Investment can be an incredibly confusing topic to unpack.
But let’s go over the basics: You shouldn’t invest unless you have a fully funded emergency fund, your serious debts are resolved (and long-term debt repayments are under control), and you've outlined your short-, mid-, and long-term financial and life goals.
Once you have all that in order, it’s a good idea to start thinking about investing, because it’s an important tool to grow your wealth. There are many ways to go about it — from stocks to bonds to mutual funds and exchange-traded funds (ETFs) — but not every method is a fit for everyone. And, contrary to popular belief, going out and buying a bunch of stock in your favorite company is probably not the smartest idea.
While people often regard "stocks" and "investment" as synonyms, buying individual stocks is not a good strategy for everyone. In fact, the risk of buying stocks is often overlooked.
There are many considerations that you should make if you're thinking about investing in stocks. But the good news is, there are a lot of other lower-risk, lower-cost options beyond simply buying individual stocks, including mutual funds and exchange-traded funds (or ETFs). Whatever you do, make sure you're adequately researching all of your options so you don't inadvertently put yourself (and your savings!) at risk.
To break down this hard-to-digest, slightly stressful topic, Refinery29 chatted with Priya Malani, an entrepreneur and founding partner at Stash Wealth, a financial-planning firm for H.E.N.R.Y.s™ (High Earners, Not Rich Yet). After years of working on Wall Street, Priya left to work with millennials, who are largely ignored by traditional financial firms.
Ahead, Priya gives us the lowdown on stocks, what you should keep in mind before buying, how to navigate investment versus debt, and much more.
There is often an assumption that investing means buying stocks — but is this the case?
"This assumption is very real and, in fact, is at the core of people’s fear of investing. But when you buy stocks, you’re not really investing, you’re gambling. Buying stocks is risky. And it's a super old-school way to invest.
"Stocks are how our parents used to invest, because there weren’t many other choices — it was either stocks or bonds. The investing world has come a long way, which is great news for millennials!
"Stocks are also expensive. In order to turn a stock portfolio from a gamble into a diversified investment, you need to buy a lot of them. And that can get expensive. For example, if you want diversified exposure to the largest companies in the U.S., you’d need to buy all 500 of the stocks in an index like the S&P 500 (a common benchmark of large U.S. companies). And that’s gonna cost you.
"People tend to perceive buying stocks as sexier and more exciting than being adequately diversified. They would rather have dessert than eat their vegetables — even if that latter is better for them in the long run.
"Thinking of it this way, buying stocks (or 'eating dessert') means you have the possibility of a sugar high — but also the crash that comes with it. On the other hand, building a diversified portfolio (or 'eating your vegetables') creates a strong foundation that allows you to build wealth over time, not overnight."
Stocks can be pretty volatile — what should first-time investors consider before buying? What are some of the risks?
"Buying stocks on their own is risky. Many investment professionals ask first-time investors what level of risk they are comfortable with. This is called 'risk tolerance.' But we suggest a different question: What level of risk do you need to be on track for your goals?
"The great thing about being a young investor is that you have plenty of time for your investments to work. Most millennials don’t need the level of risk inherent in stocks in order to be on track for their goals. So even if you are comfortable tolerating high levels of risk, why take on more risk than you need when you can be on track for your goals with less? For most of our clients, this is an 'a-ha moment.'
"Your investments should always be linked to your goals. So the first step should be to ask yourself what you are investing for. The answer could be for long-term goals, like retirement. It could also be for all the fun stuff you want to do before retirement, like upgrading your lifestyle, traveling more, buying a home, or starting a family.
"Once you know what you’re investing for, it's easy to figure out which investments (and investment tools) can help you get on track."
What exactly are stocks? Can you define them and how exactly they work?
"In general, a stock represents your ownership in a publicly traded company. The risks of the stock market vary dramatically, depending on how you’re invested. There are many different investment tools, and all of them are associated with different types and levels of risks.
"If you’re invested in a single stock of a single company, the major risk is that it can go out of business, in which case you’re likely to lose all the money you invested. Trying to guess which stocks won’t go out of business is the game most of us are playing when we are investing —whether we realize it or not.
"Most of us lose this game, or have known someone who lost this game. No one — sometimes, not even the founder of the company! — realizes it might be headed for failure or that a competitor is about to come along with a better product or service to offer."
Who should invest in stocks?
"As we’ve said, buying stocks isn’t for novices. But, as with most things 'money,' buying stocks can get very emotional. Even seasoned investors make the wrong investing decisions because their emotions get involved.
