Not Ready to Invest? Here’s What Financial Advisor Manisha Thakor Wants You to Know
Do you suffer from investing inertia? Even though you know that investing in the markets may help achieve your financial goals and ultimately help you be more financially secure, you may have trouble figuring out just how and when to start.
That’s not unusual. For many people the thought of investing, especially during uncertain times and volatile markets, can put a dead stop to even the best intentions.
Manisha Thakor, Certified Financial Planner®, Chartered Financial Analyst®, Harvard MBA, and founder of the financial wellness consultancy MoneyZen, knows how this can happen.
Thakor has spent the past 25 years in a range of financial roles, all with an eye toward improving financial literacy and advocating for investors, particularly women. She is the author of two personal finance books and sits on the board of the National Endowment of Financial Education.
Here, she answers some of the most important questions regarding investing inertia. She shares her thoughts on why you should invest, and importantly, when you know you’re ready both financially and emotionally.
Q: What Do You Think Holds People Back From Investing?
A: The art of investing is the ability to make decisions in the face of imperfect information. There are aspects about the overall markets that no one can know in advance. For example, what will happen to interest rates or when will the next market dip occur? This is also true for individual stocks and bonds. In fact, if someone did have perfect information about an individual security in advance, well, that could also be called insider trading!
Here’s the rub. It is precisely because we don’t have perfect information, because we are exposing our money to a degree of risk — well that’s what gives you the opportunity (but not the guarantee!) that your investments will grow faster than inflation. No risk, no return.
For many people, it’s extremely difficult to make a decision based on something they don’t know a lot about. They mistakenly think they “need to know it all” in terms of understanding the subtle nuances of investing before taking a step, thus keeping them paralyzed from making any decision at all.
Ironically, not making a decision actually is a decision when it comes to investing. Keeping your money in cash practically guarantees that your money will not keep up with inflation. Or said differently, doing nothing also exposes you to risk – the risk that your purchasing power will decline over time.
Interestingly, I’ve observed qualitatively that men seem to have an advantage when it comes to making decisions without full knowledge. Note, I want to be extremely clear that this does not mean the decisions are always good ones. In fact, a range of studies indicate that when women do invest, their investment returns tend to be slightly better than men’s.
What I’m talking about here is simply the propensity to “take the leap” into the market. A high comfort level with not “knowing it all” before making a move forward can also inform investment decisions. This is why we often see women, even those with plenty of savings, being more reluctant to invest than me.
Q: On the Flip Side, What Motivates People to Invest?
A: It’s usually a life event. Sometimes that life event can be as simple as having more money to invest. Perhaps you just got a new job with a higher salary, a different compensation structure, or maybe you received an inheritance. In my experience, men are particularly motivated by simply having the money to invest.
By contrast I’ve observed women with large savings still hold back. My unscientific hunch is that men are socialized to start talking about money and investing with each other earlier on in their lives, and that perceived financial fluency inspires them to take investment action.
When women are on the diving board, it’s often something bigger than themselves that helps them jump in. Getting married, getting divorced, having a child, caring for an elderly parent or the death of a loved one are all examples of something so important to women’s lives, they force themselves to take the investing leap despite imperfect information.
Of course, everything is a little different now because of the pandemic. Many people have seen their savings decimated from unemployment and health care costs related to Covid-19. On the other hand, other people who weren’t directly affected by Covid may have been able to save more during this period because their discretionary spending on things like travel and entertainment stopped. That said, they may still feel plenty of anxiety about finances and the markets. That means, for now at least, the pandemic may be a life event that is holding investors back.
Q: How Can People Know When They’re Ready to Invest?
A: You’re ready to invest once you have three core personal finance building blocks in place.
The first block? A solid emergency savings fund. It’s easy to think that if you just made more money, then you would be able to do this. Yet shockingly, the research shows that there are people making over $100,000 a year who still have trouble coming up with $500 in cash for an emergency — simply because they didn’t make this core building block a priority.
I think it’s vitally important to build up an emergency fund of three to six months of living expenses. That sounds simple but it can take up to five years for some people, especially if you’re also contributing to a 401(k) or other retirement savings plan. (Which you absolutely should be doing.)
