How to Invest Money When You Don't Have Any
My quest to learn about finance as an ignorant twentysomething.
Illustration by Wren McDonald
For months after college, my job was to sit in a windowless warehouse with dozens of other schlubs and type summaries of meetings dictated to me over the phone. The shift went from midnight to 6 AM. I'd eat the free Dominos my employer provided, slowly erode my insides with Red Bull, and slip into a fugue state while transcribing the alien-sounding phrases spat out by the MBAs on the other end of the line.
I never learned about "mutual funds" or "index funds" or "money market accounts"—it all seemed as relevant to my broke-ass existence as theology is to a goat. But these days I wonder if I missed out on a chance to turn a bad job into the equivalent of night business school. I've become increasingly aware that, like a lot of twentysomethings, I don't know what the hell I'm doing when it comes to money. A $3 coffee will turn into a $30 coffee thanks to interest payments on my credit card. I'll wake up after a night out with a crumpled receipt for pizza in my pocket and worry I just overdrew my checking account. I've contemplated simply stopping payment on my laughably unmanageable student loans.
So I've decided to embark on getting an informal financial education that so many of us sorely lack and document the results in a series of articles. Hopefully I'll learn how to manage my money; failing that, I'll at least find out why I ostensibly make some but never have any.
The first question I decided to ask was, I thought, a pretty simple one: What's the best way to invest $1,000? The answer, boringly, is "it depends," so I'm going to break it down by how much risk you want to take on.
First, I called up Ben Carlson, a chartered financial analyst (CFA) and finance blogger and asked him what I should be doing with my extra cash besides buying booze and sneakers. He told me what I didn't want to hear—that I should be taking a portion of what little money I have and putting it away where I can't touch it for a long-ass time.
Carlson said the safest bet was to set up a Roth IRA, something I could do in 15 minutes by walking into a Charles Schwab and filling out a form, or by just going on the financial services company's website. "IRA" stands for "individual retirement accounts"—the idea is that you automatically send before-tax money every week, month, or quarter into one. You can then pick a target date when you'd like to retire, and it will choose investments for you.
While that all sounded great—necessary, even—a Roth IRA is technically not an investment but rather a place to hold investments. Perhaps more importantly, retirement is a loooooonnng way away for me—what if the sea rises, or I die from an overdose of processed cheese before then? I asked Carlson, and he asked me to consider my "time horizon."
"I want to be able to buy a PS4 before the sun explodes," I said.
"I think something like an online savings account where you can earn a little bit more money would work," he offered. "At a savings account at a bank, you might earn 0.1 percent, whereas with an online savings account you might earn closer to 0.5 or 1 percent back on your money. The reason these places are able to provide higher interest rates is because they don't have a brick and mortar bank, so they are just online, and don't have any overhead costs."
We also talked about CDs, or certificates of deposit, which you can also get through a bank. If you put your money in them, they accrue more interest than a savings account, but you can't cash them in for three, five, or ten years, depending on the CD.
Even these seemingly safe investments aren't guaranteed, however—if inflation is higher than the interest you're earning from a savings account or CDs, you'll have more money but it'll be worth less than the pile you originally invested.
What about playing the stock market? That was the type of investment I was familiar with from the internet and movies about men with suspenders and slicked-back hair. Could I be like those guys?
"I think for that kind of shorter- or intermediate-term goal, you don't wanna mess around with the financial markets, because they're just too unpredictable in the short term," Carlson told me.
OK, I'm sure that's good advice—but what if I did want to mess around with the financial markets?
In the old days, diving headfirst into stock trading usually meant finding a financial adviser. Market novices still need some guidance, but that doesn't mean you have to rely on a human—nowadays "robo-advisors" are a cheaper alternative to meat-brained money managers.
Michael Batnick, the director of research at Ritholtz Wealth Management, a financial planning company that also happens to offer a robo-advisory service called Liftoff, told me that they're a great way for young people to get returns on investments and get a feel for how the markets work.
