First-Time Investor? Dad Shares Tips and Strategies: This video, First-Time Investor? Dad Shares Tips and Strategies and the article below is about investing for young adults. It discusses choosing an investment and why to start investing early. The young adult, a college student, received a bonus and decided to invest it in an ETF. Her father, a financial advisor, helped her decide the best course of action. They decided on an ETF indexed to the S&P 500 because it is a good option for a first-time investor. The video also discusses retirement plans and the importance of employer matching contributions.

Article: Retirement Daily Bonus: Dad Helps a First Time Investor

An exchange-traded fund (ETF) on the S&P 500 is the winning investing strategy for this beginning investor.

By Rachel Mahoney

Investing money can be a risky and confusing business, but choosing how to invest your money is one of the most challenging and can predict your financial future. My whole life I have heard my parents tell me to start investing young, but I was never interested in learning about the stock market or retirement accounts, so I never got around to it. Now that I am entering my 20s, I have realized that I need to start preparing for my future. This jump started when I received a $250 bonus from my boss, Robert Powell, a generous gift for a college intern at Retirement Daily. According to Bob, the only rules were that I had to invest that money somewhere, and then write about it. When thinking about where to invest my money, the stock market is the first place that comes to mind. However, the stock market does come with a lot of risks (and rewards). So, I decided that I should invest in something more stable while still involving the stock market. As a first time investor, I thought it a good idea to talk to a financial expert. I knew that finding the right investment for me would not be an easy task. So, I talked to my father, Sean Mahoney, who is the chief financial officer of RLJ Lodging Trust in Bethesda, MD. He explained all of the different ways I can invest my money: retirement accounts, stocks, bonds – and helped me reach the best decision for my first time investment.

Choosing Where to Invest

I knew that I wanted to invest in something that would grow over time, is relatively low-risk and would familiarize me with the stock market. I knew that I wanted to avoid investing in individual shares. As this is my first time investing, I don’t feel ready to navigate the stock market and make successful investment decisions. So, I decided against buying individual shares of companies; too risky for my first time. I also decided against adding to my retirement account. I set up a Roth IRA with my parents and invested in a money market fund. I knew I wanted to invest in some kind of stock or bond. I decided to ask my dad what kind of investment he recommends I make, and also to explain what some of my options are. “I would encourage people, particularly younger people, to have a portfolio that’s mostly indexed to equities, which is the highest risk but also highest return security out there. So that would be, when I say equities, it’s the stock of public companies. And you can do that either through individual companies, which is a lot more risky because you have to pick the right companies, but you could also do it through either index funds, mutual funds or ETFs that are indexed to specific, either industries or the entire market,” my dad said. With the information that my dad had given me, I did some research into each kind of fund, and I thought a pooled investment security would be a good option. Common options are either an ETF (exchange-traded fund) or a mutual fund. I also asked my dad for specific ETF recommendations. “I think for a long-term investment, probably the best option that I would recommend is an ETF indexed to the S&P 500, which is an index of the 500 largest companies on the stock market. That’ll allow you to have equity returns over a long period of time,” he said. My dad explained that an ETF is considered a pooled investment security. However, it is different from a mutual fund because an ETF can be bought and sold like an individual stock. A mutual fund is only traded once a day after the market closes. For my first investment, I wanted an investment that I had more control over, so I decided on an ETF. My dad also said that this type of investment is perfect for a first-time investor who wants to start exposing herself to the stock market. “It tends to include the best companies within the stock market and will allow you to sort of have, on a risk adjusted basis, equity-like returns, which tend to be the highest, but also have the safety of a diversified portfolio because of the index. That would be how I would think about it if I were in your shoes as a new investor,” he said.

Why Start Investing Now?

I am almost 20 years old, so my retirement seems really far off. I haven’t even graduated college, yet I need to start planning for my retirement. I feel so young, so one of the biggest questions that I had for my dad was “Why should I start investing now?” “The most important step is to start contributing to your retirement as soon as possible. The value you get for [not having] a couple year delay, or the value destruction for even waiting a couple years, when you plot out a 25, 30, 35 year career is pretty significant. So invest early, take risks,” my dad said. But, what if I decided to just invest more of my salary later? I could have more spending money now, right? My dad elaborated more on the importance of investing younger. “I think it’s a great question for new investors. I think particularly [for] young new investors, investing the most you can early on is a prudent choice in the sense that it allows you to get the maximum value of the time value of money, right? The earlier you invest, the more secure retirement you’ll have. And so when I talk to young investors, I tell them to make it hurt a little bit. In other words, put a little more than you’re comfortable with because the returns that you’ll get from that early investment in your early investment journey will pay huge dividends over your career span and then allow you to have as comfortable a retirement as possible,” he said. Essentially, he was saying that if I invest more now, I get a lot more later on. Before starting this, I had about $1,000 in a Roth IRA account, and I add $10 from every paycheck to the account. Since my dad told me that I should add more now to save up, I have decided that I will increase my contribution from $10 per paycheck to add about 15% of each paycheck into my Roth IRA.

