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Investing for Beginners: What to Know and How to Start
Good morning. Thank you for joining us today and taking time out of your schedules to dig deeper into your future finances. I'm Pat Wilker, head of Wealth Management Advisory Centers for U.S. Bancorp Investments.
Hi, and I'm Missy Frigaard. I'm a practice management consultant at U.S. Bancorp Investments. And it's absolutely our pleasure today for Pat and I to discuss some of the basics of investing with you. We'll talk about what you need to know and how we can help you get started.
So during the course of this short presentation, we're going to explain some common myths as it relates to investing. We're going to answer frequently asked questions. And then explain how getting started or diversifying your investment strategy can be easier than you think. We'll talk about investing in the current environment, given the election, the economy, and the pandemic.
And a couple of housekeeping items before we get things started here. You can adjust your view by moving and resizing each of the windows on the screen. And if you're having any technical issues, submit your question in the Q&A tab below. And at the end of the presentation, if you'd like one of our advisors to reach out to you, you can fill out the Contact Me tab. And lastly, be sure to take note and check out the Resources tab, as well.
Perfect. So let's get started.
So when you received the invitation to this webinar or if you've received emails or seen ads regarding investing in the past, you may have noticed that these pieces are labeled as being from U.S. Bancorp Investments. And you might be more familiar with U.S. Bank. U.S. Bank is the common name of the company that manages your banking-related products. So that's your checking account, your credit cards, and your mortgages. U.S. Bancorp Investments is an affiliate of U.S. Bank that provides all the investment and insurance products and services.
And from a legal and compliance standpoint, these two need to be clearly separated when talking about different products. That's why you might see a difference in logos or even email domain names. But for you, the customer, it's a seamless experience.
For example, one of the benefits of working with us is that you can see and access all of your accounts-- whether that's checking, savings, investments-- all under usbank.com dashboard. It also makes opening new accounts or transferring money between accounts very easy.
Perfect. So now that we've clarified that, we want to talk to you about why you might invest in the first place. So if you have some money to spare, you could be telling yourself, I'll just put it in a savings account. Now while savings accounts are a great low risk option, their interest rates are typically, far lower than the returns you might see from investing over time. That's why savings accounts are great for short-term needs like growing and maintaining an emergency fund or saving for an upcoming large purchase.
But if you have bigger, longer term goals, like funding for your retirement or when you have additional funds you just want to grow over time, investing can be a great way to realize a higher rate of return over time. The key for most people is to just start saving as early as possible. And making a habit of saving regularly.
If you're in the early stages of your working life, chances are you may not have a significant amount of money to put aside right away. But what you do have on your side is time. So investments can make your money work harder for you. And the sooner you start, the better.
And on the next slide here, you'll see the foundation of the benefit of investing is called compounding. Compounding, in its simplest form, is when you make a return on top of a return. So, for example, if you invested $1,000 today, over the year, it might gain 7%, so $70. Now the next year, your original $1,000 gains 7%, again, but so does the $70 you just made. So you end up making money and returns off of the previous year's earnings.
Now take this concept and think if you invested $10,000. And if you invested over 10, 20, or even 30 years. Couple the compounding with the benefit of time that Missy just mentioned, and you can see the impact that it can have on your goals.
So I want to take a closer look at what Pat just talked about. So to see how investing in the act of compounding growth can be beneficial to you, think about this. Let's say you started back in 2010 with $100,000. If you put that money into a savings account with a 1% interest rate, it would be about $110,000 today.
Now think about inflation and it averages about 2% per year. So you'd need at least 120,000 to have that same purchasing power. And when we say purchasing power, what we mean is how much it would take to purchase the same amount of goods in the future as you do today due to inflation.
Now look at if you invested that money over 10 years. Your $100,000 could be worth close to $180,000 given hypothetical 6% annual rate of return. This shows you how investing over the long-term can help you have more purchasing power over time. Which means you're not just meeting inflation, you're hopefully beating inflation.
Yeah. Thanks, Missy. And so we've seen the power of investing, yet sometimes it can be hard to know when to get started. So let's talk about some of the myths that are out there as it relates to feeling hesitant in getting started.
The first one that we hear is that investing is risky or that investing is like gambling. And if you take the concept of investing and think about it, you could say you put your money into something that could either go up. It could go down. And it's hard to know what the outcome will be. So that can feel risky.
