How I got started with investing when stalled by over-analysis
By: Evan Thomas
Tags: Personal Finance, Money, Making Of A Millionaire, Investing, Retirement

It might not be the best long-term strategy, but it’s not the worst and it can simply get you started.

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If you’re interested in investing, you’ve probably read a great deal about it.

I’m going to assume that you know you want to invest in the stock market, but the major question you’re asking yourself is, “How exactly do I get started?”

I know that when I started investing, I wasn’t sure how to get things rolling.

Like many adults, I started with zero financial knowledge. Naturally, I started to inform myself.

But I always seem to be left with the following problem:

What fund, stock, ETF, or bond do I actually invest in? There are so many to choose from.

Then I would get stuck on other questions like:

What other factors do I have to consider? How important are fees, expense ratios, and past performance?

Should I manage the money myself? Or risk getting taken advantage of? What if I make a mistake?

For me, the result was a full-blown analysis paralysis.

Analysis paralysis is not ideal because it results in lost time.

And as you probably know, time in the market is an extremely important factor for growing wealth in the stock market. Although, I certainly am not recommending that readers quickly get involved with any investment just for the sake of avoiding analysis paralysis.

Two investment vehicles got me over the hump and helped me get started with investing:

Specifically, I’m referring to:

Robo-advisors

Target-date funds

Like with any investment, there are pros and cons to these. But, I believe that I really wouldn’t have invested any significant amount of money had it not been for these options.

I also know that lots of people struggle with how to actually get started. Robo-advisors and target-date funds help you get started by essentially taking the decision making away from you.

They work as training wheels for learning how to invest.

Robo-advisors

Robo advisors give investors access to 100% digital investing services and speaking to a human is completely optional (and sometimes difficult, which is something to consider). The financial ‘advice’ is usually based on mathematical formulas and algorithms produced by a computer and is a form of passive investing.

The algorithms work with the answers to a broad set of questions asked to all investors upon opening an account (e.g. Age, financial goals, age at desired retirement, risk assessment, etc.).

I specifically started with Acorns. In my Acorns account, my holdings were mainly composed of low-cost Vanguard ETFs, bonds as well as iShares in a 90% equity, 10% bond allocation (which again, was based on the answers I provided)

Pros of Robo-advisors:

It’s fast: Open account, answer some generic questions, link your bank or other funding sources, and automate investments

‘Set it and forget it’

Low initial investment (some allow mere cents to be invested)

Good for impulsive people, those that are prone to analysis paralysis, or would otherwise be pulling funds out during market downturns, and then waiting too long to reinvest (essentially timing the market, whether intentional or not)

Little to no financial knowledge needed

Good for those that want to be as hands-off as possible

Fees are typically very low (Acorns charged me $1 per month, regardless of the amount of money in my account)

Some platforms have human fund managers behind the scenes that help select and monitor funds

Automatic rebalancing to maintain a predetermined asset allocation

Asset diversification in robo-advisors is often applauded (see cons list below)

Receive and automatically reinvest dividends (if you choose to do so)

Allow for conservative investing and reduction in volatility (at least in theory)

Cons of Robo-advisors:

Depending on the platform, customer service can be extremely hard to contact

Much less control over decisions (which may be a pro for some investors)

No one is going to talk you down or talk you out of what many would consider stupid decisions (such as pulling all of your money out based only on short term emotions)

Speaking of trying to pull your money out…selling all or a portion of your assets can be difficult to do with some robo-advisors. This can be perceived as either a pro or a con, depending on your perspective)

Asset diversification can be over-diversified in some robo-advisor portfolios

Communication is often in the form of a blog post

Some encourage low investment amounts (like mere cents) which will get eaten up, even by low fees

Performance through downturns is unknown.

According to most sources, 2020 is the first real test for robo-advisors during market downturns. Since the market recovery has been sharp, we still won’t know how robo-advisors will fair during prolonged downturns.

Since robo-advisors have become popular, the market downturns have been short-lived.

For example, in my personal experience during 2018 (a year in which the Dow Jones and the S&P 500 had negative returns), my Acorns account return roughly -7%. The DJIA’s 2018 return was down about -5.97% while the S&P 500 was down by -6.24%.

Common Robo-Advisors

These are some common platforms for robo-advising:

Acorns

Wealthfront

Betterment

M1 Finance (Often voted by several different websites as one of the best robo-advisors. I have never used it.)

Vanguard Digital Investor (Recently broadened robo-advisor access in 2020)

Fidelity Go

Target-Date Funds

Target-date funds, according to Kiplinger, are mutual funds whose asset allocation and activity are based on the year that the portfolio owner plans on retiring. The mutual fund is actively managed and rebalanced to adjust risk as the portfolio owner gets closer and closer to retirement.

Many employees with access to retirement savings accounts like a 401k, for example, often have the option to select a target-date fund, (which typically read as ‘Target Date 2040,’ where 2040 refers to the targeted year of retirement or Fidelity’s funds which would be ‘Freedom Fund 2040’).

In my first job that offered me a retirement account, I opted for a target-date fund so that I get simply get going.

Pros of Target-Date Funds

Good for hands-off investors that don’t want to spend time managing or researching finances

Simple and automated contributions

‘Set it and forget it’ in nature (someone else is making decisions for you)

Can be used for retirement savings as either pre-tax or Roth

Controlled by educated fund managers

Cons of Target-Date Funds

Often criticized as lacking diversification

Can be overly conservative

High fees (although this is relative) for active management and operating fees

They are not truly personalized

Adrian Garcia, from Bankrate, highlights an important section of analysis on target-date funds by the Federal Reserve:

“There’s this question: Does one size fit all? In the accumulation phase, the target-date fund does a pretty decent job when the only thing we know about you is the year you might retire. [However,] ultimately, we should all have a custom solution that takes into account not just what you have in your current plan with your current employer, but your entire asset picture.”

Final Thoughts

For me, I know that I simply would not have gotten started with investing if it weren’t for these two vehicles.

And while these two might not be the best way to maximize wealth, I think they are better than not investing in anything at all.

This helped me avoid keeping 100% cash, which is something I think almost everyone can agree is not a good idea when it comes to building wealth.

Robo advisors and Target-date Funds helped showed me the basics of this type of investing. I was exposed to different funds, learned about costs, and was able to ride the wave of the many upturns, and some downturns in the market over the last several years.

Mainly, they helped me breakthrough that original analysis paralysis and get my money in the market.

These investment options also helped me avoid some of the major ‘No-Nos’ that plague many investors, especially beginners (like overreacting to crashes and downturns or trying to time the market).

Now, armed with significantly more knowledge and experience, I can make adjustments as I see fit. You can do the same, or stay the course.

No matter what you want to do in life, sometimes getting started is the hardest part. Once you get over that barrier, you can gain momentum and confidence. Find ways to get over the barrier.

Disclaimer: This article is intended only as a way to share my experiences and should not be considered official financial advice. As always, do your own research and only make financial decisions that you understand and are comfortable with.