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This is part 3 of a 4 part series on investing:

  1. Why Should I invest?
  2. What’s the fee? We hear about fees all the time. What should you really look for?
  3. Options to DIY it: the pros, cons, and how exactly to get started.
  4. When should you bring in a professional? And how much do they cost?

 

Part 3: Options for DIY Investing. 2 Easy Ways to Start.

I was 22 when I started investing, and like most people, I didn’t know where to start. I knew I wasn’t ready to meet with a financial advisor – I had something like $1,000 to invest – but I wasn’t sure what my options for a semi-DIY approach were.

I ended up opening a brokerage account with my bank, acted like I was a day trader (not my finest moment), and quickly realized I should learn a little bit more before I made any more bad moves.

Today there are so many more options for the DIY or semi-DIY investor, but they’re still a little overwhelming.

I’ve sat down with my girlfriends to walk them through the process of

  1. choosing a brokerage company,
  2. opening an account,
  3. and picking investments.

It’s made me realize that though we have so many options to choose from today, it can still be really difficult to pick a brokerage company and get started. This article will hopefully give you additional help and motivation to find the investing approach that works for you.

As you know, this isn’t personalized financial advice. I’m laying out two simple ways to get started – there are more. And investing comes with the risk of loss of your money. But you already knew that.

 

DIY Approach with Vanguard:

There are a lot of low-fee brokerages that you can use if you’re going the DIY route for investing. I’m just going to talk about Vanguard because that’s what I’ve used nearly my entire adult life. (need a refresher on what a brokerage is? See this article for your pocket guide to investing.)

 

What do they offer?

Vanguard is famous for their low-cost index funds. In fact, they were the first company to offer index mutual funds to individual investors in the US. If you need a quick refresher on what an index fund is, you can find that here and here.

They offer a variety of different accounts including the following:

  • retirement accounts
  • taxable investment accounts
  • college savings accounts

When choosing investments, you can select an “all in one” fund or pick different investments individually.

With an all in one fund, you pick how long you want to hold onto an investment and how much risk you’re comfortable with. Then, they will suggest a mixture of different investments designed to help you reach your goals.

An easy example of this is when we invested in the Nevada 529 plan for our son Henry’s education. We input his age, the date we think he will start college, and how risky we wanted to be with the money. Since Henry is 3 months old, the money is currently invested in riskier stock funds. As he gets closer to college, the money will shift to funds with less risk, like bond funds. This happens automatically as part of an “all in one” option. We don’t have to do a thing once it’s set up.

If you invest in individual funds, you research the funds and decide for yourself which ones you’d like to invest in.

For example, you might decide that you want to have some stock index funds, some bond index funds, and some CDs. You would decide how much of each you want to buy and buy each investment individually.

If you want to make changes over time – say you decide you want more bond funds than stock funds – you would do that manually.

 

Where do you find information on fees and performance?

On their website under “Investment Products,” you can see details for different individual funds. You’ll find the fund name, the expense ratio (fee), and the previous average annual returns.

Just remember that past performance does not predict future performance. A fund that has performed well in the past isn’t guaranteed to perform well in the future.

One of Vanguard’s big selling points is that they have very low fees (their fees are the expense ratios in the table below). You can find more details about their other fees here.

How do you get started?

You can create a personal account on their website. You then have a lot of different options to explore, including the following:

  • what type of account you want to open (taxable, retirement, college savings, etc) and
  • what type of investments you’d like to buy (stock index funds, bond index funds, actively managed funds, CDs, individual stocks, etc).

Account minimums range from $1k-$3k.

 

What are the drawbacks?

I find parts of their website to be a little confusing.

For example, it always takes me a while to click around and find where the automatic monthly transfers are. Also, if you have no idea where you want to start investing, there’s not an easy to use guide that walks you step-by-step through decisions, like you’ll get with robo-advisors.

 

What if you want more help?

They offer personal advisory services for an annual fee of 0.3% of your total assets. If you have $100,000 invested with them, your annual fee will be $300. This service is more robust than that of a robo-advisor, but the service is only available to people who have $50k or more to invest.

 

What do we personally use it for?