Maximizing Benefits in My Career

As I am already halfway through college at Northeastern University in Boston, studying journalism and criminal justice, I have started thinking about my career and all the future benefits that come with it. Something that I had not thought about was weighing which job offers provide the most secure benefits. Securing my financial future includes more than just my investments; I have to be sure that my jobs offer good retirement benefits. “So, generally, most employers will offer some sort of retirement plan, and they can range from a defined benefit plan, which is a traditional pension that is increasingly rare, but very valuable. They tend to be limited to kind of more blue collar, police, fire, teacher funds, union workers generally will still have pension funds. That is where you will have a set, it’s called a defined benefit plan. So, you will get a defined return after you retire, usually measured as a percentage of some derivative of your compensation. And so that’s one where there’s not a whole lot you have to do from a baseline perspective because the employer will provide that,” my dad said. While pensions were common in the working days of many retirees now, they are rare in most modern career fields. Popular retirement plans now focus more on people making investments young and getting a return after they retire. “Most employers in this day and age have what are called defined contribution plans. And so defined contribution plans are things like 401(k)s, et cetera, that the employee will contribute, generally pre-tax, although there are vehicles that you can do after tax, such as Roth, which will allow you to make investments [after] taxes,” my dad said. My dad further explained that there are tax advantages to having a defined contribution plan, and they will also grow as my career advances. He explained that there are limits on the amount that I can contribute, but there are benefits to contributing the most. Some employers will match every contribution that is made to my account. So, if I worked for an employer that did this, making the maximum contribution will benefit me in my retirement. Dad added, “I would encourage any new investor to understand what the employer match is because you want to make sure that you are, at a minimum, contributing enough to maximize the employer match because that’s essentially free money to the employee.” But is using just an employer plan enough for retirement? My dad said no. “In addition to that, I would encourage people to either set up IRAs or individual investment accounts as they have disposable income to invest in whatever their risk tolerance is. The younger you are, generally speaking, the more risk tolerance you should have, and you’d likely index more to equities as opposed to fixed income securities such as bonds, et cetera. But I think you’d want to supplement your 401(k) with your own retirement, which will just allow you to, once again, get the value, the time value of money and equity returns, but at the end of the day, allow for a more fruitful retirement,” my dad said.

Doing the Actual Investing

Now I had to actually invest the money. I added the $250 bonus into my already existing Roth IRA. I have an account with Charles Schwab, so I can use that account to make investments from my Roth IRA. My dad helped me navigate my account and learn how to make an investment. As I had already decided, I was investing in an ETF for the S&P 500 index, which was $514.01 per share when I invested my money on April 4, 2024. Obviously, my bonus was not able to cover a full share, so my dad recommended that I dip into my savings. He argued that the money is sitting there without much growth when I could use it toward an active investment. So, I decided to use my savings to buy shares. With the bonus added I had around $1,250 available to invest. My dad recommended I buy two shares to start off. My dad actually said that “I am buying on the dips.” Finance saying, according to him, that means that I bought a stock during its low period, but it will likely rise. My dad elaborated a bit on why buying during a dipping period is smart. “Things got cheaper, and this happened to be one of the worst days in awhile. You’re buying at today’s price, and it’s always good to buy when the market falls. Your entry point is on a down day in the market, so it’s good for a long-term investment.”So, with the $250 bonus and an extra $750 from my savings, I made my first investment. I bought 2 shares of the ETF S&P 500 index. I still have around $200 in my Roth IRA balance, and I plan to continue adding 15% of my paycheck. As I continue learning about investing, I plan to make more investments in stock to help grow my Roth IRA.

Reflecting

Making a first-time investment can be tough and stressful. I found that having my dad, a CFO, as my guide was helpful in making the smartest decision for my investment. I am excited to see my investments grow and to explore different investing options as my Roth IRA continues to grow.

About the Author: Rachel Mahoney

Rachel Mahoney is a second-year Journalism and Criminal Justice student at Northeastern University. She is an Editorial Assistant at Retirement Daily and hopes to be an investigative journalist.