But the thing is-- and this should give you a bit of confidence-- the investments you make can be customized based on your goals and the level of risk that your comfortable with. So the key thing to know is that there are a number of ways to invest, all while mitigating risk. And most importantly, U.S. Bancorp has a lot of resources-- whether that's our advisors, Automated Investor, our digital tools-- that are all here to help you decide what is best for you. And to help you weigh risk versus reward.
So to give you more context, I'll have Missy explain a bit more.
Thanks, Pat. And that's absolutely right. So, first and foremost, when you think about investing over the long-term, did you know that over the past 80 years, the S&P 500 Index has had an average annualized return of about 8%? Now, there were absolutely some years where the market had negative returns, but over time, the market generally has gone up.
It's important to note that past performance can never guarantee future returns. But what we're talking about here today, it's about having a long-term strategy and staying diligent, while understanding that market volatility is absolutely to be expected.
Now one way you can help reduce volatility risk is to diversify. You've probably heard that term before. But it basically means that you're mixing in investments with different risk and volatility levels. Like different asset classes that tend to behave differently in the market. So that way, if one area of your portfolio is up, it can compensate for another is down.
Another way to try to reduce risk is by investing in things like mutual funds, exchange-traded funds or ETFs, or index funds. Basically, these funds are groups of stocks, rather than one individual company stock. So that way, if some companies aren't performing, others that do will keep your money working for you.
Now" one last note about risk, Pat, that I think people-- people tend to equate risk and volatility as the same thing. Now they absolutely are related from a timeline perspective, but really, volatility is simply, the ups and downs the market can take over a period of time. Think about over a day, a week, or a month.
But when you're investing for the long-term, these short-term ups and downs don't impact your long-term value as much. And could actually help you have greater returns over time if you're investing consistently. So the key point that I'm making is to just think about the time frame you're investing for. When you set up a goal, as you get closer to your goal, we can help you make adjustments along the way to smooth out volatility and keep you on track.
Yeah. Great point, Missy. And well said.
Another myth that we hear is that if you invest, your money is all tied up. So it's important note your goal plays a big role in what you invest in and how accessible your money is. So, for example, if you're thinking about investing in a retirement plan like your company's 401(k) or an IRA-- with those plans, yes. Your money is less available until you retire. Otherwise, you could face large tax penalties.
Now if you're generally investing in a non-retirement account and just want your money to grow and work harder for you, then yes. Your money is invested. But you can also access that money if you need to without a tax penalty.
Now there will still be transaction fees, potential cap gains taxes when you liquidate investments. Those might be short-term, long-term. And you'll really want to review those impacts with your tax advisor. Now ultimately, we believe investing is a longer term strategy. So an investment account shouldn't be something as liquid like a savings account, where you may withdraw money if unexpected expenses come up.
In the event you do need money from your investment, yes. You can easily move it to another account, such as your checking or savings accounts.
And lastly, good reminder that as a foundational concept, having a good financial plan in place will allow you to navigate life events and better prepare you for the unexpected.
Absolutely. So the last investing myth we'll cover is that investing is too complicated or it's too confusing. So investing as a whole, you know what? It can be confusing. When you think about the terminology, the seemingly endless investment options that we have, and you just look at all the media coverage about the market, that honestly is not always helpful to most retail investors. However, the good news is, it really does not have to be hard or confusing at all.
And at U.S. Bancorp Investments, we do have a lot of resources for you that can absolutely make it easier. And we can help you navigate through that process. We have online resources. We have individual financial advisors. We have wealth management teams. And we have an automated investing platform and some other tools to make it easy for you to get started.
And we invite you to take a look at those links on the Resources tab or fill out that Contact Me tab that Pat mentioned. And we can get in touch with you about all of these options. We'll talk a bit more about these as we go through the presentation.
Yeah. Thanks, Missy. We talked about some of the top myths. Let's take a minute here to get into some of the frequently asked questions that we hear when talking to people about investing.
The first question we get is how to balance the debt they have versus wanting to start investing. And this is a common one and important one to talk about. Here are some things I'd offer up to think about.
First and foremost, always make sure you can pay your bills. Investing shouldn't be a burden on your finances. And it's important that you have that foundation taken care of.
