SALT LAKE CITY — Alexis Richards is in the midst of establishing herself in a new job she began in February. Among the more pressing issues for the 25-year-old Murray resident is what to do with some money she has from a retirement plan at her previous employer.
While she has been told that it should be a relatively easy process, thus far it has been anything but simple.
“It’s confusing,” Richards said. “I’ve honestly put it off because I have a year to do it.”
Even a little money with 40 years to grow can yield a good result. She's procrastinating, she said, because of her lack of knowledge about often-complex financial matters.
“It’s hard when you don’t really know anything and you don’t know where to start,” she said. Growing up, she said no one explained or discussed how to set up an investment savings or retirement account.
“They tell you that you need to invest and put a lot into retirement, but nobody ever teaches you how,” Richards said. While some classes in high school discuss financial literacy, they teach you “how to write a check,” not about investing.
She said she's focused on learning the proper way to set up her retirement account at her new job and get started saving for her future.
“I want a plan that I can contribute as much as I can to, and one that my company will match,” she said. “I want to put as much money in as I can.”
Richards said she would consult with her parents for suggestions on how to start her savings plan.
While figuring out how to invest can be a daunting task for novice investors, there are a few keys that first-time or new investors should consider as they begin to save and invest for the future, said one local analyst.
Create a budget
Creating a budget to determine household expenses is the first consideration, said Jeff Solomon, branch manager for Solomon Financial Advisors/Raymond James in Salt Lake City
“This will help determine how much one might save for a long-term need, such as retirement, by getting an idea of the actual cost of living,” he said. New investors should consider catastrophic risk and contingency planning as they begin investing, he said.
“Establishing an emergency fund or adequate savings is very important,” he said. “Unexpected expenses can create immediate need for funds outside of the monthly budget, and if there is no emergency fund or contingency plan, such an event could force liquidation of long-term assets for immediate needs.”
Catastrophic risk can be managed with other financial tools, such as life insurance, but “it can be very difficult to recover financially from loss of life without prior planning.”
First-time investors should always review life insurance needs, other catastrophic risks and emergency/contingency planning as they begin to invest, he said.
New investors should also consider the relative time frame for their investments.
“Long-term established goals should match up with longer term investment strategies and account types to best serve the client need, return potential and any tax benefits associated with certain account types, such as retirement accounts,” Solomon said.
“In longer term investing, adopting a buy and hold strategy with good quality and well-diversified investments is typically the best way to yield good results.”
By weathering the market cycles and maintaining their long-term strategy, investors can avoid the emotional tendency many have to sell in down markets, thereby incurring losses, he said.
“Stock market cycles are typical, and a well-diversified portfolio should be expected to recover and continue to make gains over time,” he said.
For newbies like Richards, having little formal training or education on the subjects of investing and saving can pose a substantial obstacle on the way to building a retirement nest egg.
Eagle Mountain resident Jordan Ott, 28, finds himself in a similar situation. The married father of an infant is trying to figure out what it will take to save for his family’s future, having had no close family or friends with prior experience to turn to for advice.
“It’s not something you are familiar with until you are faced with the prospect of it in your own life,” Ott said. “I’ll probably just talk to (my mother-in-law) or the (human resources) person about what kind of matching the company does. (I) just want to get a general feel for what is a good decision.”
He acknowledged his lack of knowledge on the topic, and said he is more than willing to seek the help necessary to make the best choices for his family.
Taking the time to become informed is critical and will serve any investor well in the long run, said Keith Woodwell, director of the Utah Division of Securities.
“You really do have to vet the financial professional you’re working with,” he said. The agency has compiled volumes of records and information that consumers can access online to aid in their research prior to selecting investments to put their money into.
“There is a wealth of public information that is available,” he said.
Woodwell also said that employees should begin investing immediately in their 401(k) or other self-contributing retirement plan, especially when there are matching funds from the employer. Matching funds is like having additional return on investment, he said. Any time there are matching funds an investor should contribute, he added.
In choosing an investment strategy, the most important principle to understand is “risk versus reward.”
“Risk and reward always go together when you invest,” he said. “If you want to chase higher rewards (long term), you are going to take on more risk in the process. Whereas, if you thinking short term, you want to take on less risk and you will correspondingly get less reward.”
In an effort to warn against “get rich” thinking employed by some aggressive, sometimes overeager investors, he said beware of so-called advisers offering high yielding investments that are “sure things.” If something seems too good to be true, it usually is.
Investors become victims of fraud when they chase promises of huge rewards with little or no risk, which are often pitched by con artists and scammers, he said.
“There is no such thing as high reward with no risk,” Woodwell said.