"When your stock is up, you’ll think you’re a genius, and when it’s down, you’ll think you suck at investing. The truth is, stocks go up and down, and you have to be ready to ride the roller coaster.
"Knowing if you should consider stocks as an investment strategy comes down to your reason for investing in the first place. If you’re investing to accomplish a mid- or long-term financial goal, stocks are not for you, unless you can buy a lot of them to be adequately diversified.
"If you’re investing because you have some extra money lying around (lucky!) and you want to have some fun and see what happens, buying stocks could be a way to accomplish that. But at Stash Wealth, we joke that if you want to gamble with your money, you might as well go to Vegas — at least they give you free cocktails!
"Do not invest until you have credit card debt paid off, a proper emergency fund built, and a handle on your student-loan payoff plan. That doesn’t mean you have to have your student loans completely paid off, but it does mean that you need to have a game plan for how you’re going to pay them off.
"A lot of the time, people begin investing because they think they’ll make a quick buck and use that to help pay off their loans. But the truth is, even seasoned professionals don’t have that kind of luck! No joke.
"If you think you’re ready to get started, maybe start with a few shares. The price of a stock is dictated by the supply and demand of buyers and sellers. You can use a site like Yahoo Finance to check in on the price of your stock.
"If you do decide to buy stocks and are attempting to diversify, think globally, not locally. If you buy Twitter, Snapchat, and Facebook stocks, you’re not diversified, just because you own three different companies. You have to diversify across sector, company size, and geographic location.
"There’s a lot more to it than you might think — that’s why ETFs get my vote at the end of the day. They make it so much easier (and cheaper) to accomplish the true diversification that wins in the long run. A great podcast on this topic is Planet Money: Episode 688. Brilliant versus Boring. And it’s only 20 minutes!"
Bearing in mind some of the potential risks of the stock market, can you give us a step-by-step guide to buying stocks?
"If you have your heart set on buying stocks, go for it. But we typically advise that you invest no more than 3-5% of your overall investments in single stocks. Especially if you are just getting started. This way, no matter what happens with those single stock investments, you have other investments that are properly diversified and have you on track for your goals.
"The conventional advice behind buying stocks suggests that you start by doing your research. Understand the company — its operations, its financials, its management structure, its business plan.
"If you feel like you have the information needed to make an informed investment, you can open an account at a company like Robinhood, where you can buy a stock in your chosen company — for free!
"JPMorgan also launched a self-directed investing platform called You Invest, where your first 200 trades are free. These days, a lot of the big banks are offering free or low-cost trades, including Ally Invest, Merrill Edge, Vanguard, Charles Schwab, and Etrade.
"When it comes to buying stocks in popular, liquid companies, there's really very little difference amongst these options. I would say Robinhood is the newest and built from a tech-first perspective. Some of the others I mentioned will charge anywhere from $2.95 to $6.95 per trade.
"No matter where you choose to buy, just remember: Don’t invest everything you have — let alone put the majority of your investments — into single stocks."
So, basically, you're saying that stocks should only ever represent a small portion of one’s investment portfolio, is that right?
Yes — and here’s a great piece on the topic. One additional point here: If you work for a company that gives you stock through RSUs or an ESPP that you participate in, then you only own a single stock.
"Don’t forget to calculate that as part of your investments to make sure you don’t hold too much single stocks. Hopefully, things go well, but if they don’t, not only could you lose your investment, but you could lose your job.
"Remember, millennials don’t need too much risk to be on track for their goals. We advise clients to sell and diversify their company stock when applicable."
Investment strategy varies, depending on things such as age. For instance, someone who is younger might be able to tolerate more risk than someone in their 50s, but how much risk is a good idea when it comes to stocks? And how do you figure out where you stand?
"More than age, your investment strategy and the risk and reward profile of your investments should depend on the time you have until you’re trying to accomplish a goal.
"The more time you have until you’re trying to accomplish a financial goal, the riskier your investment strategy can be. And on the flip side, the less time you have until you’re trying to accomplish a financial goal, the less risky your investment strategy should be.
"When it comes to the more traditional goal of retirement, age is certainly a factor. When you’re young, you’ll want to start out with a more aggressive (riskier) investment strategy, and as time goes on, the strategy should get less and less risky (more conservative). If you are offered target-date funds (TDFs) in your 401k, they are designed to do this exact thing."
What are some of your favorite investment tools that people interested in stocks should also consider?
*Information provided is for illustrative purposes only and is not intended as investment advice. Please consult a professional financial adviser for advice specific to your financial situation.