As a general rule of thumb, it's important to set aside three to six months worth of living expenses. That typically is the right target to ensure that you have the right amount of cash reserves.
Second, if you have debt with high interest rates like credit cards, it's always good to pay those and prioritize paying those off. Now remember, some debt, even though it's debt, could be considered good debt. Things like school loans, car loans, or even your mortgage, these are generally lower interest rates and have longer time frames to pay off.
So one approach is that rather than paying off a loan at 3%, let's say, you can choose to invest that money for the potential of higher returns over time. Now you will have to look at the specifics of your situation and see what might make sense. But the key, though, is to start off small, gradually grow your investments over time as it's comfortable.
Yeah. And Pat, another question we get-- and I just got this yesterday-- is, when should I start investing? Or when's a good time?
So right now, there's a lot going on in the world and things are changing every day. And what's important to think about is it's not about trying to time the market, which means people are trying to delay or maybe they're waiting to invest when they think the market will go down enough to start investing. But what that does is it keeps people on the sidelines and the possibility to miss out on growth.
So, again, for the long-term buy and hold investor, it's really about how much time you're actually in the market.
So this relates to what we talked about earlier, with the combination of time and compounding growth. And if you take a look at this hypothetical example, it's assuming a 7% annual return.
So let's say at the age of 25, someone started saving $200 a month. And by the time they were 65, they'd have over $530,000 saved. Compare that to someone who just waited 10 years later-- 35. They would only have just over $246,000 in investments. So that 10-year head start resulted in that early saver generating more than twice as much in savings by the age of 35.
And this just shows the power of time and investing early and often. So if you look at the market over the years, studies have shown that if you're invested throughout an entire year, it has an average higher return, than if you were to try to pick and choose which days or times to be invested in that year.
The key is to invest early. Your most valuable asset, as we said, is your time. And that's not to say that it's ever too late. Just don't procrastinate longer than you need to.
Yeah. And so, let's say, you've now realized you want to get started. Naturally, we still hear hesitations around, how much money do I need to start investing? Don't I need to have a lot of money? I can only invest $50 bucks a month. And there's traditionally, this view that investing is only for the wealthy. That couldn't be further from the truth.
The short answer is you could have just a couple of dollars and start investing. The key, though, is the mindset and the ability and intention to save. So let's talk about that a little further and play out an example.
So let's say, you're starting out with a savings account. And I would say, start there because habit one is to develop the habit of setting money aside. And so you get in that habit. You start with $10, $100 a month. And you do that for a period of time so that you can feel confident in your behavior.
And after that, you can start to accumulate a certain amount of dollars. And once you do that, you can look at leveraging everything from our investment options tool online. You could call our investment consultant team who could help you determine the best path to get started. You can use lots of resources to really get your bearings on, what is the best decision for you?
And depending upon your situation, it might make sense for you to open a self-directed brokerage account, for example. Now this would enable you to purchase stocks, bonds, ETFs, or even mutual funds. It's a simple process. You could put money into this account and then select basically, stocks or funds that you want to invest in.
The difference in that platform, though, is the decision-making is generally in your court. And you may be someone who values more advice and active support than that. And in that case, Automated Investor is a great opportunity for you to make progress.
And I would say, a few things to note. This product starts at $5,000 as the minimum investment. And really, it selects investments for you and monitors your account. So it selects a portfolio of investments that are recommended based on your unique goals, time frame, and risk tolerance. And this means that it'll buy and sell some of those investments to keep track of your progress toward your goals and keep you on track over time. Simple and easy way to get started and to be exposed to high quality ETFs.
And it's low cost to do so. The annual advisory fee, Missy, is less than a quarter of $0.01, at 0.24% of investable assets. And if you invest $5,000, for example, that equals $1 a month or just $12 a year.
So stepping back here, just for perspective. We have thousands of clients with Automated Investor accounts. Some started with the minimum of $5,000. We also have clients with hundreds of thousands of dollars. So to summarize, it's important that, again, when thinking about how much money do you need, step one is develop the habit to set money aside so that you're ready to invest. And then at the end of the day, know that we have tools and resources to help you get started.
Absolutely. So naturally, I'm going to switch gears just a little bit here because the recent election is hot on people's minds, Pat. And for those who are thinking about getting started, you might wonder if this affects anything regarding the timing or getting into the market.