"This software is a perfectly viable replacement for humans with two caveats," he explained. "You must be able to emotionally handle wild market swings without someone talking you off the ledge, and you have no financial planning needs. As most people earn more money and have a family, their needs become more complicated and advice from a human starts becoming very necessary."
There are tons of robo-advisor services out there, and some of them require no minimum balance or monthly contribution, like the one I went with. All you do to sign up for Betterment is go to their website, input your age and income, and select what your goal is. You can pick "retirement," "safety net," or "general investing," and they stick your money in an index fund—which is made up or 12 different funds in order to minimize risk—and give you a goal. For this service, they take out between 0.15 percent and 0.35 percent of your principal every three months. (There are several other options, and you should try to figure out which one is the best for you.)
Given that I was already setting up a Roth IRA for retirement, I went with "safety net," which meant that I'd be working toward having six months' worth of income saved.
But still—when the fuck would I be able to buy a PS4?
"Understand that if you are speculating, whether it be in stocks, bonds, commodities, or currencies, there is an army of highly trained, educated, and experienced CFAs and PhDs trying to make money in the market," Batnick warned me. "They are the sharks, you are the guppies."
To be quite honest, until maybe a week or two ago, my idea of finance was entirely derived from the end of Trading Places, in which Eddie Murphy and Dan Ackroyd yell a bunch, wave some paper in the air, and manage to make enough money to go live on a yacht together.
Personally, I love both yelling and yachts, and I think Trading Places is one of the greatest comedies of all time. But I have also seen this movie 20+ times without being able to figure out how short-selling orange juice futures works. Both Carlson and Batnick were not really down to help me with this—for understandable reasons.
In The Intelligent Investor, a 1949 book that's considered the Bible to people like Warren Buffet, economist and investor Benjamin Graham spends pages and pages explaining the difference between "investing" and "speculating." What I wanted to do is the latter, and it's considered very, very stupid.
Basically, investing is putting a percentage of income into a variety of businesses and financial instruments that consistently perform well while not succumbing to get-rich-quick day-trading schemes or pulling out money because of a market hiccup. Speculating, on the other hand, is trying to hit a home run and letting emotions dictate how you play the markets. You should never, warns Graham, try to beat the market, but should instead trust that over a long enough time scale, as long as you're consistent, you will get a decent return on your investments.
Still, for the learning experience if nothing else, I decided to give it a shot. There are a couple of ways you can follow me in my folly, which, again, you should not do: You can go through a site like TD Ameritrade and pay a broker $7 per trade, or use the app I just downloaded that will make the trades for free. It's called Robinhood, and it's supposed to ~disrupt~ the brokerage industry.
You just download it and add cash to your account. It's as easy as playing the scratch-off lotto, and in the long run about as profitable. (According to the app's FAQ, Robinhood plans to make money on the interest of the money users have in their accounts and don't invest.)
"Picking stocks is really difficult, you're not just fighting your own psychology, but you're also fighting the fact that the majority of stocks just stink," Batnick told me.
It's true—most stocks are terrible investments. As Batnick put it, "Since 1980, roughly 40 percent of all stocks have suffered a permanent 70-percent decline from their peak value. Also, two out of every three stocks underperform the index."
Using the Robinhood app, I purchased two shares of Calloway Golf, which was picked basically at random, although I guess I thought hitching my wagon to a golf company would be a good entryway to the world of wealth. Also, it was like $10 a share and I was only willing to put like, $25 into this experiment.
After two days, I was down 2.77 percent. This did not seem like a path to riches, or even a PS4. Investing in your financial future is, day-to-day, about as exciting as transcribing other peoples' meetings—it's a slow process by which a tiny nest egg grows by fractions of percentage points until you're ready to retire, at which point you'll be able to buy whatever video game system you like, and can you even imagine how intense Halo 65 will be?
The trick, Michael Batnick advised me, was just to reinvest my dividends every year, and to remember that you have many years ahead to learn more and to grow your accounts.
"The problem for millennials is it's hard to think long-term," he told me. "The unfortunate reality is that time and compound interest are an investor's greatest asset, yet so few are able to leverage it."
Follow Allie Conti on Twitter.