6 Real Questions About Investing—Answered

If you’re curious about investing but have yet to dip your toes in the water, you’re not alone. Taking the plunge may be the hardest part.

The world of investing is broad and, at times, can feel complicated. As much as you may read and research, it’s natural to end up with unanswered questions.

Here are a few common ones by new investors: “When should I start investing? How much do I need to start? And what type of investments are right for me?”

For answers, you can scour the internet for articles, but it can be hard to know where to go and whom to trust. That’s where a trusted financial advisor comes in.

When, how, and how much do you need to start investing?

Great news: Investing in your future is no longer an activity reserved for the wealthy. You can get started easily, even without much in your pocket.

When you’re an investor starting with a small amount, say $10 or $100, it may be a good idea to look for banks or online stock trading platforms that offer free accounts, no account and investment minimums, and no trading costs. SoFi Invest® is one such option.

SoFi Invest has no minimum for investing, so you can get started as soon as you’d like. And, with investing, sometimes earlier is better.

By starting early, you may be able to take advantage of the power of compounding. Compounding interest is the phenomenon of earning a rate of return on both the money you’ve invested and all of the profits you’ve already earned on that investment. So, you’re earning a profit on top of your profits—causing your rate of growth to increase at an increasing rate.

That said, it may be worth setting up a secure emergency fund before you start investing. An emergency fund is often held in cash separate from your checking account, preferably in an accessible, FDIC-insured savings account.

It’s recommended to save between three to six month’s worth of expenses before investing. (One exception? Take advantage of your company’s 401(k) match, if you have one. And that’s investing!)

I am going to have $30 left in my bank account before my monthly salary hits. What is the lowest possible entry threshold that isn’t a waste of resources?

First, do you have an emergency fund?

Falling within $30 of a zero-dollar bank account at the end of the month may mean there’s not enough extra for unexpected emergencies and incidentals.

What happens if you get hit with an unforeseen medical bill? Or your car breaks down? It’s helpful to have a cash cushion to weather any storms–and avoid going into credit card debt to cover unexpected costs.

You might consider spending some time building up your cash reserves. As mentioned in the previous question, three months of expenses is a good start. But you may want to increase this amount to six months or more.

And once you’ve secured a minimum of three months’ expenses in an emergency fund, it may be time to consider your next money moves.

A great next step is to determine if your employer offers a 401(k) match. Even if you’re only able to invest 1% of your salary, your employer may match with an additional 1%—an immediate 100% return on your investment.

Don’t have a 401(k)? Then the previous answer applies. It may be wise to avoid wasting precious resources on the fees and costs of investing when you’re starting with small amounts, like $30.

I have $10,000 burning a hole in my pocket. Should I buy stock?

You’ve got $10,000 to invest—how exciting.

SoFi’s financial advisors are realistic about how difficult it is to pick the next hottest stock—try as we might, we can’t predict the future. And anyway, we typically prefer a diversified investment strategy.

Diversification is the practice of allocating money to many different investment types. Big picture, this means investing in multiple different asset classes like stocks, bonds, cash, and real estate. Next, someone might consider diversifying within each category. With stocks, investors might consider companies within different industries and countries of origin.

One way to diversify is with a portfolio of low-cost index funds, whether index mutual funds or exchange-traded funds (ETFs). For example, you could buy an S&P 500 index fund that invests in 500 leading companies in the United States across many industries. This way, you may eliminate the risk of investing in only one company or in one industry.

Once you’ve established a diversified strategy with the majority of your funds, you might consider buying a few individual stocks. Bear in mind that stock-picking is hard work and requires hours of research—and a ton of luck. Therefore, you may not want to use more than $500 (5% of your $10,000) on individual stocks.

For the newbie investor, do you recommend ETFs or mutual funds?

Mutual funds and ETFs are similar in that they each bundle together some other type of investment, such as stocks are bonds.

They also have some important differences. ETFs trade throughout the day, like a stock. Mutual funds trade once per day.

Here’s an important question: What is the strategy being used to invest within the fund? Funds, both mutual funds and ETFs, come in two varieties: actively managed and index. (Currently, many ETFs are index, though there are actively-managed ETFs.)

An actively-managed fund typically has higher costs, while an index fund aims to invest in the market using a passive strategy, usually at a low cost. (Not sure of the cost? Look for a fund’s annual fee, called an expense ratio.)

They’re called “index funds” because they track an index that aims to measure market performance. For example, the S&P 500 is an index designed for the sole purpose of tracking U.S. stock market performance.

But, it is possible to buy an index fund that mimics the S&P 500—and this can be done via either an ETF or an index mutual fund.

Considering that it’s possible to buy ETFs and index mutual funds that accomplish the same exact thing, you may want to consider the following: 1) Which do you have access to and 2) Which option is lower-cost?

For example, if you only have access to index mutual funds in your 401(k), that may be the direction to go in. If you were to open an investment account with SoFi Invest, you can buy ETFs with no transaction costs.

Would you recommend me opening a traditional IRA or stick with a 401(k)?

Here’s the scenario: I have already maxed out my employer match. Right now I’m investing about $10,000 into my 401K after my employer’s match. I want to put more into my 401(k) but I don’t like target retirement funds.

The company that does low-cost index funds in my 401(k) is a small company that I don’t trust to optimize returns. It sounds like you have two separate concerns: First, you don’t like target-date funds. Second, you do like low-cost index funds, but not the ones offered in your 401(k).

Let’s address each.

For a target date fund, you pick a “target” retirement date so that you’re matched with a target-date fund with an appropriate investment mix for your age.

I’d be interested to know more about yours. If you do indeed have a preference for low-cost index funds, see what is held inside of your target-date fund: Some target-date funds do indeed hold index funds. Others hold more expensive, managed options.

To investigate further, you can look into what is called a fund’s “tracking error,” which measures its success at mimicking the index for which it is designed to track.

If you’re still not pleased with your 401(k) options, you can absolutely consider opening an investment account outside of your 401(k).

However, as an active participant in your 401(k), your ability to contribute to a traditional, tax-deductible IRA depends on your income level. If you are already covered by a workplace retirement plan, the IRS allows you to deduct the full amount ($6,000) only if you earn less than $64,000 as a single person and $103,000 if you file taxes jointly.

You might have better luck with a Roth IRA, which has different taxation and rules for use than a Traditional IRA. Unlike a 401(k) and Traditional IRA, Roth IRA contributions are not tax-deductible.

Although you don’t get a tax break now, you won’t pay taxes on it when you pull the money out in retirement. You can contribute the full amount to a Roth IRA if you earn less than $122,000 as a single filer or $193,000 for joint filers.

If neither of these options work, you can always open up a brokerage account with an online trading platform. Just because these accounts do not have “special” tax treatment like retirement-specific accounts does not mean that they cannot be used to save and invest for the long term. You’ve got lots of options!

Do you offer financial planning to individuals who have Sofi Invest® accounts?

Yes, we do! Sign up online to schedule an appointment with one of our advisors.

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