The second building block: You’ve paid off all of your high-interest debt. What constitutes “high interest?” Here’s how I think about it. Over the very long run, stocks historically have generated a 7% return after inflation (using a 3% historical inflation rate – the future could be higher or lower) So, if you have debt that has an interest rate of 7% or above, in most cases, it’s a better return to get rid of that debt before you start investing outside of a retirement account. Why? Because you’ve just guaranteed yourself a “return” of whatever that interest rate is — as you no longer have to shell out that money!
The third building block? Having money that you don’t expect to spend in the next five to ten years. That gives you a long runway to hold steady while the market inevitably goes up and down. One of the single biggest investment mistakes is selling when the market is down — either out of fear or worse, because you put money into the market that you knew you were going to be spending.
Q: How Do People Know What Kind of Investor They Might Be?
A: This is a gigantic question that should be asked more often. If more people were aware of the two basic flavors of investing, my hunch is that people would be much less fearful of putting their money in the market.
I like to think of it like this. Some people like to drive in the left lane, weaving in and out to pass cars, speeding up to make it through the traffic light. Some people like to drive in the right lane, keeping to the speed limit and a straight line to their destination. Both drivers tend to end up at the red traffic light, albeit using different speeds! And of course, there’s always that one driver that zooms through right at the last minute of the yellow light.
The same goes for investing. Driving in the right lane is akin to investing in index funds and ETFs that mirror the markets. Driving in the left lane is akin to investors choosing actively managed mutual funds and ETFs or individual stocks and bonds.
In the right lane you are guaranteed to get whatever return that index generates (minus fees). In simple terms, you’ll earn the market return. In the left lane you have the possibility — but not the guarantee — to be that one car that makes it through before the light turns red. Because of the power of compounding, the incremental results of being that “one car” that generates much better returns than the overall market can have a gigantic impact. That’s the thrill of left lane investing.
I find that when potential investors understand that just like your driving style, you can find an investing style that matches your personality, they feel more comfortable investing. And of course, it doesn’t have to be all one or the other — many people choose a mix of the two. If I know a particular road well, I may drive faster and get to where I’m going faster. But if I’m unfamiliar, I may slow down and become less aggressive. The same thinking can be applied to your selection of an investment strategy.
Over the years I’ve noticed a tendency for many women to like the idea of right lane investing. While some may think we’re being “too conservative” — academic research shows that just like the car trying to weave in and out of the traffic, nine times out of ten you end up at the same place over the long run driving in the right lane, but with a lot less stress!
Q: What About Investing Trends, Like Crypto and Meme Stocks? How Do They Affect First-Time Investors?
A: When first-time investors are bombarded with information overload about investing in hot new trends like crypto and NFTs, it can make you even more reluctant to invest. When it comes to these hot trends, I actually think that’s a healthy gut reaction. To me, investing in these areas is like wanting to take a commercial rocket ride into space. Risky and not well-tested yet.
However, I fully realize that there is so much hoopla around these shiny new objects — headlines, broadcast reports, and social media posts — you can feel like you should be doing it too. My advice for first-time investors: Stay clear of these and focus on driving in that right or left lane. But if you absolutely can’t stop yourself from joining that loud, wild party, only invest money you can totally afford to lose.
Bottom line: If you are a first-time investor, the power move is to focus on getting your three building blocks in order. Simply doing that will put you miles ahead of the average person when it comes to the health of your finances. Having these building blocks in place will go a long way towards increasing your comfort with starting to invest for the long run.
Are You Ready to Start Investing?
SoFi Invest® can help, whether you’re a right lane or left lane investor. With the Active Investing Platform you can purchase company stocks, exchange-traded funds (ETFs), and fractional shares. For those who want a more hands-off approach, SoFi’s Automated Investing Service builds and manages portfolios for members. SoFi doesn’t charge SoFi management fees, and — even better — SoFi members have access to complimentary financial advice from professionals.
SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected] Please read the prospectus carefully prior to investing. Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Guest Participation: The individuals interviewed for this article were not compensated for their participation. Their advice is educational in nature, is not individualized, and may not be applicable to your unique situation. It is not intended to serve as the primary or sole basis for your financial decisions.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SOIN0122715
Comments are closed.