The coolest financial planner ever taught me how to think about investing.
Once upon a former lifetime, I was in my last semester of my last year of journalism school, working on a profile of a prominent on-camera business personality. I was under strict instructions to “not write about her clothes, Chelsey” and make this a capital-b Business story, tackling a topic I knew literally nothing about: the stock market and how it’s reported on.
I will never remember the glossary worth of investing terms I committed to short-term memory with the idea of not looking like a complete dumbass in front of this blazer-clad Lady Boss, but I do remember her leaning across the table, a half-smile spreading across her face as though she was about to tell me a secret. “Don’t be afraid of the numbers. They aren’t nearly as complicated as they seem. Actually, don’t even think of them as numbers, think of them as stories.”
Fast-forward to this week, when our financial planners/guardian angels at Stash Wealth (see part one for a bit of background) were juxtaposing my boyfriend and my current finances with our life goals, dropping knowledge on investing and risk and how to achieve everything we wanted to achieve by the time we retire. It sounds totally cheesy, but I was brought back to that day when I was just a shivering chihuahua across the table from an Important Business Lady. And so I stopped thinking about them as numbers (which I don’t understand) and started thinking about them as stories (which I do).
A financial plan is really just structuring the story of your life (getting real deep here, I know), by working backwards from your goals—be they four kids and a Tesla, or a home in the Hamptons, or slippers from The Row—and filling the blanks in between with the numbers you need to get there.
And sometimes, a bi-weekly paycheck alone isn’t enough to get you to reach those goals—you might need to make your money work for you along the way (read: investments). That’s a long and flowery way of introducing this story, which is as much about how to think about investing as it is how to actually invest.
Because if there’s one thing I learned from Stash Wealth this week, it’s that investing for the sake of investing is just gambling, and throwing thousands of dollars in a low-risk mutual fund and calling it a day may actually risk you not reaching your long-term goals when you want to.
Here’s our guide to how to start—maybe, if you’re ready—investing.
1. LIFE VEST BEFORE YOU INVEST
First and foremost, if you don’t have your emergency fund set up (Stash advises three months’ pay worth of cash savings tucked away in its own online bank account), you shouldn’t be investing at all. If you want to start dabbling in investing, step one should be creating that emergency account and starting to steadily funnel funds into it until you hit your goal. And don’t confuse this account with your short-term savings, either—this is for an actual emergency (your apartment catches fire, your dog suddenly needs surgery, etc.).
2. TAKE CARE OF YOUR DEBT BEFORE YOU BET
There’s no specific age you should be starting to invest at, but rather a level of financial comfortability that comes with having your “lines of defense” (emergency fund, short-term savings) in place. And that also means, if you have a lot of debt, think about taking care of it first.
“It's a little bit of a dance here—financial planning is part art, part science—but we like to see that you have a plan around paying off your debt,” says Malani, who is basically the exact opposite of the boring, balding guy you picture when you think ‘financial advisor.’ “Some people who have heavy student loan burdens won't want to wait until those are completely annihilated before starting to invest, but if you have serious credit card debt that's costing 15%-25% annually, you really should take care of it first before investing. The market will never be able to make up for those kinds of losses.”
3. #GOALS #GOALS #GOALS
Malani’s mandatory step before starting to invest? Outline your goals. The Stash team basically threw it back to Dr. Seuss here, with an “Oh The Places You’ll Go!”-esque preamble before turning us loose on our second workbook, where we detailed our goals, how important they were to us on a 1-10 scale, how much we expected they would cost and when we wanted to achieve them by (example: Own Condo, #7, $800,000 and 2020). They then aggregated our goals into short, mid, and long-term objectives, juxtaposed them with our current financials and trajectory, and told us how much we’d have to be saving per month in order to make them happen (literally down to the cent).
“In a nutshell, you can't know what to invest in, until you know what you're investing for,” says Priya Malani.
Now we had a reason to start talking about investing and some targets to aim for instead of just dumping a bunch of money into the stock market and watching them flutter away like winged dollar bill emojis into the night.
4. THE GAME OF RISK
The gist: money you plan on spending on short-term goals (in our case, a trip to Spain at the end of the year, and a new car or lease next year), you should have zero or very little risk associated with at all. For money you plan on using for mid-term goals (i.e. a vacation property in 2025) you can dial up that risk a little bit. And for money set aside for “a very long time from now”, you can dial it up a bit more, says Malani.
“Usually when our clients come to us, they’re their own worst enemy because they have no clue about risk, so they want to invest like they are 75,” says Malani. “We spend a lot of time explaining risk and talking about the three buckets (short-term, mid-term and long-term). We explain that it's not about taking on as much as you can handle, it's about taking on as much as you need to be on track for your goals.”
