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So many people never get around to investing. According to data from the Federal Reserve, only 52 percent of American families have money invested in the markets in some shape or form. The most common way is through retirement accounts.
Investing late in life means you'll need to contribute more and be strategic about which accounts you choose to invest in. Use 401(k)'s to get deferred contributions or you can choose a regular brokerage account with M1 Finance or Robinhood to invest on the open market.
However, when you isolate this down to just people who invest in individual stocks, that number drops to 14 percent.
To make matters worse, those proportions get more slanted as you look at them by income bracket. Only about one-third of households below the median income threshold have any money invested in the markets.
Meanwhile, stock ownership among the top 10 percent of wealthiest households stands at an overwhelming 90 percent.
If you’ve been putting off getting into the investment game, I want you to know: There’s still hope! You don’t have to be some fresh-faced college graduate who’s just starting their career to take advantage of the markets, recover from your losses, or even make up for the lost time.
You could be in your 40s or 50s, and it still wouldn’t matter! What is important is that you don't procrastinate any longer. And in this post, I’m going to show late bloomers how they can become first-class investors.
What Should I Invest In As A Late Investor?
Perhaps the biggest barrier to entry into the world of investing is in knowing exactly what it is that you should invest in.
There are literally millions of different stocks, funds, and products that you could purchase. And each of them comes with its unique set of pros and cons.
So I think this is where a lot of people who want to invest get stuck. Will I pick the wrong one and lose all of my money? How do I know a good investment from a bad one?
My advice: Don’t be afraid!
You can basically throw out about 99.99 percent of the financial products out there and focus on just a handful of important ones. Here’s where you can start looking.
Mutual Funds
A mutual fund is simply a collection of investments that are bundled together into a single financial product.
You and thousands of other investors will mutually pool your money together to buy these assets and share in the profits that they generate.
This means that each share of a mutual fund could represent hundreds or even thousands of different securities.
Most mutual funds have what’s known as a fund manager.
The fund manager is the person who decides what securities the fund should invest in and what the overall strategy should be.
These types of funds are called “active funds” because someone is actively making decisions for them.
The benefits of a mutual fund are that you’ll spread out your risk of loss through diversification.
Because you are part of this larger pool of investors, you can afford to buy large quantities of various securities that you might never have been able to buy otherwise.
In addition, you’ve got this fund manager who is helping you to supposedly pick the “good ones”.
Mutual funds have been around since the early 20th century and continue to be a classic way to invest.
Most 401k retirement plans are made up of different mutual funds for you to choose from.
In fact, the majority of people who invest in them have absolutely no idea what securities they hold.
I believe for beginners that mutual funds are definitely one of the easiest places to get started.
Thanks to their structure and natural ability to provide diversification, the price fluctuations aren’t nearly as wild as what you’d experience with individual stocks.
That means you’ll sleep a little better at night, even if you’re someone who's risk-averse.
ETFs
An ETF or exchange-traded fund is similar to a mutual fund.
At their core, they contain a bundle of securities that are bundled together and sold as one package.
However, they have a fundamental difference.
Unlike mutual funds whose value is recalculated once per day after the markets close, ETFs can be bought and sold in the open market the same way that stocks can.
This means their value fluctuates creating opportunities to buy them at a premium or discount (relative to the assets they hold).
ETFs are relatively newer financial products and have caught on in popularity thanks to their simplicity and low cost.
Many of the new digital trading apps that might not be registered to sell mutual funds will instead offer ETFs as an alternative.
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Individual Stocks
Individual stocks (also known as equities) are shares of publicly traded companies.
These are the stocks that regular, everyday people like you and I can buy on the open stock market.
To make a purchase, all you have to do is pick a broker and place your order – that’s it!
People have definitely made a lot of money by buying individual stocks.
If you think that you’ve found a company that you believe will be the next Google or Amazon, then there’s nothing stopping you from buying a couple of shares.
However, putting too much money into just a handful of stocks can leave you incredibly vulnerable to risk.
If the company gets bad press or goes bankrupt, then your shares can lose a significant amount of their value – sometimes all of it!
Yes … this even happened to me. I bought shares of a distressed automotive company back around the time of the Great Recession.