A lot. I have my Individual Retirement Account (IRA) with them, Jordan and I have joint taxable investment accounts, and we have our son Henry’s 529 college savings plan with them.

 

Looking for similar options?

You can check out Fidelity and Charles Schwab for similar low-fee investments.

 

Robo-Advisor: a semi-DIY approach with Wealthfront

You’ve probably heard a lot of buzz around the robo-advisors. They’re a low-cost way to help people invest with just a little more hand-holding than the Vanguard option above. There are a lot of robo-advisors out there, but I chose Wealthfront because of their low fees and because the author of my favorite finance book, A Random Walk Down Wall Street, is their Chief Investment Officer. 

 

What is robo-advisor?

A robo-advisor offers a little more hand-holding than going with a company like Vanguard but doesn’t have the personal touch of a human advisor.

When you open an account with a robo-advisor, you’ll be asked a series of questions to help them gauge your goals, priorities, and risk level. Based on that questionnaire, they’ll suggest different accounts for you to open as well as a mix of investments.

 

What do they offer?

Just like Vanguard, they’ll use index funds or Exchange Traded Funds (ETFs) to build your portfolio. You won’t be invested in individual stocks.

The whole process is automated and once it’s set up, you don’t have to log in and make any changes. The software will manage your investments for you.

 

What are the fees and account minimums?

Because a robo-advisor offers continual management compared to investing in funds directly on your own, they charge management fees. With Wealthfront, I pay a 0.25% management fee on the money that I have invested with them, plus the actual fees on the funds (the expense ratios).

In the screenshot below from my account, they break down exactly what fund I am invested in and what the expense ratio for that fund is. I’m paying 0.04% for the Vanguard fund that I’ve purchased through Wealthfront plus the 0.25% annual management fee.

The fees are higher, yes, and I technically could’ve purchased that fund directly from Vanguard. But Wealthfront will automatically rebalance my portfolio so I don’t end up with too much money in one fund and too little in another. Therefore, my risk level stays exactly where I want it. That is important for me.

They also do something called Tax Loss Harvesting.

It sounds fancy, but the idea is that when an investment does poorly, you can sell it to offset the taxes you’d pay on the investments that made you money.

The goal is to save you money on the taxes you pay.

 

How do you get started?

With their easy-breezy questionnaire. You can actually start the questionnaire before signing up for an account. After the questionnaire, they’ll suggest the type of account you should open as well as the mix of investments you should purchase.

What are my investment options?

After filling out the survey, Wealthfront gives you their suggestion to build a portfolio for you. My risk tolerance from the survey put me at a risk tolerance of 10.0 (out of 10) and an investment plan that looks like this:

Be honest when filling out the survey so you can get a risk tolerance that’s right for your situation. I have a 10 out of 10 risk tolerance. I let it roll.

This is because this is a taxable account that is separate from my retirement, Henry’s college fund, or any money that we plan to use relatively soon. I feel really comfortable taking on more risk here and I won’t panic if I lose money in the short term.

 

What if you want more help?

There’s no human option here, aside from technical support, but they do have a tool called Path that can help you visualize your financial future.

You can put in different amounts to save and invest to see what that does to your future retirement or college savings.

 

What do we personally use it for?

A taxable investment account.

 

What are some similar options?

Any other robo-advisor will offer similar services with fairly similar fees. Some options are Betterment, Ellevest, Wealthsimple, and Personal Capital*.

*Note: I use Personal Capital’s free account aggregator, but not their investing options. See my video tutorial and a full review of Personal Capital here.

 

How do you know what’s right for you?

Read their websites and reviews and pick up the phone to call a prospective company.

It was overwhelming to look at all of the options out there when I got started and calling different companies actually helped ease my concerns about the process.

Be honest with yourself about whether you’d prefer to take the time to DIY or if you’d rather have a set it and forget it attitude.

You’ll also want to consider how you would act in a downturn. Are you the type of person that might panic and sell investments when the market declines? If so, a DIY approach might cause you to make decisions that aren’t in your best interest.

And if your still not comfortable with either approach outlined here, next up in this investing series, we’ll talk about when you might consider bringing on a professional.

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