5. AND KEEPING IT ALL IN A SAVINGS ACCOUNT FOREVER CAN ACTUALLY BE RISKY, TOO.
“It's important to remember that because of inflation, not putting your money to work (i.e. keeping it under a mattress or keeping it all in a savings account) is actually super risky,” says Malani. “If that money never grows, you're going to be eating ramen in your golden years. No judgement, I LOVE ramen.”
6. HOW TO MAKE SURE YOU’RE INVESTING, NOT GAMBLING
I’m going to let Malani take this one away, for obvious reasons. Here are five tips she has for practicing safe stocks.
1. Choose the unsexy investments—namely, ETFs.*
2. Don't get caught in emotional investing (ignore headlines).
3. Don't invest any money needed in the short-term (less than 2-3 years).
4. Invest with a purpose—don't let anybody tell you what to invest in before knowing what you're investing for.
5. Some of my clients enjoy "playing the stock market". If you are so compelled, carve out 3-5% of your portfolio (NEVER MORE THAN THAT!) and go to town, but if you lose it all, the game's up.
*That’s Exchange-Traded Fund, for us liberal arts majors.
7. BEWARE THE WOLVES OF WALL STREET
Okay, time to get schooled on the fiduciary versus suitability standard (it’s not as complicated as it sounds).
“What I'm about to tell you may blow your mind,” says Malani. “Most of Wall Street operates under the suitability standard which states that if the product or investment suits the client's needs, you can advise them to buy it, even if it's not the most cost effective choice (i.e. pays the financial advisor a big fat commission). The fiduciary standard—which is what Stash operates under—says you have to treat the client like your mom, and unless you're a total jerk, you'd pick the best possible investment (taking cost into consideration) for your client or your mom.”
So basically, if you’re going the more traditional investing route, be skeptical of what’s being recommended. If someone—be it your banker, your best friend on Wall Street, your parents’ stock broker—is giving you advice, your first course of action is to find out how they are compensated to see if there’s a conflict of interest.
“I think it's crazy that this distinction even exists, no wonder our generation doesn't trust Wall Street!” says Malani.
8. TO APP OR NOT TO APP?
“I'm glad investment apps are encouraging younger investors to get started. I'd say, it's totally fine to start with an app,” says Malani. “Especially if it automates your savings and investments and keeps you disciplined.”
However, once you hit the $10K-mark in investments, it’s time to start looking at the bigger picture and plan what you’re investing for in the first place.
9. HANDS OFF!
“Every study under the sun shows that the more you tinker with your portfolio, the worse it does,” says Malani.
During our second Stash meeting, she used the anecdote of the person who panicked post-2008 crash and pulled all their money out of the market, versus the person whose financial advisor held their hand and told them to hang in there—markets go up and go down, and they’ll go back up if you wait. Guess who fared better?
“There are two types of investing—active and passive,” says Malani. “Active means like a mutual fund, where there's a manager or a team of investment managers who are tinkering with the fund to make it have the best possible return. Studies show that the majority of active management does not work. Just buy an ETF, let it ride the ups and downs of the market and you'll do better in the end.”
10. PSST - YOU CAN INVEST IN OTHER THINGS BESIDES STOCKS
If you don’t know shit about the stock market but are pretty sure you can make it as an orthopedic surgeon, guess what? You might get a better return if you head to med school with your hard-earned funds and invest in those future doctor dollars. Or (and I know we’ve been edging away from this as a generation of Uber-and-Airbnb addicts), you could consider investing in property. If you’re self-employed or run a small business that’s doing well, then there’s also the option of re-investing your money in yourself if there’s potential to make a solid return (i.e. investing in a kickass new website you can use to get new and higher-paying clients). Then, there’s microfinance.
“Microfinance is a pretty big trend. It's definitely less-conventional,” says Malani. “The basic concept is you make a mini-loan to a person in a third world country—i.e. your loan helps them buy a cow that they can then use to produce milk and sell—and they pay you back with a small return.”
11. ABOVE ALL, LEAN ON THE PROS. IT’S WHAT THEY’RE THERE FOR.
“A favourite quote [of mine] is ‘the difference between rich people and everybody else, is that rich people plan before they need a plan,’” says Malani.
If you’re not a money-savvy person, don’t try to go it alone. It’s a much better investment to build a relationship with someone who does know what they’re doing to help you build a plan tailored to your story and where you see the plot taking you.
“I think our generation sees it as a joke to have a financial advisor, which is obviously very sad. A bunch of old dudes messed it up for us, but we're trying to bring the integrity back to the profession,” says Malani. “If you don't want to make major mistakes, have a pro help.”