Even though that company made a turnaround, I learned that in bankruptcy anything is possible – including the ability of the company to cancel its old shares and issue brand new ones under a new name.
Overnight, my stock in this company was completely worthless!
However, not all stocks are so dangerous. If you do your homework and pick companies with strong financial fundamentals, then you can definitely earn some money over time.
I took this approach for my next stock purchase and bought shares of a much more reputable company: Apple.
That was a decision that turned out to be quite a good one!
Index Funds
Chances are when you watch the news at night, they’ll say something about the stock market being up or down.
When you see this, they’re not telling you what happened with every single stock on the market. Instead, they’re reporting how the “index” performed.
An index is just a group of companies that represents the market as a whole. On the news, this is usually represented by the Dow Jones Industrial Average, the 30 largest industrial companies in the U.S.
For the broader market, the Standard & Poor's 500 Index (S&P 500) represents the top 500 companies in the U.S.
So how does someone invest in an index?
Go back to the definition of a mutual fund or ETF. What if instead of having someone pick the securities, you just generically copied all the companies that are contained in the S&P 500.
That’s exactly what an index fund does.
This incredibly simple idea was popularized in the 1970s by the founder of Vanguard Jack Bogle.
He proposed that index funds would always outperform active funds because their fees would be lower (since there wouldn’t be any need to have a fund manager).
Decades later, it turns out he was right, and index funds are now a well-known way to invest.
If you’re an absolute beginner at investing, then index funds are definitely the place you want to start.
Without knowing anything, you can basically capture the performance of the whole market and achieve an “average” return rate, which is something that not even most active funds can claim!
How Much Should I Invest When I'm A Late Investor?
Unfortunately, I wish there was an easy answer to this question.
You’ve probably heard from friends or read online that you should be saving at least 10 percent of your income into an investment account (like a retirement plan).
However, let me be the first to tell you that this is very generic advice.
In reality, the best answer is one that aligns with your goals. For example, let’s say you’d like to retire by the time you’re 60 years old.
However, you’re currently 40, never invested, and have only been saving your money into a regular old bank account.
In this case, you’d have some work to do if you’d like to get on track.
For starters, you’d want to stop putting your money into the bank and instead start investing it through a tax-advantaged retirement account.
At the same time, you’ll most likely have to bump up your savings rate to 20 or even 30 percent.
This is to make up for the shortcomings of less growth since compound returns aren’t going to have enough time to multiply your savings.
A Helpful Tool
No matter if you’re saving up for retirement, a new house, or college for the kids, it will be helpful to know what kind of numbers to shoot for.
That’s why a free online calculator like this one here from Investor.gov can be useful.
Just input your numbers and find out exactly how much you should be investing every month.
Where Do I Get Started Investing As A Late Investor?
So now that you know what to invest in and have maybe spent a few minutes with a savings calculator, the next question will be where you can go to make your investment.
These days, you have a wide variety of options to work with. Here are some of the best places to get started.
Retirement Plans
Hands down, I will tell anyone of any age that if they want to get involved with investing, the best place to start is through a retirement account.
This is for one major reason: Tax savings.
As a way to motivate people to save for retirement and use these plans, the IRS has made special exceptions where you get to defer the taxes made on contributions to the following types of accounts:
- Workplace plans: 401k, 403b, 457
- Individual retirement accounts (IRAs)
Additionally, there’s another style of plan where instead of taking the tax break upfront, you can take it when you retire and withdraw the distributions. This applies to:
- Roth IRAs
- Roth 401ks
I personally see investing in my 401k as a golden opportunity to save thousands of dollars in taxes every year.
When I save up to the IRS limit of $19,500, I avoid giving the IRS approximately $4,290 of my earnings. Since both my wife and I do this every year, we effectively double this value!
Investment Options
With workplace plans like the 401k, you’re generally only limited to whatever investment choices your employer allows for the plan.
For some companies, this can be a huge array of choices including mutual funds, ETFs, stocks, etc.
For other companies (usually smaller ones), the choices may be limited to just a handful of mutual funds.
With IRAs, because you can pick which broker to use, you’ve also got a ton of flexibility on what it can include. This can be pretty much any mutual fund, ETF, or stock.