And so, I will say this. There's always an external reason to procrastinate. A lot of people say I want to wait till after the new year. I want to wait until COVID is more under control. I want to wait until the next administration change after the election. All of these things are out of your control.
So I would ask you to not let external factors dictate or hold you back from taking ownership of your own financial future. Because what you can control is how much you set aside and when you start. And that really is the most important factor for future financial success.
To address the election specifically, if you look at historical performance around election times, whoever won the presidency in the past really hasn't mattered when it comes to your long-term investments. Now there may be impact on the economy. Yes. But that shouldn't stop you from investing now.
We've also consulted with our affiliate U.S. Banks Asset Management Group on this topic. And they said that overall, we foresee minimal medium to long-term impacts on the financial market performance based on the election outcome. Now there could, again, be short-term impact if market participants anticipate any major policy changes. But really, it shouldn't be a factor in the long-term.
So with presidential elections, in general, you need to just make sure-- or with anything-- you just got to make sure that you have all the components of a diversified portfolio in place. And then stick to a long-term strategy that's designed for more than one election cycle.
Yeah. Thanks, Missy.
And the next question we get, especially as we head towards the end of the year-- what should I be thinking about financially as the year winds down? There's five things I give you here. And they may seem simple, but know that they can have a meaningful impact to your success in 2021 and beyond.
So number one, take a look at your debt. Take a look at the outstanding debt, the interest rates that you have. And you can start to see whether or not you need to prioritize paying down certain debts differently.
And then after looking at that debt, number two, take a look at how much money that you're bringing in. And going back to developing the habit to get you investing, can you start setting more money aside? Again, you get the benefit of time and compounding when you do that, even in a savings account. So if you can start those habits now, it only helps you set yourself up for success.
Tax season is around the corner-- number three here. And if you haven't yet opened an IRA, there could be tax benefits available to you if you do that before April 15 of 2021. This is really, an extra account that can help you save more towards retirement. That's always a good thing.
Number four, take a look at the financial products that you're using. So basic. But do I know what all the products I'm using are? And are they working hard for me? Am I getting the benefit that I need? A basic, but an important question.
And lastly, if your company offers a 401(k) plan, this is the right time of year. It's benefits season and benefits enrollment season comes around to determine whether or not you're maxing out that 401(k) match. If your company provides that match, it's the easiest way for you to get extra leverage. And it's important that you take advantage of that.
Yeah. So everything that Pat just outlined, as you're thinking about your finances and then the goals that you have with your money, there are really four levers that can help you achieve your overall goals. Now one, you can save more. Number two, you can spend less. Three, you can delay goals to give you more time. And four, you can invest smarter.
So today, we've talked about why you'd want to consider investing in the market to take advantage of that potential long-term growth. We also addressed the concept of diversification and how to manage risk. And then we looked at how to balance debt and having an emergency fund while you start investing. And finally, we did talk about all of the tools and resources that you can leverage and have available to you at U.S. Bancorp Investments to make this process easy and manageable.
Now at the end of the day, how and when you start to invest is completely based on your personal goals and what you are looking to accomplish. How does investing impact your future or that of your family? Are you looking to plan for retirement? Or do you have other major financial goals?
That's what we are here to help you do. Let us help you define your goals. And then we can help you determine the best way to start.
Yeah, this really has been a great discussion. And as we close things out here, a few reminders.
First, know that, again, we have a number of free resources available to you. You can check out the links in the Resource tab and you'll find links to our online tools such as videos, calculators, FAQs, and more.
Secondly, if you'd like to speak with one of our investment professionals to weigh your options or even to clarify questions, know that our advisory center takes calls Monday through Friday, 8:00 AM to 8:00 PM Central time. And our investment consultants are here to discuss anything with you. Whether it's, again, clarifying questions, discussing your goals, or simply, just understanding what you can do to develop better habits financially. There's no obligations and they're here to help you.
And lastly, if you would like one of our advisors to reach out to you directly, fill out the Contact Me button in the window below. We'll make sure to give you a call in the next few days or so. And explore more about your personal goals and investing needs.
Thanks, Pat. So this is all the material we had for you today. We really hope you enjoyed it and learned something to help you to either start or continue on your own investing journey. We are always here if you need anything. And please have a great rest of your day. And thanks so much for listening, everybody. Thank you.
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