Where do I park my money for long term investing?
I am currently a student in college and have some money (around 10k) that I would like to put somewhere that can earn money over time. I am not experienced with investing, but I have looked into some of the following ways and would like a little more guidance. I have looked into stocks (maybe a few blue chip), mutual funds, ETF's etc. What would be the best option for someone who isn't as experienced and is looking for low risk?
Congratulations on getting started with investing. Due to the way your question is phrased, I am assuming that you already have some money in a savings account or a money market account to serve as an emergency fund, that you have little or no credit card debt, do not have any large purchases planned in the near future, and student loans are not an issue. All of these concerns would take priority over long term investing at your stage. If you are looking to start a long term investment, I would recommend researching broad-based index funds either in mutual fund or ETF form. Take a look at U.S index funds as well as international index funds. Because you are just getting started, I would steer clear of individual stocks at this point as you wouldn't be able to create much diversification in your new portfolio and you are still learning the basics of investing. By buying and holding index funds you will have quite a bit of diversification, even if you don’t hold many funds.
Another option would be to choose a low cost allocation portfolio, or target-based portfolio that would automatically create a well diversified portfolio for you with representation from most of the major asset classes. Good luck!
It’s always great to hear when young people are looking to begin the process of financial education and securing finances for the future. We often discuss this issue with our older clients, as the financial literacy of their children often lacks what might be required when they receive an inheritance. In fact, a 2014 FINRA study showed only 18 percent of young millennials (ages 18 – 26) were able to correctly answer just four or five questions of a financial literacy quiz. We’re glad to hear you're well on your way to boosting those numbers.
In regards to your question, a few key points jump out. First, you’re young. Second, you want to “park your money” and “earn money over time.” Finally, you are looking for low risk. These considerations are great starting points to begin to create an appropriate portfolio. Long-term investing can be a great approach to achieving long-term financial goals, and the sooner you can begin to both save and invest, the better. When you say you want to “park your money,” that typically relates to wanting to put money in a money market, which essentially means you want to put your money in cash because you expect to need it in the short term. I suspect that you really mean you are looking to invest for the long term with more of a “hands off” approach. Money managers consider this passive investing, or the process of applying sound research to an initial investment design, followed by limited buying and selling for the sake of appreciation over the long term. This is different from an active investor, who might try to time the market, buying and selling more rapidly to capture gains (or losses) from short-term price changes. A passive approach would require a longer time horizon (which you have since you’re young) and a well-diversified portfolio that could withstand shorter-term market downturns.
The discussion of the risk and reward balance is more complex, as it (and various other factors) very much defines what type of investment products are most appropriate for you. You mentioned you have a low risk tolerance, which could mean you couldn’t tolerate a dramatic dip in the value of your investment. However, if your risk tolerance is too low, more conservative investment strategies may not provide enough growth in your portfolio to achieve your long-term needs. In general, the younger you are, the more risk you can assume, since your portfolio will have time to make up any short-term losses.
With all that said, you’re still too young to be too worried about your long-term financial needs. Now is a good time to start to experience the process so you are better prepared in the future. You mentioned stocks, ETFs, and mutual funds. In general, investing in a few individual stocks is more risky than investing in a mutual fund or ETF. Mutual funds and ETFs are products with various holdings within the one investment. In other words, these products tend to provide generally less inherent risk and more of the diversification needed for your long-term mindset. Meanwhile, selecting individual stocks with higher risk can get you in the habit of paying attention to company fundamentals. There are essentially unlimited options, especially because of your age. There are several online “robo” platforms that would suit your needs, but as your assets grow, you should definitely consider speaking with a financial advisor. As you get older and begin a family, it will become more important for your portfolio to properly reflect your current investments, financial situation and needs, tax status, investment objectives, investment experience, time horizon, liquidity needs, and risk tolerance.
Wait for the U.S. stock market to collapse for the third time since 2000 before taking risks. Until then, put your money into http://myra.gov/ where you get 2.25% guaranteed by the U.S. government, completely nontaxable. After the stock market has crashed, gradually start buying whatever is least popular. That probably won't be until 2019.
Having a diversified portfolio is a great way to help mitigate risk while striving to maximize returns. Based on your goals and time horizon, your stock and bond allocation should be divided to capture growth and income. A low-cost ETF portfolio with various fund types is a great way to go. Your individual taxable account and/or Roth IRA account can be managed and automatically rebalanced for you at Betterment.