It can even include alternative investments such as precious metals (like gold and silver).
401k Matching
In addition to the tax savings, another reason to invest your money through a workplace retirement plan is that you might get paid too!
I’m not joking.
If your employer offers something called 401k matching, then this means they will make contributions into your 401k plan alongside the money you put in.
Plus, those contributions are also tax-deferred!
Sometimes the matching is dollar for dollar.
Other times it's $0.25 to a dollar. It all depends on who your employer is and what their rules are.
The best way to find out is to contact your HR department, ask if they offer 401k matching, and then request the specifics of their rules.
Catch-Up Contributions
If you’re 50 years or older, then the IRS makes this even more enticing.
As a way to better prepare for retirement and attempt to make up for being a late investor, they’ll allow you to make what’s known as “catch-up contributions”.
Here are the limits as of 2021:
- Workplace retirement plans (401ks, etc.): $6,500 on top of the normal $19,500 limit.
- IRAs: $1,000 on top of the normal $6,000 limit.
Brokerage Accounts
Like I mentioned – I love retirement accounts because of the tax savings. But they also come with a big limitation:
You’re not allowed to start making withdrawals from them until age 59-1/2. (Hence, the fact that they are supposed to be retired.)
This is why if your primary goal is not saving for retirement or you need access to the money sooner then another option might be to use what’s commonly referred to as taxable brokerage accounts.
There are many of these types of services.
Many cities have local Edward Jones branches where you can walk into an office and meet with an actual financial advisor.
If you’re more like me and prefer to do things online, then there are plenty of ways to do that too.
Sites like Vanguard and Fidelity have easy-to-use websites. Discount brokers like E-Trade and Robinhood have also streamlined investing from a computer or smartphone.
All of these sites have plenty of customer support representatives available to help you if you get stuck or have a question about something.
Some of the bigger companies will even offer to have you work with a financial advisor (depending on how much money you’ve got to invest, of course).
Robo Advisor
If you’d really like to take a hands-off, do-it-for-me approach to investing, then you may want to consider using a robo advisor.
Robo advisors are apps you can download to your smartphone and the software picks out your investments for you.
There’s no human interaction involved.
Robo advisors have become a very popular way for young people and millennials to get involved with investing.
This is all thanks to their simplicity, low cost, and convenience.
If you’d like to give this a try, check out apps like:
- M1 Finance
- Betterment
- Wealthfront
Where Can I Learn More About Investing?
For late investors, there are tons of ways you can educate yourself. I’m actually a little jealous that more of these didn’t exist back when I got started.
Here are a few good ones to try:
Books for Beginners
If reading is your thing, then head on over to Amazon or check out any of the following from your local library:
- “The Little Book of Common-Sense Investing” by John Bogle
- “A Beginner's Guide to the Stock Market” by Matthew Kratter
- “The Only Investment Guide You'll Ever Need” by Andrew Tobias
Free Educational Websites
There are thousands of great websites and blogs related to investing as well as a whole array of personal finance topics. Specifically for people just getting started, I would recommend you check out the following:
YouTube Channels
If you’re more of a visual learner (like me), then try these free online videos:
- Cooper Academy
- Khan Academy – Search “finance” to see all of the investing related topics
- Graham Stephan
Don't forget about Minority Mindset!
The Late Investor Can Build Wealth Too
If you're a late investor, don't think that the train has left and you're flat out of luck.
It's totally possible to make up for lost time and still achieve your financial goals as long as you're willing to put in the work.
The first thing you'll want to do is figure out what your goals are. This will help you to refine which strategies you'll use and how much of your money that you'll want to invest.
To keep things simple, I suggest sticking to basic investment products like mutual funds, ETFs, and individual stocks. If you really want to make life easy, then check out index funds.
For the best tax efficiency, I strongly recommend using retirement accounts like 401ks and IRAs. If you need access to the money, then go with taxable brokerage accounts or robo advisor apps instead.
The best thing you do to become a better investor is to keep things simple. Don't try to get creative or greedy. This rarely ever works out the way you want it to.
Most importantly, work on educating yourself.
No matter what age you are or where you're starting out, there will always be hope that you can achieve financial freedom if you learn the proper fundamentals and put them into practice.
