It can be daunting to start out as a new investor. But mastering a few basics can go a long way to helping you succeed, Securities and Exchange Commission Chairman Jay Clayton tells Grow.
Financial literacy is an important component of the agency's role — and Clayton's, too. The SEC is behind education site Investor.gov, and Clayton has created a series of educational videos based on his conversations with individual investors.
"We did a number of investor town halls where we went around the country and I basically just took questions from what I would call ordinary retail investors," he says.
Clayton noticed many people were asking about the same things. So he started jotting down notes on core concepts that new investors would benefit from learning. Those notes became the basis of his presentation at future town halls and his videos.
"If people understand those things, I think you substantially improve their chances of being satisfied investors," Clayton says.
Here's what he wants everyone to know.
In his notes, Clayton writes that compounding boils down to "making money tomorrow on the money you've made investing today." In other words, with compound interest, you're earning a return not just on your money but also on the interest it has already accrued.
Einstein reportedly called compounding "the most powerful force in the universe." And the earlier you start saving and investing, the more powerful compounding becomes — even if you're only able to put aside a small amount.
"Look, starting in your 30s is four times as good as starting in your mid-40s. It's that simple," Clayton tells Grow.
"This is a financial term saying, 'Don't put all your eggs in one basket,'" Clayton writes in his notes. All investing entails risk, but the more exposure your portfolio has to a specific company or sector, the more risk you're taking on. "Economists will tell you, you can reduce risk and keep the same returns by diversifying."
Clayton also points out that there are some financial products that let you diversify easily and inexpensively.
Two examples: exchange-traded funds (ETFs) and index funds. There are some key differences between the two, but they both let investors buy an assortment of assets all at once, and both tend to have low fees. Legendary investor Warren Buffett has championed index funds as "the best thing" because they allow you to bet on the broader market rather than try to pick individual stocks.
Video by Jason Armesto
"One of the best things you can do is keep your fees and expenses low," Clayton says.
In fact, Clayton's favorite question to ask of any financial professional you do business with is, "How much of the money I'm investing is going to work for me and how much is going to fees and expenses?" It's also a good question to pose to yourself when comparing investments in an account like your 401(k) or IRA.
Video by Jason Armesto
Fees reduce returns, he points out. And they can add up when you're investing over the long term for a goal like retirement.
How much are we talking about? In a 2014 report, the Center for American Progress looked at three hypothetical workers who earn the same and invest the same amount of money each year for retirement over their careers. The investor paying annual fees of 1.3% would reach retirement with about $96,000 less than the one paying fees of just 0.25%.
"Advice and services are not free," Clayton writes in his notes, "but understand what you're paying, and don't pay more than you need to."
If you have access to a workplace retirement plan like a 401(k), financial experts typically recommend putting in at least enough to get the full company match — that is, money your employer kicks in. That's important to prioritize even as you juggle other goals like building an emergency fund and paying down debt.
"Take the 'Free Money,'" Clayton writes in his notes. "Take it if you can to the maximum you reasonably can. I've seen countless investments and I can't find any better than matching."
The average employer match is about 5%. That essentially means you're doubling your money on the first 5% of your own contribution, and that free money can amount to thousands of dollars growing and compounding on your behalf each year.
"There is no better investing than getting your debt under control," Clayton writes in his notes.
Think of it this way, he tells Grow: "There's no investment that's going to pay you 18%, or at least no sure investment that's going to pay you 18%. But you surely have to pay somebody 18%" if you're paying down credit card debt.
But there's more to getting your debt under control than coming up with a repayment strategy and dedicating part of each paycheck to it. Financial experts also suggest revisiting your budget to make sure you're not overspending, and building an emergency fund so that you have cash reserves to fall back on. Those precautions can help ensure that you're not racking up new debts as you pay down the old ones.
Video by David Fang
Leveraging these basics can make a big difference in helping you grow wealth and meet your financial goals, Clayton says.
"Without exception, as I've traveled around the country and talked to people, investors who are generally satisfied with where they've ended up in their retirement all say, 'I wish I knew more earlier and I wish I started earlier,'" he says.
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