Congrats! You’re in your first or second full-time job, financially independent, and thinking about how to grow wealth over time.
For many people like you, investing in a company 401(k) is the best way to set aside money for the future, says John Augustine, the chief investment officer at The Huntington Private Bank, which has over $18 billion in assets under management. Another option, which isn’t only for retirement, despite its name, is an individual retirement account, also known as an IRA.
In a 401(k), “10-15% of your pre-tax salary is what you should strive for,” he told Business Insider in a recent interview. “If you have to go up a percent every year to get there so you don’t affect your budget, do that.”
These accounts are typically run by massive firms like Fidelity and Vanguard and allow their owners to pick from a variety of funds. Many plans default to a target-date fund that’s set up to deliver growth by the time a person reaches retirement age.
For people who’d rather turn off autopilot and take some control, Augustine cautioned against relying on stable value funds, which provide a conservative way to play the market while guarding against losses. Such funds are loaded with quality fixed-income securities that are less volatile than stocks.
Then, to decide how much risk to take in the markets, he suggested another approach: take the number 120, subtract your age, and that should be the minimum stake you have in stocks. The idea is to take more risk when you’re younger and pare down as you get older.
Some other iterations of this approach call for subtracting your age from 100; Augustine recommends the higher starting point of 120 that increases exposure to the stock market because bond yields are historically low.
“So if I’m 40, I still want 80% in equities because I just can’t get 6-8% [in returns] off bonds, that doesn’t work,” he said.
This approach is not without its flaws. Like many pieces of investing advice, it doesn’t account for individual needs and goals, which are much more diverse.
Also, because bonds don’t yield what they used to, older people may miss out on higher returns in stocks by tilting too heavily into fixed income, unless preserving capital is of the utmost importance.
And so, what’s important is not using this principle as a strict formula but as a guide.
For people who want to foray into stock-picking, it’s crucial to know what you own, Augustine said in his second piece of advice.
“Outside of your mortgage or rent, take your five next biggest household bills and invest in those,” he said. “You’ll know what you’re invested in. Chances are, a lot of other people are invested in them. And, chances are you’re going to pay yourself back the dividend.”
Back in 2008, as people complained about $4 gas, he’d tell them to buy shares in Exxon or wherever they filled up, because at least they’d get paid a dividend.
“We were kind of saying it tongue-in-cheek then, but we were like, it would make sense if more people invested in what they knew and where they spent their money.”