financial Planner™ professionals get from Origin members.
First up, is all about investments.
We help a lot of people who are newbies to the world of investing. While investment portfolios can seem intimidating or complex, it doesn’t have to be.
As a newcomer to the world of investing, you probably have questions like:
- Should I be investing?
- Where should I invest?
- When should I invest?
- How do I get started?
- What about cryptocurrency?
Here's a cheat sheet for you.
Should I be investing?
We recommend investing when you have your financial ducks in a row, which means you have a reliable income, no high-interest debts (such as credit card debt or personal loans), and an emergency savings fund that covers between 3 to 6 months worth of expenses. Between job losses, unexpected medical bills, car repairs, or home expenses—you don’t want to be caught without cash savings account to cover these expenses.
Tip: If you’re an Origin member, set up a 1-on-1 meeting with a Certified Financial Planner™ at no cost to you to assess your current financial situation. Not an Origin member? Here’s a blog about how to ask your employer for financial wellness benefits.
Where should I invest?
There are many different ways you can invest, and it’s important to remember that all investment types come with risk. Here are the most common types of investments.
- Mutual funds
- Exchange-Traded Funds
- Real estate
- Real Estate Investment Trusts
Editor’s note: For further reading and to learn about the differences of these types of investments, check out “A beginner’s guide to investing,” which covers the basics of building a solid investment portfolio in easy-to-understand terms.
When should I invest?
Investing comes with risk. Determining “when” to invest involves utilizing asset classes while keeping in mind your timeframe. Will you need to pull your money out in a couple of years to purchase a home? Or are you OK with investing this money for the long-term?
Short-term investments (0 to 3 years)
Let’s say you are trying to buy a $300,000 home in the next 12 months and have $60,000 saved for a downpayment. Where should that money sit for the next 12 months?
Since you need the money in the short term, we recommend keeping it in cash, or a high yield savings account. We would not recommend investing it, as there is a significant risk that you could lose money over a 1-year time horizon.
Intermediate-term investments (3 to 10 years)
Let’s say your home purchase timeframe is about 5 years, and you have $20,000 of the $60,000 down payment saved. Your time frame allows you to think a little differently about where that $20,000 can be put.
We might recommend an investment allocation of 60% bonds and 40% stocks. The larger allocation to bonds helps dampen the volatility of the investment, while the stock portion helps boost expected returns.
Long-term investments (10+ years)
If your home purchase is in the distant future, you might want to invest more aggressively. For example, a portfolio that is approximately 10% bonds and 90% stocks (even 100% stocks) may be appropriate.
Though there will be more volatility, you don’t need the money in the near term so you are able to withstand that volatility. Also, because of the higher allocation to stocks, you can expect a higher return over this time horizon.
How do I get started?
You can elect to self-manage your own portfolio to save investment fees or select a portfolio manager that fits your investment objectives.
Tip: Origin members can partner with their Certified Financial Planner™ on their Origin investment account to optimize and automate their investments. Learn more about Origin Investments.
To self-manage, determine what you want to invest in, then decide which custodian (brokerage firm) you’ll use to place your trades and hold your brokerage account. When deciding where to open your brokerage account, it’s important to note that trading some securities may incur transaction costs each time you trade.
If you stay within the fund family, typically the transaction fees to buy and sell their own funds will be waived.
For example, if you plan to buy Vanguard securities, you should open a Vanguard brokerage account because Vanguard will allow you to buy and sell Vanguard proprietary funds transaction cost-free. This is true with most custodians.
Using an investment manager
When selecting an investment manager, consider their investment style and make sure it is consistent with your goals.
For example, some managers will select broadly diversified index funds (passive investing) and others will select individual companies to try to beat a target index (active investing). The indexed approach tends to be much less expensive. Active managers may sometimes justify their fees through performance, however, it is difficult for active managers to consistently outperform index returns in many markets over time.
If you choose to use an investment manager, you will pay management fees in addition to any expenses and fees associated with the funds as described above. Management fees may be charged as a flat rate or a percentage of assets managed assets (i.e. .25%-1.5% per year).
A word about cryptocurrency as an alternative investment
Alternative investments refer to investments in asset classes besides stocks, bonds, and cash (“traditional assets”). Cryptocurrency is a digital form of money to buy and sell goods virtually. Given its relatively recent inception, crypto has positioned itself as a new form of currency and as a new asset class for investors.
Even though some cryptocurrencies have boasted massive gains in a relatively short period, several investors still view crypto as highly speculative. The problem with crypto as an investment is that it doesn’t generate actual cash flow. So, to profit from your crypto investment, someone else must pay more for the currency than you did.
In its relatively short history, crypto has exhibited unprecedented volatility. For example, Bitcoin traded at $20,000 in December 2017, plunged to $3,200 one year later and skyrocketed to record levels in December 2020. For this reason, financial professionals will typically advise against putting retirement funds or near-term funds in crypto since the future growth prospects are highly unreliable.
At Origin, we consider cryptocurrencies as an asset class that belongs in your “speculation” bucket. Despite impressive gains, no one knows whether it will exist over the long run, and if it does, we don’t know which type of crypto will succeed.